Filed pursuant to Rule 424(b)(3)
Registration Statement No. 333-23075
LOGO
160 RIO ROBLES
SAN JOSE, CA 95134
March 21, 1997
Dear Shareholder:
As most of you are aware, KLA Instruments Corporation ("KLA") has entered
into an agreement to combine with Tencor Instruments ("Tencor") in a strategic
business combination (the "Merger"). At our Special Meeting on April 30, 1997,
you will be asked to consider and vote upon (i) the issuance of shares of the
Common Stock, par value $0.001 per share, of KLA (the "KLA Common Stock") to the
shareholders of Tencor pursuant to an Agreement and Plan of Reorganization,
dated as of January 14, 1997 (the "Reorganization Agreement"), among KLA, Tencor
and Tiger Acquisition Corp., a wholly-owned subsidiary of KLA ("Merger Sub");
(ii) the amendment to the Restated Certificate of Incorporation of KLA (the
"Certificate") to change the corporate name of KLA to "KLA-Tencor Corporation"
(the "Combined Company") subject to and contingent upon consummation of the
Merger; and (iii) the amendment to the Certificate to increase the number of
authorized shares of KLA Common Stock by 175 million shares to 250 million
shares and to eliminate the designation of a class of Junior Common Stock. Each
of the foregoing proposals is described more fully in the accompanying Joint
Proxy Statement/Prospectus.
Pursuant to the Reorganization Agreement, the Board of Directors of the
Combined Company following the Merger will be increased to twelve members, seven
of whom will be the current directors of KLA, and five of whom will be current
directors of Tencor. The designees of Tencor will be James W. Bagley, Richard J.
Elkus, Jr., Dean O. Morton, Jon D. Tompkins and Lida Urbanek.
In addition, following the Merger, the principal executive officers of the
Combined Company will be as follows: Kenneth Levy, currently Chairman of the
Board and Chief Executive Officer of KLA, will be Chairman of the Board; Jon D.
Tompkins, currently Chairman of the Board, President and Chief Executive Officer
of Tencor, will be Chief Executive Officer; Kenneth L. Schroeder, currently
President and Chief Operating Officer of KLA, will be President and Chief
Operating Officer; and Graham Siddall, Ph.D., currently Executive Vice President
and Chief Operating Officer of Tencor, will be Executive Vice President
responsible for Wafer Inspection Operations.
After careful consideration, the KLA Board of Directors has unanimously
approved the Reorganization Agreement and the transactions contemplated thereby
and the proposed amendments to the Certificate, and has concluded that these
matters are fair to and in the best interests of KLA and its shareholders. Your
Board of Directors unanimously recommends a vote in favor of the issuance of the
KLA Common Stock and proposed amendments to the Certificate.
Following the Merger, based on the shares of Tencor Common Stock and KLA
Common Stock outstanding as of March 7, 1997, and the one-for-one exchange
ratio, the former shareholders of Tencor will hold approximately 37.7% of the
common stock of the Combined Company, and the shareholders of KLA prior to the
Merger will hold approximately 62.3% of the common stock of the Combined
Company.
All shareholders are invited to attend the Special Meeting in person. The
issuance of the shares of common stock by KLA in the Merger requires the
affirmative vote of a majority of the total votes cast in person or by proxy
regarding such proposal and the amendments of the Certificate each require the
affirmative vote of the holders of a majority of the outstanding shares of KLA
Common Stock.
Shareholders are urged to review carefully the information contained in the
accompanying Joint Proxy Statement/Prospectus, including in particular the
information under the captions "Risk Factors," "KLA Special
Meeting -- Recommendations of KLA Board of Directors," "Approval of the Merger
and Related Transactions -- Joint Reasons For the Merger," "-- KLA's Reasons For
the Merger" and "-- Material Contacts and Board Deliberations" prior to making
any voting decision in connection with their KLA Common Stock.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to assure representation of your shares. You may revoke
your proxy at any time before it has been voted, and if you attend the Special
Meeting you may vote in person even if you have previously returned your proxy
card. Your prompt cooperation will be greatly appreciated.
Sincerely,
Kenneth Levy
Chairman of the Board and
Chief Executive Officer
YOUR PROXY IS IMPORTANT -- PLEASE VOTE PROMPTLY
KLA INSTRUMENTS CORPORATION
160 RIO ROBLES
SAN JOSE, CALIFORNIA 95134
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 30, 1997
------------------------
TO THE SHAREHOLDERS OF KLA INSTRUMENTS CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "KLA
Special Meeting") of KLA Instruments Corporation, a Delaware corporation
("KLA"), will be held on April 30, 1997 at 10:00 a.m., local time, at KLA's
headquarters at 160 Rio Robles, San Jose, California 95134.
At the KLA Special Meeting you will be asked to consider and vote upon the
following matters:
(1) the issuance of shares of the Common Stock, par value $0.001 per
share, of KLA ("KLA Common Stock") to the shareholders of Tencor
Instruments, a California corporation ("Tencor"), pursuant to an Agreement
and Plan of Reorganization, dated as of January 14, 1997 (the
"Reorganization Agreement"), among KLA, Tencor and Tiger Acquisition Corp.,
a wholly-owned subsidiary of KLA ("Merger Sub"), providing for the merger
of Merger Sub with and into Tencor (the "Merger");
(2) an amendment to the Restated Certificate of Incorporation of KLA
(the "Certificate") to change the corporate name of KLA to "KLA-Tencor
Corporation" (the "Combined Company") subject to and contingent upon
consummation of the Merger;
(3) an amendment to the Certificate to increase the number of
authorized shares of KLA Common Stock by 175 million shares to 250 million
shares and to eliminate the designation of a class of Junior Common Stock.
Each of the foregoing proposals is described more fully in the accompanying
Joint Proxy Statement/Prospectus.
As a result of the Merger, each outstanding share of Common Stock, no par
value per share, of Tencor ("Tencor Common Stock"), other than shares as to
which dissenters' rights pursuant to the California Corporations Code have been
exercised and shares owned by Merger Sub, KLA or any wholly-owned subsidiary of
KLA, will be converted into the right to receive one share of KLA Common Stock,
and each outstanding option or right to purchase Tencor Common Stock under
Tencor's stock option plans will be assumed by KLA and will become an option or
right to purchase the same number of shares of common stock of the Combined
Company on the same terms and at the same exercise price per share. Following
the Merger, based on the shares of Tencor Common Stock and KLA Common Stock
outstanding as of March 7, 1997, and the one-for-one exchange ratio, the former
holders of Tencor Common Stock will hold approximately 37.7% of the common stock
of the Combined Company and the holders of KLA Common Stock prior to the Merger
will hold approximately 62.3% of the common stock of the Combined Company.
Shareholders of record at the close of business on March 7, 1997 are
entitled to notice of, and to vote at, the KLA Special Meeting and any
adjournments or postponements thereof, and are cordially invited to attend the
KLA Special Meeting in person.
For the Board of Directors
Larry W. Sonsini
Secretary
San Jose, California
March 21, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE KLA SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE
NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
TENCOR LOGO
ONE TECHNOLOGY DRIVE
MILPITAS, CA 95035
March 21, 1997
Dear Shareholder:
Tencor Instruments ("Tencor") has entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with KLA Instruments
Corporation, a Delaware corporation ("KLA"), providing for a strategic business
combination of Tencor and KLA. Pursuant to the Reorganization Agreement, a
special meeting of shareholders (the "Tencor Special Meeting") of Tencor will be
held at Tencor's headquarters at One Technology Drive, Milpitas, California
95035 on April 30, 1997 at 10:00 a.m. local time.
At the Tencor Special Meeting you will be asked to consider and vote upon
the approval of the Reorganization Agreement and related Agreement of Merger
which provides for the merger of Tencor with a wholly owned subsidiary of KLA
(the "Merger"). Upon consummation of the Merger, Tencor will become a wholly
owned subsidiary of KLA, and KLA will change its name to "KLA-Tencor
Corporation" (the "Combined Company"). As a result of the Merger, each
outstanding share of Tencor Common Stock will be converted into the right to
receive one share of common stock of the Combined Company. The foregoing
proposal is described more fully in the accompanying Joint Proxy
Statement/Prospectus.
After careful consideration, the Tencor Board of Directors has unanimously
approved the Reorganization Agreement and the transactions contemplated thereby
and has concluded they are fair to and in the best interests of Tencor and its
shareholders. Your Board of Directors unanimously recommends a vote in favor of
the Merger.
Pursuant to the Reorganization Agreement, the Board of Directors of the
Combined Company following the Merger will be increased to twelve members, seven
of whom will be the current directors of KLA, and five of whom will be current
directors of Tencor. The designees of Tencor will be James W. Bagley, Richard J.
Elkus, Jr., Dean O. Morton, Jon D. Tompkins and Lida Urbanek.
In addition, following the Merger, the principal executive officers of the
Combined Company will be as follows: Kenneth Levy, currently Chairman of the
Board and Chief Executive Officer of KLA, will be Chairman of the Board; Jon D.
Tompkins, currently Chairman of the Board, President and Chief Executive Officer
of Tencor, will be Chief Executive Officer; Kenneth L. Schroeder, currently
President and Chief Operating Officer of KLA, will be President and Chief
Operating Officer; and Graham Siddall, Ph.D., currently Executive Vice President
and Chief Operating Officer of Tencor, will be Executive Vice President
responsible for Wafer Inspection Operations.
Following the Merger, based on the shares of Tencor Common Stock and KLA
Common Stock outstanding as of March 7, 1997, and the one-for-one exchange
ratio, the former shareholders of Tencor will own approximately 37.7% of the
common stock of the Combined Company and the shareholders of KLA prior to the
merger will own approximately 62.3% of the common stock of the Combined Company.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Shareholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by the Tencor shareholders at the Tencor Special Meeting and
a Proxy Card. The Joint Proxy Statement/Prospectus more fully describes the
proposed transactions. Shareholders are urged to review carefully the
information contained in the accompanying Joint Proxy Statement/Prospectus, in
particular the information under the captions "Risk Factors," "Tencor Special
Meeting -- Recommendations of Tencor Board of Directors," "Approval of the
Merger and Related Transactions -- Joint Reasons For the Merger," "-- Tencor's
Reasons For the Merger" and "-- Material Contacts and Board Deliberations" prior
to voting on the proposal.
All shareholders are cordially invited to attend the Tencor Special Meeting
in person. If you attend the Tencor Special Meeting you may vote in person if
you wish even though you have previously returned your proxy. Whether or not you
plan to attend the Tencor Special Meeting it is important that your shares be
represented and voted at the Tencor Special Meeting, regardless of the number
you hold. Approval of the Merger requires the affirmative vote of the holders of
a majority of the outstanding shares of Tencor Common Stock. Therefore, please
complete, sign and date, and return your proxy in the enclosed envelope.
Sincerely,
Jon D. Tompkins
Chairman of the Board,
President and Chief Executive Officer
YOUR PROXY IS IMPORTANT -- PLEASE VOTE PROMPTLY
TENCOR INSTRUMENTS
ONE TECHNOLOGY DRIVE
MILPITAS, CALIFORNIA 95035
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 30, 1997
------------------------
TO THE SHAREHOLDERS OF TENCOR INSTRUMENTS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Tencor
Special Meeting") of Tencor Instruments, a California corporation ("Tencor"),
will be held on April 30, 1997 at 10:00 a.m., local time, at Tencor's
headquarters at One Technology Drive, Milpitas, California 95035 to consider and
vote upon the following;
A proposal to approve and adopt the Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated as of January 14,
1997, among Tencor, KLA Instruments Corporation, a Delaware corporation
("KLA") and Tiger Acquisition Corp., a California corporation and wholly
owned subsidiary of KLA and related Agreement of Merger, pursuant to which,
among other matters, (i) Tencor will become a wholly owned subsidiary of
KLA (the "Merger"), with KLA to be renamed "KLA-Tencor Corporation" (the
"Combined Company") and (ii) each share of Common Stock, no par value per
share of Tencor (the "Tencor Common Stock"), will be converted into the
right to receive one share of common stock, par value $0.001 per share of
the Combined Company.
If the Reorganization Agreement is approved by the shareholders of Tencor
at the Tencor Special Meeting and the Merger is effected by Tencor, Tencor may
have obligations under Chapter 13 of the California Corporations Code to
dissenting shareholders. See "Terms of the Merger -- Dissenters' Rights."
Information relating to the above matters is set forth in the attached
Joint Proxy Statement/Prospectus. Shareholders of record at the close of
business on March 7, 1997 are entitled to notice of, and to vote at, the Tencor
Special Meeting and any adjournments or postponements thereof. Approval of the
Merger will require the affirmative vote of the holders of a majority of the
shares of Tencor Common Stock outstanding on the record date. All shareholders
are cordially invited to attend the Tencor Special Meeting in person.
For the Board of Directors
Frederick A. Ball
Secretary
Milpitas, California
March 21, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE TENCOR SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE
NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
KLA INSTRUMENTS CORPORATION AND TENCOR INSTRUMENTS
JOINT PROXY STATEMENT
------------------------
KLA INSTRUMENTS CORPORATION PROSPECTUS
------------------------
KLA Instruments Corporation, a Delaware corporation ("KLA"), and Tencor
Instruments, a California corporation ("Tencor"), have entered into an Agreement
and Plan of Reorganization, dated as of January 14, 1997 (the "Reorganization
Agreement"), among KLA, Tencor and Tiger Acquisition Corp., a wholly owned
subsidiary of KLA ("Merger Sub"). In accordance with the Reorganization
Agreement, Merger Sub will merge into Tencor, Tencor will become a wholly owned
subsidiary of KLA, the corporate name of KLA will be changed to "KLA-Tencor
Corporation" (the "Combined Company") and each outstanding share of Common Stock
of Tencor, no par value ("Tencor Common Stock"), will be converted into one
share of the common stock of the Combined Company, par value $0.001 (all such
actions collectively, the "Merger").
This Joint Proxy Statement/Prospectus is being furnished to shareholders of
KLA in connection with the solicitation of proxies by the KLA Board of Directors
(the "KLA Board") for use at the Special Meeting of KLA shareholders to be held
on April 30, 1997, at KLA's headquarters at 160 Rio Robles, San Jose, California
95134, commencing at 10:00 a.m., local time, and at any adjournment or
postponement thereof (the "KLA Special Meeting").
This Joint Proxy Statement/Prospectus is also being furnished to
shareholders of Tencor in connection with the solicitation of proxies by the
Tencor Board of Directors (the "Tencor Board") for use at the Special Meeting of
Tencor shareholders to be held on April 30, 1997, at Tencor's headquarters at
One Technology Drive, Milpitas, California 95035, commencing at 10:00 a.m.,
local time, and at any adjournment or postponement thereof (the "Tencor Special
Meeting").
This Joint Proxy Statement/Prospectus constitutes the Prospectus of KLA
with respect to up to 31,946,903 shares of Common Stock of KLA, par value $0.001
(the "KLA Common Stock") to be issued in the Merger in exchange for outstanding
shares of Tencor Common Stock.
------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. THE
SHAREHOLDERS OF KLA AND TENCOR ARE URGED TO READ AND CONSIDER CAREFULLY THIS
JOINT PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED
TO BEGINNING ON PAGE 13 UNDER "RISK FACTORS."
------------------------
This Joint Proxy Statement/Prospectus and the accompanying proxy cards are
first being mailed to shareholders of KLA and Tencor on or about March 21, 1997.
The date of this Joint Proxy Statement/Prospectus is March 21, 1997.
Upon consummation of the Merger, each issued and outstanding share of
Tencor Common Stock (other than shares owned by KLA, Merger Sub, or any
subsidiary of KLA or shares for which dissenter's rights have been perfected
under the California Corporations Code ("Dissenting Shares")) will be converted
into the right to receive one share of KLA Common Stock (the "Exchange Ratio")
and each outstanding option to purchase Tencor Common Stock under the stock
option plans of Tencor will be assumed by KLA and will become an option to
purchase the same number of shares of common stock of the Combined Company, on
the same terms and at the same exercise price per share. All shares of Tencor
Common Stock will cease to be outstanding and will be canceled and retired and
will cease to exist, and each holder of a certificate formerly representing
shares of Tencor Common Stock will thereafter cease to have any rights with
respect thereto, except the right to receive shares of common stock of the
Combined Company or, in the case of Dissenting Shares, the right to receive
payment of the fair market value thereof.
KLA Common Stock is listed on the Nasdaq National Market ("Nasdaq") under
the symbol KLAC and following the Merger, the common stock of the Combined
Company will continue to be traded under such symbol. It is a condition of the
obligations of KLA and Tencor to the consummation of the Merger that the shares
to be issued in the Merger be approved for quotation on Nasdaq, upon official
Notice of Issuance. Following consummation of the Merger, Tencor Common Stock
will be removed from registration under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and will no longer be listed for quotation on
Nasdaq.
On January 14, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement, the
closing sale prices of the KLA Common Stock and Tencor Common Stock on Nasdaq
were $40.875 per share and $30.50 per share, respectively. On March 7, 1997, the
closing sale prices of the KLA Common Stock and Tencor Common Stock were $40.313
per share and $39.75 per share, respectively.
Because the Exchange Ratio is fixed, changes in the market price of KLA
Common Stock will affect the dollar value of the common stock of the Combined
Company to be received by shareholders of Tencor in the Merger. Shareholders of
KLA and Tencor are encouraged to obtain current market quotations for KLA Common
Stock and Tencor Common Stock prior to the KLA Special Meeting and Tencor
Special Meeting, respectively.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY, AND, IF GIVEN, ANY SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY KLA, TENCOR,
OR ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON WHOM IT IS
NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF KLA OR TENCOR SINCE THE DATE HEREOF,
OR THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
AVAILABLE INFORMATION................................................................. 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 1
FORWARD LOOKING STATEMENTS............................................................ 2
SUMMARY............................................................................... 3
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA.................... 11
RISK FACTORS.......................................................................... 13
COMPARATIVE PER SHARE DATA............................................................ 17
COMPARATIVE MARKET PRICE DATA......................................................... 18
KLA SPECIAL MEETING................................................................... 19
Date, Time and Place of KLA Special Meeting......................................... 19
Purpose............................................................................. 19
Record Date and Outstanding Shares.................................................. 19
Vote Required....................................................................... 19
Proxies............................................................................. 19
Solicitation of Proxies; Expenses................................................... 20
Recommendations of KLA Board of Directors........................................... 20
TENCOR SPECIAL MEETING................................................................ 21
Date, Time and Place of Tencor Special Meeting...................................... 21
Purpose............................................................................. 21
Record Date and Outstanding Shares.................................................. 21
Vote Required....................................................................... 21
Proxies............................................................................. 21
Solicitation of Proxies; Expenses................................................... 21
Dissenters' Rights.................................................................. 22
Recommendations of Tencor Board of Directors........................................ 22
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS....................................... 23
Joint Reasons For the Merger........................................................ 23
KLA's Reasons For the Merger........................................................ 24
Tencor's Reasons For the Merger..................................................... 25
Material Contacts and Board Deliberations........................................... 26
Opinions of KLA's Financial Advisors................................................ 28
Opinion of Tencor's Financial Advisor............................................... 35
Certain Federal Income Tax Considerations........................................... 39
Governmental and Regulatory Approvals............................................... 40
Accounting Treatment................................................................ 40
TERMS OF THE MERGER................................................................... 41
Effective Time...................................................................... 41
Manner and Basis of Converting Shares............................................... 41
Stock Ownership Following the Merger................................................ 42
Conduct Following the Merger........................................................ 42
Conduct of KLA's and Tencor's Business Prior to the Merger.......................... 43
No Solicitation..................................................................... 44
i
Break Up Fees....................................................................... 46
Conditions to the Merger............................................................ 46
Termination of the Reorganization Agreement......................................... 47
Option Agreements................................................................... 48
Affiliate Agreements................................................................ 50
Interests of Certain Persons........................................................ 50
Dissenters' Rights.................................................................. 52
COMPARISON OF CAPITAL STOCK........................................................... 54
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS........................... 63
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY KLA SHAREHOLDERS................. 67
Proposal Two -- Amendment to Restated Certificate of Incorporation -- Name Change... 67
Proposal Three -- Amendment to Restated Certificate of Incorporation -- Increase to
Authorized Common Stock.......................................................... 67
LEGAL MATTERS......................................................................... 69
EXPERTS............................................................................... 69
SHAREHOLDER PROPOSALS................................................................. 69
ANNEX A -- Agreement and Plan of Reorganization, dated as of January 14, 1997, among
KLA, Tiger Acquisition Corp. and Tencor
ANNEX B -- Stock Option Agreements dated as of January 14, 1997 between KLA and Tencor
ANNEX C -- Sections 1300-1312 of the California Corporations Code
ANNEX D -- Opinion of Deutsche Morgan Grenfell Inc.
ANNEX E -- Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
ANNEX F -- Opinion of Lehman Brothers Inc.
ii
AVAILABLE INFORMATION
KLA and Tencor are subject to the information reporting requirements of the
Exchange Act, and in accordance therewith file reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may be obtained by mail from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC also maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at the address
http://www.sec.gov. KLA Common Stock and Tencor Common Stock are quoted on
Nasdaq, and such reports, proxy statements and other information can also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
KLA has filed with the SEC a registration statement on Form S-4 (herein,
together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This Joint Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information,
reference is hereby made to the Registration Statement. Copies of the
Registration Statement and the exhibits and schedules thereto may be inspected,
without charge, at the offices of the SEC, or obtained at prescribed rates from
the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the SEC by KLA (File No.
0-09992) pursuant to the Exchange Act are incorporated by reference in this
Joint Proxy Statement/Prospectus:
1. KLA's Annual Report on Form 10-K for the fiscal year ended June 30,
1996;
2. KLA's Quarterly Reports on Form 10-Q for the quarters ended September
30, 1996 and December 31, 1996;
3. KLA's Current Reports on Form 8-K dated September 24, 1996 and January
22, 1997;
4. Description of KLA Common Stock contained in KLA's Registration
Statement on Form 8-A filed with the SEC on October 26, 1981; and
5. Description of KLA Common Stock Purchase Rights contained in KLA's
Registration Statement on Form 8-A filed with the SEC on March 15, 1989
(including all amendments in respect thereof).
The following documents previously filed with the SEC by Tencor (File No.
0-20007) pursuant to the Exchange Act are incorporated by reference in this
Joint Proxy Statement/Prospectus:
1. Tencor's Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
2. Tencor's Current Report on Form 8-K dated January 22, 1997; and
3. Description of Tencor Common Stock contained in Tencor's Registration
Statement on Form 8-A filed with the SEC on March 30, 1992.
All documents and reports subsequently filed by KLA and by Tencor pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Joint Proxy Statement/Prospectus prior to the date of the KLA and Tencor Special
Meetings shall be deemed to be incorporated by reference in this Joint Proxy
Statement/Prospectus and to be part hereof from the dates of filing of such
documents and reports.
1
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof except
as so modified or superseded.
All information contained or incorporated by reference on this Joint Proxy
Statement/Prospectus relating to KLA has been supplied by KLA and all such
information relating to Tencor has been supplied by Tencor.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST
BY ANY PERSON TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED,
IN THE CASE OF DOCUMENTS RELATING TO KLA, FROM KLA, 160 RIO ROBLES, SAN JOSE,
CALIFORNIA 95134, ATTENTION: INVESTOR RELATIONS; TELEPHONE NUMBER: (408)
434-4200, AND IN THE CASE OF DOCUMENTS RELATING TO TENCOR, FROM TENCOR, ONE
TECHNOLOGY DRIVE, MILPITAS, CALIFORNIA 95035, ATTENTION: INVESTOR RELATIONS;
TELEPHONE NUMBER: (408) 571-3000. IN ORDER TO ASSURE TIMELY DELIVERY OF THE
DOCUMENTS PRIOR TO THE SPECIAL MEETINGS, ANY SUCH REQUEST SHOULD BE MADE BY
APRIL 20, 1997.
This Joint Proxy Statement/Prospectus contains trademarks of KLA and Tencor
and may contain trademarks of others.
FORWARD LOOKING STATEMENTS
Other than statements of historical fact, statements made in this Joint
Proxy Statement/Prospectus, including statements as to the benefits expected to
result from the Merger and as to future financial performance and the analyses
performed by the financial advisors to KLA and Tencor, are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors,
including those set forth in "Risk Factors" below, which shareholders should
carefully review.
2
SUMMARY
The following contains a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. This summary does not contain a
complete statement of all material elements of the proposals to be voted on and
is qualified in its entirety by the more detailed information appearing
elsewhere in this Joint Proxy Statement/Prospectus and in the information and
documents annexed hereto.
THE COMPANIES
KLA Instruments Corporation
KLA is a leader in the design, manufacture, marketing and service of yield
management and process monitoring systems for the semiconductor industry. KLA
systems are used to analyze product and process quality, critical steps in the
manufacture of integrated circuits, and to provide feedback so that fabrication
problems can be identified, addressed and contained. This understanding of
defect sources and how to contain them enables semiconductor manufacturers to
increase yields. Quickly attaining and then maintaining high yields is one of
the most important determinants of profitability in the semiconductor industry.
KLA believes that its customers typically experience rapid paybacks on their
investments in KLA systems. KLA sells to virtually all of the world's major
semiconductor manufacturers. KLA's technological strengths have enabled it to
develop and introduce major new product families in the past four years for the
following three business units: Wisard, which addresses imaging-based
semiconductor patterned wafer inspection; Rapid, which addresses reticle
inspection; and Metrology, which addresses overlay, registration and line width
measures. KLA believes that its Wisard and Rapid product families incorporate
proprietary technologies which provide greater sensitivity to defects than any
competing systems. KLA's executive offices are located at 160 Rio Robles, San
Jose, California 95134, and its telephone number is (408) 434-4200.
Tencor Instruments
Tencor designs, manufactures, markets and services wafer inspection, film
measurement, metrology systems and physical measurement standards, primarily for
the semiconductor industry. Tencor systems are used to control, monitor and
refine circuit design patterns from engineering to manufacturing, and to assist
in the rapid start-up of new semiconductor manufacturing facilities. Tencor
markets its products worldwide to virtually all of the major semiconductor
manufacturers. Certain of Tencor's metrology systems are sold to the data
storage and flat panel display industries. Tencor uses its technical expertise
in understanding customer needs to create what it believes is one of the
broadest lines of high performance laser scanning-based wafer inspection
systems, thin film measurement systems and metrology systems used in the
semiconductor industry today. Since its founding in 1976, Tencor's products have
all shared a common development philosophy: systems instruments must be
user-friendly, generate results that are accurate and easy to interpret, and
provide the user with a rapid return on investment resulting in a low cost of
ownership. To date, Tencor has introduced over 112 different products for use in
the semiconductor and other industries, and has shipped more than 10,000
systems, ranging from benchtop instruments to complex automated systems.
Tencor's executive offices are located at One Technology Drive, Milpitas,
California 95035, and its telephone number is (408) 571-3000.
Tiger Acquisition Corp.
Merger Sub is a corporation recently organized by KLA for the purpose of
effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the Merger. Merger Sub's executive offices
are located at 160 Rio Robles, San Jose, California 95134, and its telephone
number is (408) 434-4200.
SPECIAL MEETING OF SHAREHOLDERS OF KLA
Time, Date, Place and Purpose
The KLA Special Meeting will be held at KLA's headquarters at 160 Rio
Robles, San Jose, California 95134, on April 30, 1997 at 10:00 a.m., local time.
The purpose of the KLA Special Meeting is to approve (i) the issuance of shares
of KLA Common Stock to the shareholders of Tencor pursuant to the Reorganization
Agreement; (ii) the amendment to the Restated Certificate of Incorporation of
KLA (the
3
"Certificate") to change the corporate name of KLA to "KLA-Tencor Corporation,"
subject to and contingent upon consummation of the Merger; and (iii) the
amendment to the Certificate to increase the number of authorized shares of KLA
Common Stock by 175 million shares to 250 million shares and to eliminate the
designation of a class of Junior Common Stock. See "KLA Special Meeting -- Date,
Time and Place of KLA Special Meeting," and "-- Purpose."
Record Date and Vote Required
Only KLA shareholders of record at the close of business on March 7, 1997
(the "KLA Record Date") are entitled to notice of and to vote at the KLA Special
Meeting. Under Delaware law, the charter documents of KLA and the rules of
Nasdaq, the issuance of shares of KLA Common Stock in the Merger requires the
affirmative vote of a majority of the total votes cast regarding such proposal
and the amendments of the Certificate each require the affirmative vote of the
holders of a majority of the outstanding shares of KLA Common Stock. See "KLA
Special Meeting -- Record Date and Outstanding Shares" and "-- Vote Required."
As of the KLA Record Date, there were approximately 1,285 shareholders of
record of KLA Common Stock and 51,655,785 shares of KLA Common Stock
outstanding, with each share entitled to one vote on each matter to be acted
upon at the KLA Special Meeting. See "KLA Special Meeting -- Vote Required."
Recommendations of KLA Board of Directors
The KLA Board has unanimously approved the Reorganization Agreement and the
transactions contemplated thereby and has determined that the Merger is fair and
in the best interests of KLA and its shareholders. After careful consideration,
the KLA Board unanimously recommends a vote in favor of (i) the issuance of
shares of KLA Common Stock pursuant to the Reorganization Agreement; (ii) the
amendment of the Certificate to change the corporate name of KLA to "KLA-Tencor
Corporation," subject to and contingent upon consummation of the Merger; and
(iii) the amendment of the Certificate to increase the number of authorized
shares of Common Stock by 175 million shares to 250 million shares and to
eliminate the designation of a class of Junior Common Stock. Shareholders should
read this Joint Proxy Statement/ Prospectus carefully before voting. See "KLA
Special Meeting -- Recommendations of KLA Board of Directors," "Approval of the
Merger and Related Transactions -- Joint Reasons For the Merger," "-- KLA's
Reasons For the Merger" and "-- Material Contacts and Board Deliberations."
SPECIAL MEETING OF SHAREHOLDERS OF TENCOR
Time, Date, Place and Purpose
The Tencor Special Meeting will be held at Tencor's headquarters at One
Technology Drive, Milpitas, California 95035, on April 30, 1997 at 10:00 a.m.,
local time. The purpose of the Tencor Special Meeting is to approve and adopt
the Reorganization Agreement and approve the Merger. See "Tencor Special
Meeting -- Date, Time and Place of Tencor Special Meeting" and "-- Purpose."
Record Date and Vote Required
Only Tencor shareholders of record at the close of business on March 7,
1997 (the "Tencor Record Date") are entitled to notice of and to vote at the
Tencor Special Meeting. Pursuant to the California Corporations Code ("CCC") and
the Tencor Restated Articles of Incorporation, as amended, the affirmative vote
of the holders of a majority of the Tencor Common Stock outstanding as of the
Tencor Record Date is required to approve and adopt the Reorganization
Agreement.
As of the Tencor Record Date, there were approximately 830 shareholders of
record of Tencor Common Stock and 31,245,304 shares of Tencor Common Stock
outstanding, with each share entitled to one vote on the matter to be acted upon
at the Tencor Special Meeting. See "Tencor Special Meeting -- Vote Required."
4
Recommendations of Tencor Board of Directors
The Tencor Board has unanimously approved the Reorganization Agreement and
the transactions contemplated thereby and has determined that the Merger is fair
to and in the best interests of Tencor and its shareholders. After careful
consideration, the Tencor Board unanimously recommends a vote in favor of
approval and adoption of the Reorganization Agreement and approval of the
Merger. Shareholders should read this Joint Proxy Statement/Prospectus carefully
prior to voting. See "Tencor Special Meeting -- Recommendations of Tencor Board
of Directors," "Approval of the Merger and Related Transactions -- Joint Reasons
For the Merger," "-- Tencor's Reasons For the Merger," and "-- Material Contacts
and Board Deliberations."
DISSENTERS' RIGHTS
Pursuant to California law, holders of Tencor Common Stock may be entitled
to certain dissenters' rights ("Dissenters' Rights") in connection with the
Merger. A holder of Tencor Common Stock who desires to pursue Dissenters' Rights
must (i) make a written demand ("Notice") on Tencor no later than the date of
the Tencor Special Meeting for the purchase of such shares and (ii) vote against
the Reorganization Agreement, all in accordance with the CCC. See "Tencor
Special Meeting -- Dissenters' Rights," "Terms of the Merger -- Dissenters'
Rights" and Annex C hereto.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the combined businesses of KLA and Tencor.
REASONS FOR THE MERGER; RECOMMENDATIONS OF BOARDS OF DIRECTORS
The Boards of Tencor and KLA have authorized the execution and delivery of
the Reorganization Agreement with the expectation that the proposed Merger, by
combining the highly complementary product lines of the two companies, the
Combined Company would have the potential to realize long-term improved
operating and financial results and a stronger position in the industry. See
"Risk Factors," "Approval of the Merger and Related Transactions -- Joint
Reasons For the Merger," "-- KLA's Reasons For the Merger," and "-- Tencor's
Reasons For the Merger."
FAIRNESS OPINIONS
Each of Deutsche Morgan Grenfell Inc. ("DMG") and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") has delivered to the KLA Board its
written opinion, dated January 14, 1997, to the effect that, as of such date,
the Exchange Ratio pursuant to the Reorganization Agreement was fair from a
financial point of view to KLA. The full text of the opinions of DMG and Merrill
Lynch, which set forth assumptions made and matters considered, are attached as
Annex D and Annex E, respectively, to this Joint Proxy Statement/Prospectus and
are incorporated herein by reference. Holders of KLA Common Stock are urged to,
and should, read such opinions in their entireties. See "Approval of the Merger
and Related Transactions -- Opinions of KLA's Financial Advisors" and Annexes D
and E hereto.
Lehman Brothers Inc. ("Lehman Brothers") has delivered to the Tencor Board
its written opinion, dated January 14, 1997, to the effect that, as of such
date, the Merger was fair from a financial point of view to the holders of
Tencor Common Stock. The full text of the opinion of Lehman Brothers, which sets
forth assumptions made and matters considered is attached as Annex F to this
Joint Proxy Statement/Prospectus, and is incorporated herein by reference.
Holders of Tencor Common Stock are urged to, and should, read such opinion in
its entirety. See "Approval of the Merger and Related Transactions -- Opinion of
Tencor's Financial Advisor" and Annex F hereto.
5
INCOME TAX TREATMENT
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), in which case no
gain or loss generally should be recognized by the holders of shares of Tencor
Common Stock on the exchange of their shares of Tencor Common Stock solely for
shares of common stock of the Combined Company. As a condition to the
consummation of the Merger, each of KLA and Tencor will have received an opinion
from tax counsel that the Merger will constitute a reorganization under Section
368(a) of the Code. However, all Tencor shareholders are urged to consult their
own tax advisors. See "Approval of the Merger and Related
Transactions -- Certain Federal Income Tax Considerations."
REGULATORY MATTERS
Consummation of the Merger is subject to compliance with the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR Act").
The notifications required under the HSR Act as well as certain information have
been furnished to the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Department of Justice (the "Antitrust Division") and the
specified waiting period under the HSR Act for the Merger has expired. The
Merger will also need to satisfy the requirements of the federal securities laws
and applicable securities and "blue sky" laws of the various states. See
"Approval of the Merger and Related Transactions -- Governmental and Regulatory
Approvals."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling-of-interests for financial
reporting purposes in accordance with generally accepted accounting principles.
Consummation of the Merger is conditioned upon receipt at the closing of the
Merger by KLA and Tencor of letters from Price Waterhouse LLP, KLA's and
Tencor's independent accountants, reaffirming the firm's concurrence with KLA
management's and Tencor management's conclusions, respectively, as to the
appropriateness of pooling-of-interests accounting for the Merger under
Accounting Principles Board Opinion No. 16 ("APB No. 16"), if consummated in
accordance with the Reorganization Agreement. See "Approval of the Merger and
Related Transactions -- Accounting Treatment" and "Terms of the
Merger -- Conditions to the Merger."
THE MERGER
Terms of the Merger; Exchange Ratio
At the Effective Time (as defined below) of the Merger, Merger Sub will
merge with and into Tencor and Tencor will become a wholly owned subsidiary of
the Combined Company. Once the Merger is consummated, Merger Sub will cease to
exist as a corporation and all of the business, assets, liabilities and
obligations of Merger Sub will be merged into Tencor with Tencor remaining as
the surviving corporation (the "Surviving Corporation"). As a result of the
Merger, each outstanding share of Tencor Common Stock, other than shares as to
which Dissenters' Rights pursuant to the CCC have been perfected and shares
owned by Merger Sub, KLA or any wholly owned subsidiary of KLA, will be
converted into the right to receive one share of common stock of the Combined
Company, and each outstanding option to purchase Tencor Common Stock under the
stock option plans of Tencor will be assumed by KLA and will become an option to
purchase the same number of shares of common stock of the Combined Company on
the same terms and at the same exercise price per share.
6
On January 14, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement, the
closing prices per share of KLA Common Stock and Tencor Common Stock on Nasdaq
were $40.875 and $30.50, respectively. On March 7, 1997, the closing prices per
share of KLA Common Stock and Tencor Common Stock on Nasdaq were $40.313 and
$39.75, respectively. See "Comparative Market Price Data." Because the Exchange
Ratio is fixed, changes in the market price of KLA Common Stock will affect the
value of the common stock of the Combined Company to be received by shareholders
of Tencor in the Merger. KLA shareholders and Tencor shareholders are encouraged
to obtain current market quotations for KLA Common Stock and Tencor Common Stock
prior to the KLA Special Meeting and Tencor Special Meeting, respectively.
Effective Time of the Merger
The Merger will become effective upon the filing of an Agreement of Merger
(the "Agreement of Merger") with the Secretary of State of the State of
California or at such later time as may be agreed in writing by KLA, Tencor and
Merger Sub and specified in the Agreement of Merger (the "Effective Time").
Assuming all conditions to the Merger are met or waived prior thereto, it is
anticipated that the Closing Date of the Merger (the "Closing Date") and
Effective Time will be after the close of business on April 30, 1997. See "Terms
of the Merger -- Effective Time."
Exchange of Tencor Stock Certificates
Promptly after the Effective Time, KLA, acting through Boston EquiServe, LP
as its exchange agent (the "Exchange Agent"), will deliver to each Tencor
shareholder of record a letter of transmittal with instructions to be used by
such shareholder in surrendering certificates which, prior to the Merger,
represented shares of Tencor Common Stock. CERTIFICATES SHOULD NOT BE
SURRENDERED BY THE HOLDERS OF TENCOR COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. At the Effective Time, each then
outstanding option to purchase Tencor Common Stock, whether vested or unvested,
will be assumed by KLA without any action on the part of the holder thereof and
will become an option to purchase the same number of shares of the Combined
Company on the same terms and at the same exercise price per share. OPTION
AGREEMENTS NEED NOT BE SURRENDERED. See "Terms of the Merger -- Manner and Basis
of Converting Shares."
Form S-8 Registration Statement
No later than two business days after the Closing Date, KLA will file a
registration statement on Form S-8 under the Securities Act covering the shares
of common stock of the Combined Company issuable upon exercise of options to
purchase Tencor Common Stock to be assumed at the Effective Time. See "Terms of
the Merger -- Manner and Basis of Converting Shares."
Stock Ownership Following the Merger
Based upon the number of shares of Tencor Common Stock outstanding and the
number of shares issuable upon exercise of outstanding options to purchase
Tencor Common Stock as of March 7, 1997, and assuming that Dissenters' Rights
are not perfected, an aggregate of approximately 31,245,304 shares of Common
Stock of the Combined Company will be issued to Tencor shareholders in the
Merger and the Combined Company will assume Tencor options exercisable for up to
approximately 3,054,604 additional shares of common stock of the Combined
Company. Based upon the number of shares of KLA Common Stock issued and
outstanding as of March 7, 1997, and after giving effect to the issuance of
common stock of the Combined Company as described in the previous sentence, the
former holders of Tencor Common Stock would hold, and have voting power with
respect to, approximately 37.7% of the Combined Company's total issued and
outstanding shares as of the Effective Time, and holders of former Tencor
options would hold options to purchase approximately 3.6% of the Combined
Company's total issued and outstanding shares (assuming the exercise of only
such options). The foregoing numbers of shares and percentages are subject to
change in the event that the capitalization of either KLA or Tencor changes
subsequent to March 7, 1997 and
7
prior to the Effective Time, and there can be no assurance as to the actual
capitalization of KLA or Tencor at the Effective Time or the Combined Company at
any time following the Effective Time. See "Terms of the Merger -- Stock
Ownership Following the Merger."
Board of Directors; Management Following the Merger
Pursuant to the Reorganization Agreement, the Board of Directors of the
Combined Company (the "Combined Company Board") following the Merger will be
increased to twelve members, seven of whom will be the current directors of KLA,
and five of whom will be current directors of Tencor. The designees of Tencor
will be James W. Bagley, Richard J. Elkus, Jr., Dean O. Morton, Jon D. Tompkins
and Lida Urbanek. The Combined Company will have a staggered board, with three
classes of directors: Class I, II and III. The classes of directors will be
elected in sequential years. At the Combined Company's next Annual Meeting,
currently expected to take place in November 1997, the Class II directors will
be elected.
Following the Merger, the principal executive officers of the Combined
Company will be as follows: Kenneth Levy, currently Chairman of the Board and
Chief Executive Officer of KLA, will be Chairman of the Board; Jon D. Tompkins,
currently Chairman of the Board, President and Chief Executive Officer of
Tencor, will be Chief Executive Officer; Kenneth L. Schroeder, currently
President and Chief Operating Officer of KLA, will be President and Chief
Operating Officer; and Graham Siddall, Ph.D., currently Executive Vice President
and Chief Operating Officer of Tencor, will be Executive Vice President
responsible for Wafer Inspection Operations. See "Terms of the Merger -- Conduct
Following the Merger."
Conduct of Business Prior to the Merger
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, Tencor (and each of its subsidiaries) and KLA (and each of its
subsidiaries) agree, except (i) as indicated in their respective disclosure
schedules or (ii) to the extent that the other of them shall otherwise consent
in writing, to conduct its business diligently and in accordance with good
commercial practice and to conduct its business in the usual, regular and
ordinary course, in substantially the same manner as previously conducted and in
compliance with all applicable laws and regulations, to pay its debts and taxes
when due subject to good faith disputes over such debts or taxes, to pay or
perform other material obligations when due, and use its commercially reasonable
efforts consistent with past practices and policies to preserve intact its
present business organization, keep available the services of its present
officers and employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. Each of Tencor and KLA have agreed to promptly notify the other of any
material event involving its business or operations. In addition, except as
provided in their respective disclosure schedules, Tencor and KLA have agreed
that they shall not, without the prior written consent of the other, perform or
engage in certain activities in the conduct of their business and the business
of their subsidiaries. See "Terms of the Merger -- Conduct of KLA's and Tencor's
Business Prior to the Merger."
No Solicitation
Under the terms of the Reorganization Agreement, except under certain
limited circumstances, each of KLA and Tencor has agreed that it will not engage
in certain activities relating to, or which could result in, an acquisition
proposal from a third party. See "Terms of the Merger -- No Solicitation."
Stock Option Agreements
As an inducement to the other party to enter into the Reorganization
Agreement, each of KLA and Tencor entered into a stock option agreement with the
other, pursuant to which, subject to certain conditions, KLA granted to Tencor
(the "Tencor Option Agreement") and Tencor granted to KLA (the "KLA Option
Agreement") the right to acquire up to a number of shares of KLA Common Stock
(the "Tencor Option") or Tencor Common Stock (the "KLA Option"), as the case may
be, equal to 19.9% of its issued and outstanding shares on the occurence of
certain events. See "Terms of the Merger -- Option Agreements."
8
Termination; Fees
The Reorganization Agreement may be terminated under certain circumstances.
Each of KLA and Tencor has agreed that if the Merger is not consummated under
certain circumstances, then it will pay to the other party $60 million, in the
case of payment by KLA, or $40 million, in the case of payment by Tencor, or an
amount equal to $5 million in other circumstances. See "Terms of the
Merger -- Termination of the Reorganization Agreement" and " -- Break Up Fees."
Conditions to the Merger
Consummation of the Merger is subject to certain conditions, including: (i)
certain approvals by the shareholders of Tencor and KLA in connection with the
Merger; (ii) declaration by the SEC of the effectiveness of the Registration
Statement; (iii) absence of any law or order prohibiting consummation of the
Merger; (iv) receipt by KLA and Tencor of legal opinions that the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code;
(v) receipt by KLA and Tencor of letters from their independent accountants
reaffirming the firm's concurrence with KLA management's and Tencor management's
conclusions as to the appropriateness of pooling-of-interests accounting for the
Merger under APB No. 16; (vi) the accuracy of the representations and warranties
given by each party in the Reorganization Agreement; (vii) performance of all
covenants required by the Reorganization Agreement; and (viii) the absence of a
material adverse effect with regard to either KLA or Tencor. See "Terms of the
Merger -- Conditions to the Merger."
Affiliate Agreements
Each of the members of the KLA Board and certain officers of KLA have
entered into agreements restricting sales, dispositions or other transactions
reducing their risk of investment in respect of the shares of KLA Common Stock
held by them to help ensure that the Merger will be treated as a
pooling-of-interests for accounting and financial reporting purposes. Each of
the members of the Tencor Board and certain officers of Tencor have entered into
agreements restricting sales, dispositions or other transactions reducing their
risk of investment in respect of the shares of Tencor Common Stock held by them
prior to the Merger and the shares of KLA Common Stock received by them in the
Merger so as to comply with the requirements of applicable federal securities
and tax laws and to help ensure that the Merger will be treated as a
pooling-of-interests for accounting and financial reporting purposes. See "Terms
of the Merger -- Conditions to the Merger" and "-- Affiliate Agreements."
Interests of Certain Persons in the Merger
In considering the recommendation of the Tencor Board with respect to the
Reorganization Agreement, holders of Tencor Common Stock should be aware that
members of the Tencor Board and the executive officers of Tencor have certain
interests in the Merger that are in addition to the interests of holders of
Tencor Common Stock generally. See "Terms of the Merger -- Interests of Certain
Persons."
Management Retention Arrangements
The Combined Company intends to enter into agreements with or adopt plans
covering members of senior management providing for the continuation of certain
benefits in the event of termination of their full-time employment as a member
of senior management following the Merger. These agreements and plans are
expected to provide for (i) the continuation of compensation (at then current
levels) for periods ranging from six months to two years (depending on
management position), and (ii) the continued vesting of certain stock options
for periods up to three years (depending on management position), in each case
based upon the availability of some continued service to the Combined Company.
See "Terms of the Merger -- Interests of Certain Persons."
9
Anti-takeover Provisions of Delaware Law and the Combined Company's Charter
Documents
Upon consummation of the Merger, the shareholders of Tencor, a corporation
organized under the laws of California, will become shareholders of the Combined
Company, a corporation organized under the laws of Delaware. Certain provisions
of Delaware law applicable to the Combined Company may have the effect of
delaying, deterring or preventing changes in control or management of the
Combined Company. The charter documents of the Combined Company will contain
certain additional provisions which may further this effect. The Combined
Company will be subject to the provisions of Section 203 of the Delaware General
Corporation Law, which restricts the corporation from entering into certain
"business combinations" with an "interested person" for a period of three years.
An interested person is generally defined to mean a person or entity that has
acquired in excess of 15% of the Combined Company's voting stock. KLA has
adopted the Rights Agreement between KLA and First National Bank of Boston, as
Rights Agent, as restated and amended April 25, 1996 (the "KLA Rights Plan," and
each right under the KLA Rights Plan, a "Right"). Pursuant to the KLA Rights
Plan, each outstanding share of KLA Common Stock has a Right to purchase that
number of shares of KLA Common Stock having a market value at the time equal to
twice the exercise price (currently $160) upon the occurrence of certain events,
including, but not limited to, ten days after the commencement or announcement
of a hostile tender offer. In addition, the Combined Company Board will have
authority to issue up to 1,000,000 shares of Preferred Stock, par value $0.001
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of such shares without any further vote or action by the
shareholders. The issuance of such Preferred Stock could have a dilutive effect
upon the shareholders of the Combined Company, and could discourage an
unsolicited attempt to take over the Combined Company. In addition, shareholders
of the Combined Company will not be eligible to call Special Meetings, and
shareholders will not be permitted to take actions by written consent. See
"Comparison of Capital Stock."
MARKET AND PRICE DATA
KLA Common Stock is traded on Nasdaq under the symbol "KLAC." On January
14, 1997, the last trading day before the execution of the Reorganization
Agreement, the closing price of KLA Common Stock as reported on Nasdaq was
$40.875 per share. On March 7, 1997, the closing price of KLA Common Stock as
reported on Nasdaq was $40.313 per share. There can be no assurance as to the
actual price of KLA Common Stock prior to, at or at any time following the
Effective Time of the Merger, or in the event the Merger is not consummated.
Tencor Common Stock is traded on Nasdaq under the symbol "TNCR." On January
14, 1997, the last day before the execution of the Reorganization Agreement, the
closing price of Tencor Common Stock as reported on Nasdaq was $30.50 per share.
Following the Merger, Tencor Common Stock will no longer be traded on Nasdaq. On
March 7, 1997, the closing price of Tencor Common Stock as reported on Nasdaq
was $39.75 per share. There can be no assurance as to the actual price of Tencor
Common Stock prior to, or at the Effective Time of the Merger, or in the event
the Merger is not consummated. See "Risk Factors" and "Comparison of Capital
Stock."
10
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following selected historical annual financial information of KLA and
Tencor has been derived from their respective audited historical financial
statements and should be read in conjunction with such consolidated financial
statements and notes thereto. The consolidated financial statements for KLA for
the three fiscal years ended June 30, 1996 and for Tencor for the three fiscal
years ended December 31, 1996 are incorporated by reference in this Joint Proxy
Statement/Prospectus. The selected historical financial information as of
December 31, 1996, and for the six month periods ended December 31, 1995 and
1996, for KLA have been derived from the unaudited consolidated financial
statements of KLA, and in the opinion of KLA's management reflect all
adjustments necessary for the fair presentation of this unaudited interim
financial information. The results of operations for those interim periods are
not necessarily indicative of the results to be expected for the entire year.
The selected pro forma combined financial information is derived from the
unaudited pro forma combined condensed financial statements, and should be read
in conjunction with such unaudited pro forma financial statements and the notes
thereto included in this Joint Proxy Statement/Prospectus. For purposes of the
pro forma operating data, KLA's consolidated financial statements for each of
the three fiscal years ended June 30, 1996, and for the six month periods ended
December 31, 1995 and 1996 have been combined with Tencor's consolidated
financial statements for each of the three twelve month periods ended June 30,
1996, and the six month periods ended December 31, 1995 and 1996. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the Merger had been consummated at the beginning of the periods
indicated, nor is it necessarily indicative of future operating results or
financial position.
KLA SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
HISTORICAL CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales............................ $155,963 $167,236 $243,737 $442,416 $694,867 $314,826 $315,825
Restructuring charges (recovery)..... 8,158(1) (718)(1) -- -- -- -- --
Income (loss) from operations........ (13,585) 11,490 40,082 82,051(2) 177,504 81,843 61,727
Net income (loss).................... (13,810) 6,961 30,188 58,618(2) 120,884 57,161 45,308
Net income (loss) per share.......... $ (0.38) $ 0.18 $ 0.68 $ 1.20(2) $ 2.31 $ 1.09 $ 0.86
Shares used in computing net income
per share.......................... 36,902 39,414 44,088 48,870 52,329 52,397 52,605
JUNE 30,
----------------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996
-------- -------- -------- -------- --------- -------------
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..... $ 23,711 $ 52,362 $139,126 $244,753 $261,411 $379,933
Total assets......................................... 188,457 199,089 321,570 546,296 712,772 758,759
Long-term obligations................................ 24,000 20,000 20,000 -- -- --
Total shareholders' equity........................... 103,032 114,050 227,382 403,969 537,249 589,083
- ---------------
(1) Represents a one-time non-recurring pre-tax restructuring charge for the
discontinuation of a business unit.
(2) Includes a one-time non-recurring pre-tax charge of $25.2 million to
write-off in-process technology in conjunction with the KLA acquisition of
Metrologix Inc. Excluding this one-time charge, net income per share for KLA
on a stand-alone basis would have been $1.53 for the year ended June 30,
1995.
11
TENCOR SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.............................................. $85,054 $107,874 $182,330 $330,197 $403,170
Income from operations.................................... 3,159 10,342 39,476(3) 104,396 91,950(4)
Net income................................................ 2,402 7,158 24,316(3) 65,324 61,288(4)
Net income per share...................................... $ 0.12 $ 0.30 $ 0.90(3) $ 2.09 $ 1.93(4)
Shares used in computing net income per share............. 20,270 23,492 27,162 31,212 31,763
DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $14,054 $ 31,551 $ 73,826 $174,565 $258,132
Total assets.............................................. 64,487 91,340 184,549 395,040 484,419
Long-term obligations..................................... 959 205 1,195 3,027 1,335
Total shareholders' equity................................ 49,236 70,192 144,729 288,145 365,033
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
--------------------------------- ---------------------
1994 1995 1996 1995 1996
------- -------- -------- -------- --------
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net sales................................................. $376,454 $695,950 $1,094,492 $498,751 $503,295
Income from operations.................................... 55,784 156,609 296,266 140,843 93,915(4)
Net income................................................ 40,443 104,811 196,634 94,114 67,799(4)
Net income per share...................................... $ 0.59 $ 1.34 $ 2.34 $ 1.11 $ 0.80(4)
Shares used in computing net income per share............. 69,076 78,427 84,195 84,452 84,403
DECEMBER 31,
1996
------------
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..................................................... $ 638,065
Total assets......................................................................................... 1,243,178
Long-term obligations................................................................................ 1,335
Total shareholders' equity........................................................................... 954,116
- ---------------
(3) Includes $2.3 million of expenses related to Tencor's acquisition of
Prometrix Corporation.
(4) Includes a one-time non-recurring pre-tax restructuring charge of $8.5
million. Excluding this one-time charge, net income per share for Tencor on
a stand-alone basis would have been $2.10 for the year ended December 31,
1996. Pro forma net income per share, excluding this one-time charge, would
have been $0.87 for the six month period ended December 31, 1996.
12
RISK FACTORS
The following factors should be considered carefully by holders of Tencor
Common Stock in evaluating whether to approve and adopt the Reorganization
Agreement, and by holders of KLA Common Stock in evaluating whether to approve
the issuance of KLA Common Stock pursuant to the Reorganization Agreement. These
factors should be considered in conjunction with the other information included
or incorporated by reference in this Joint Proxy Statement/Prospectus, including
in conjunction with forward-looking statements made herein.
RISKS RELATED TO MERGER
Difficulties of Integrating Two Companies. The successful combination of
KLA and Tencor will require substantial attention from management. The
anticipated benefits of this Merger will not be achieved unless the operations
of Tencor are successfully combined with those of KLA in a timely manner. The
difficulties of assimilation may be increased by the need to integrate personnel
and to combine different corporate cultures. The diversion of the attention of
management and any difficulties encountered in the transition process could have
an adverse impact on the revenues and operating results of the Combined Company.
The successful combination of the two companies will also require integration of
the companies' product offerings and the coordination of their research and
development and sales and marketing efforts. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses,
which could have a material adverse effect on their combined operations. There
can be no assurance that the Combined Company will retain and successfully
integrate its key management, technical, sales and customer support personnel,
or that it will realize any of the anticipated benefits of the Merger. See
"Approval of the Merger and Related Transactions -- Joint Reasons For the
Merger."
Risks Associated with Fixed Exchange Ratio. As a result of the Merger,
each outstanding share of Tencor Common Stock will be converted into the right
to receive one share of common stock of the Combined Company. Because the
Exchange Ratio is fixed, it will not increase or decrease due to fluctuations in
the market price of either KLA Common Stock or Tencor Common Stock. The specific
value of the consideration to be received by Tencor shareholders in the Merger
will depend on the market price of KLA Common Stock at the Effective Time. In
the event that the market price of KLA Common Stock decreases or increases prior
to the Effective Time, the market value at the Effective Time of the Common
Stock to be received by Tencor shareholders in the Merger would correspondingly
decrease or increase. The market prices of KLA Common Stock and Tencor Common
Stock as of a recent date are set forth herein under "Summary -- Market and
Price Data," and "Comparative Market Price Data." KLA and Tencor shareholders
are advised to obtain recent market quotations for KLA Common Stock and Tencor
Common Stock. The KLA Common Stock and the Tencor Common Stock historically have
been subject to substantial price volatility. No assurance can be given as to
the market prices of KLA Common Stock or Tencor Common Stock at any time before
the Effective Time or as to the market price of the common stock of the Combined
Company at any time thereafter. See "Summary -- Market and Price Data,"
"Comparative Market Price Data," and "Comparison of Capital Stock."
Substantial Expenses Resulting from the Merger. The negotiation and
implementation of the Merger will result in aggregate pre-tax expenses to KLA
and Tencor estimated at approximately $40 million, primarily relating to costs
associated with combining the operations of the two companies and the fees of
financial advisors, attorneys, merger consultants and accountants. Although the
companies do not believe that the costs will exceed the aforementioned amount,
there can be no assurance that the companies' estimate is correct or that
unanticipated contingencies will not occur that will substantially increase the
costs of combining the operations of the two companies. In any event, costs
associated with the Merger are expected to negatively impact results of
operations in the quarter ending June 30, 1997.
Dependence on Retention and Integration of Key Management. The success of
the Combined Company is dependent on the retention and integration of the
management of KLA and Tencor, including Kenneth Levy, Jon D. Tompkins, Kenneth
L. Schroeder and Graham Siddall, Ph.D. While the Combined Company
13
intends to implement management retention arrangements for its senior
management, there can be no assurance that the senior management personnel will
remain with the Combined Company. The loss of services of any of the key members
of the Combined Company's management team, especially Messrs. Levy, Tompkins,
Schroeder and Siddall, could adversely affect the Combined Company's business
and financial results.
RISKS RELATED TO BUSINESS AND OPERATIONS
Fluctuations in Quarterly Operating Results. KLA's and Tencor's quarterly
operating results have fluctuated in the past and the Combined Company's
operating results may fluctuate in the future. The Combined Company's operating
results are dependent on many factors, including the economic conditions in the
semiconductor industry, the size and timing of the receipt of orders from
customers, customer cancellations or delays of shipments, the Combined Company's
ability to develop, introduce and market new and enhanced products on a timely
basis, the introduction of new products by its competitors, changes in average
selling prices and product mix, and exchange rate fluctuations, among others.
The Combined Company's expense levels will be based, in part, on expectations of
future revenues. If revenue levels in a particular quarter do not meet
expectations, operating results could be adversely affected. Both KLA and Tencor
derive their revenues primarily from the sale of a relatively small number of
high-priced systems which can range in price from $100,000 to over $3 million
per unit. The sale of fewer systems than anticipated in any quarter may have a
substantial negative impact on the operating results for the quarter.
Historically, Tencor has operated with relatively less backlog than KLA, often
receiving orders and shipping products in the same quarter. The Combined
Company's results of operations for a particular quarter could be adversely
affected if anticipated orders are not received in time to enable shipment
during such quarter, if anticipated shipments are delayed or canceled by one or
more customers or if shipments are delayed due to manufacturing difficulties.
The slowdown in the semiconductor industry and in the construction of new wafer
fabrication facilities has resulted in both KLA and Tencor experiencing a
reduction in new orders as well as rescheduled and canceled orders. There can be
no assurance that this slowdown will not continue. There can be no assurance
that these and other factors will not materially adversely affect the Combined
Company's future business and financial results.
Current Slowdown and Volatility in the Semiconductor Equipment
Industry. Both KLA's and Tencor's businesses depend and the business of the
Combined Company will depend upon the capital equipment expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits. In addition, both companies' businesses depend upon the new
construction of semiconductor fabrication facilities and improvements to
existing fabrication facilities to improve yields. The semiconductor industry
has been cyclical in nature and historically has experienced periodic downturns.
The semiconductor industry is presently experiencing a slowdown in terms of
product demand and volatility in terms of product pricing. This slowdown and
volatility has caused the semiconductor industry to reduce purchases of
semiconductor manufacturing equipment and construction of new fabrication
facilities. These conditions have adversely affected KLA's and Tencor's, and may
continue to adversely affect the Combined Company's, aggregate bookings,
revenues and operating results, and no assurance can be given that the Combined
Company's bookings, revenue and operating results will not be adversely affected
by future downturns in the semiconductor industry. Even during periods of
reduced revenues, in order to remain competitive KLA and Tencor as well as the
Combined Company, will be required to continue to invest in research and
development and to maintain extensive ongoing worldwide customer service and
support capability which could adversely affect its financial results.
Dependence on New Products and Processes; Rapid Technological
Change. Rapid technological changes in semiconductor manufacturing processes
subject the semiconductor manufacturing equipment industry to increased pressure
to maintain technological parity with deep submicron process technology. Both
KLA and Tencor believe that the future success of the Combined Company will
depend in part upon its ability to develop, manufacture and successfully
introduce new products with improved capabilities and to continue to enhance
existing products. Due to the risks inherent in transitioning to new products,
the Combined Company will be required to accurately forecast demand for new
products while managing the transition from older products. If new products have
reliability or quality problems, reduced orders, higher manufacturing
14
costs, delays in acceptance of and payment for new products and additional
service and warranty expense may result. In the past, both KLA and Tencor have
experienced some delays as well as reliability and quality problems in
connection with product introductions, resulting in some of these consequences.
There can be no assurance that the Combined Company will successfully develop
and manufacture new products, or that new products introduced by the Combined
Company will be accepted in the marketplace. If the Combined Company does not
successfully introduce new products, the Combined Company's results of
operations will be materially adversely affected.
In addition, both KLA and Tencor expect the Combined Company to continue to
make significant investments in research and development. There can be no
assurance that future technologies, processes or product developments will not
render the Combined Company's current product offerings obsolete or that the
Combined Company will be able to develop and introduce new products or
enhancements to its existing products which satisfy customer needs in a timely
manner or achieve market acceptance. The failure to do so could adversely affect
the Combined Company's business.
Highly Competitive Industry. The semiconductor equipment industry is
highly competitive. Each of KLA and Tencor has experienced and expects to
continue to face substantial competition throughout the world. Both KLA and
Tencor believe that to remain competitive, the Combined Company will require
significant financial resources in order to offer a broad range of products, to
maintain customer service and support centers worldwide, and to invest in
product and process research and development. Both KLA and Tencor believe that
the semiconductor equipment industry is becoming increasingly dominated by large
manufacturers such as Applied Materials, Inc. ("Applied Materials"), which
recently entered the yield management market, Hitachi Electronics Engineering
Co., Ltd. and Tokyo Electron Limited, who have the resources to support
customers on a worldwide basis. Many of these competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing and customer service and support capabilities than either KLA or
Tencor have or the Combined Company will have. In addition, there are smaller
emerging semiconductor equipment companies which provide innovative technology.
The Combined Company expects its competitors to continue to improve the design
and performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics. No
assurance can be given that the Combined Company will be able to compete
successfully worldwide.
Importance of International Sales. International sales accounted for 65%,
69% and 68% of KLA's net sales for fiscal years 1994, 1995 and 1996,
respectively, and 51%, 62% and 64% of Tencor's net sales for fiscal years 1994,
1995 and 1996, respectively. Both KLA and Tencor expect that international sales
will continue to represent a significant percentage of net sales of the Combined
Company. The future performance of the Combined Company will be dependent, in
part, upon its ability to continue to compete successfully in Asia, one of the
largest areas for the sale of yield management and process monitoring equipment.
The Combined Company's ability to compete in this area in the future is
dependent upon the continuation of favorable trading relationships between the
region (especially Japan and Korea) and the United States and the continuing
ability of the Combined Company to maintain satisfactory relationships with
leading semiconductor companies in the region. International sales and
operations may be adversely affected by the imposition of governmental controls,
restrictions on export technology, political instability, trade restrictions,
changes in tariffs and the difficulties associated with staffing and managing
international operations. In addition, international sales may be adversely
affected by the economic conditions in each country. The net sales and income
from the Combined Company's international business may be affected by
fluctuations in currency exchange rates. Although both KLA and Tencor attempt to
manage near term currency risks through "hedging," and the Combined Company is
expected to do the same, there can be no assurance that such efforts will be
adequate. These factors could have a material adverse effect on the Combined
Company's future business and financial results.
Dependence on Key Suppliers. Certain of the components and subassemblies
included in each of KLA's and Tencor's products are obtained from a single
supplier or a limited group of suppliers. Both KLA and Tencor believe that
alternative sources could be obtained and qualified to supply these products.
Nevertheless, a prolonged inability to obtain certain components or a
significant increase in the price of one or more of these
15
components could have an adverse effect on the Combined Company's operating
results and could adversely affect relationships with customers.
Intellectual Property Matters. From time to time, both KLA and Tencor have
received letters from third parties alleging infringement of such parties'
patent rights by KLA's or Tencor's products. While these letters are prevalent
in the industry, the companies believe that generally it is possible to
negotiate licenses on commercially reasonable terms. However, no assurance can
be given that the Combined Company will be able to negotiate necessary licenses
on commercially reasonable terms, or at all, or that any litigation resulting
from such claims would not have a material adverse effect on the Combined
Company's business and financial results.
Both KLA's and Tencor's success depends in part on their proprietary
technology. While KLA and Tencor attempt to protect their proprietary technology
through patents, copyrights and trade secrets, they believe that the success of
the Combined Company will depend more upon technological expertise, continuing
development of new systems, market penetration and installed base and the
ability to provide comprehensive support and service to customers. There can be
no assurance that the Combined Company will be able to protect its technology or
that competitors will not be able to develop similar technology independently.
KLA and Tencor currently have a number of United States and foreign patents and
patent applications. There can be no assurance that any patents issued to KLA or
Tencor will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide competitive advantages to KLA, Tencor or to the
Combined Company.
Dependence on Key Employees. The future success of the Combined Company is
dependent, in part, on its ability to retain certain key personnel. To continue
to grow the Combined Company will also need to attract additional skilled
personnel in all areas of its business on a worldwide basis. Competition for
such personnel is intense. There can be no assurance that the Combined Company
will be able to retain its existing key management, engineering and sales
personnel or attract additional qualified employees in the future. This could be
particularly significant if the Combined Company needs to hire, train and
assimilate a large number of new employees. A failure to retain or attract
qualified employees could materially adversely affect the business and financial
results following the Merger.
Potential Volatility of Common Stock Price. The market price of the common
stock of the Combined Company could be subject to significant fluctuations in
response to variations in quarterly operating results, shortfalls in revenues or
earnings from levels expected by securities analysts and other factors such as
announcements of technological innovations or new products by the Combined
Company or by the Combined Company's competitors, government regulations,
developments in patent or other proprietary rights. In addition, the stock
market has in recent years experienced significant price fluctuations. These
fluctuations often have been unrelated to the operating performance of the
specific companies whose stocks are traded. Broad market fluctuations, as well
as economic conditions generally in the semiconductor industry, may adversely
affect the market price of the common stock of the Combined Company.
Potential Anti-takeover Effects. Certain provisions of the KLA Rights
Plan, its Certificate of Incorporation and Delaware law could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Combined Company. The Combined Company Board will have the authority to
issue up to 1,000,000 shares of Preferred Stock without any further vote or
action by the shareholders. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Combined Company
without further action by the shareholders and could adversely affect the rights
and powers, including voting rights, of the holders of common stock of the
Combined Company. Such effects could result in a decrease in the market price of
the Combined Company's common stock. In addition, shareholders of the Combined
Company will not be eligible to call special meetings of the shareholders, and
shareholders will not be permitted to take actions by written consent. These
provisions could diminish the opportunities for a shareholder to participate in
tender offers, including tender offers at a price above the then current market
value of the common stock of the Combined Company. Such provisions may also
inhibit increases in the market price of the common stock of the Combined
Company that could result from takeover attempts. See "Comparison of Capital
Stock."
16
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of KLA and
Tencor and combined per share data on an unaudited pro forma basis after giving
effect to the Merger on a pooling-of-interests basis of accounting. The
information set forth below should be read in conjunction with the selected
historical financial data and the unaudited pro forma combined condensed
financial information, included elsewhere in this Joint Proxy
Statement/Prospectus. The pro forma combined financial data are not necessarily
indicative of the operating results that would have been achieved had the Merger
been consummated as of the beginning of the periods presented and should not be
construed as representative of future operations.
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
------------------------ --------------
1994 1995 1996 1995 1996
----- ----- ------ ----- ------
HISTORICAL -- KLA:
Net income per share................................... $0.68 $1.20(4) $ 2.31 $1.09 $ 0.86
Book value per share(1) (at period end)................ $4.98 $8.07 $10.53 $9.21 $11.48
YEAR ENDED
DECEMBER 31,
----------------------------------------
1993 1994 1995 1996
----- ----- ----- -------
HISTORICAL -- TENCOR:
Net income per share................................... $0.30 $0.90 $2.09 $ 1.93(5)
Book value per share(1) (at period end)................ $3.05 $5.27 $9.37 $ 11.76
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
------------------------ --------------
1994 1995 1996 1995 1996
----- ----- ------ ----- ------
PRO FORMA AND EQUIVALENT PRO FORMA COMBINED NET INCOME
PER SHARE:
Pro forma net income per KLA share(2)................ $0.59 $1.34(4) $ 2.34 $1.11 $ 0.80(5)
Equivalent pro forma net income per Tencor
share(2)(3)....................................... $0.59 $1.34 $ 2.34 $1.11 $ 0.80
PRO FORMA COMBINED BOOK VALUE PER SHARE (AT PERIOD
END):
Pro forma combined book value per KLA share(2)....... $4.39 $8.11 $10.65 $9.27 $11.58
Equivalent pro forma combined book value per Tencor
share(2)(3)....................................... $4.39 $8.11 $10.65 $9.27 $11.58
- ---------------
(1) Historical book value per share is computed by dividing total shareholders'
equity by the number of shares outstanding at the end of each period.
(2) For purposes of the pro forma combined data, KLA's financial data for the
three fiscal years ended June 30, 1996 and for the six month periods ended
December 31, 1995 and 1996, have been combined with Tencor's financial data
for the same periods. Pro forma combined book value per share is computed by
dividing pro forma shareholders' equity by the pro forma number of shares of
common stock outstanding of the Combined Company.
(3) The equivalent pro forma combined net income per Tencor share and equivalent
pro forma combined book value per Tencor share are calculated by multiplying
the respective pro forma combined per KLA share amounts by the Exchange
Ratio of one share of KLA Common Stock for each share of Tencor Common
Stock.
(4) Includes a one-time non-recurring pre-tax charge of $25.2 million to
write-off in-process technology in conjunction with the KLA acquisition of
Metrologix Inc. Excluding this one-time charge, net income per share for KLA
on a stand-alone basis would have been $1.53 for the year ended June 30,
1995.
(5) Includes a one-time non-recurring pre-tax restructuring charge of $8.5
million. Excluding this one-time charge, net income per share for Tencor on
a stand-alone basis would have been $2.10 for the year ended December 31,
1996. Pro forma net income per share excluding this one-time charge would
have been $0.87 for the six month period ended December 31, 1996.
17
COMPARATIVE MARKET PRICE DATA
The table below sets forth, for the calendar quarters indicated, the
reported high and low closing prices of KLA Common Stock and Tencor Common Stock
as reported on Nasdaq.
KLA TENCOR
COMMON STOCK COMMON STOCK
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
1995 CALENDAR YEAR
First Quarter.................................................. $32 1/2 $231/4 $31 5/8 $177/8
Second Quarter................................................. 39 5/8 30 43 1/2 28 /16
Third Quarter.................................................. 47 1/8 381/2 47 1/8 391/4
Fourth Quarter................................................. 46 3/4 261/16 46 243/4
1996 CALENDAR YEAR
First Quarter.................................................. 35 1/4 213/4 29 161/2
Second Quarter................................................. 31 1/4 211/4 26 1/2 17
Third Quarter.................................................. 23 173/4 19 5/8 143/4
Fourth Quarter................................................. 38 1/2 203/4 28 3/8 175/8
1997 CALENDAR YEAR
First Quarter (through March 7, 1997).......................... 48 5/8 343/16 46 3/8 257/8
On January 14, 1997, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement, the
closing prices on Nasdaq were $40.875 per share of KLA Common Stock and $30.50
per share of Tencor Common Stock. On March 7, 1997, the closing prices on Nasdaq
were $40.313 per share of KLA Common Stock and $39.75 per share of Tencor Common
Stock.
Because the Exchange Ratio is fixed, changes in the market price of KLA
Common Stock will affect the dollar value of the common stock of the Combined
Company to be received by shareholders of Tencor in the Merger. KLA shareholders
and Tencor shareholders are urged to obtain current market quotations for KLA
Common Stock and Tencor Common Stock prior to the KLA Special Meeting and Tencor
Special Meeting, respectively.
Neither KLA nor Tencor has paid cash dividends. The Combined Company
currently intends to retain earnings for development of its business and not to
distribute earnings to shareholders as dividends. The declaration and payment by
the Combined Company of any future dividends and the amount thereof will depend
upon the Combined Company's results of operations, financial condition, cash
requirements, future prospects, limitations imposed by credit agreements or
senior securities and other factors deemed relevant by its Board of Directors.
18
KLA SPECIAL MEETING
DATE, TIME AND PLACE OF KLA SPECIAL MEETING
The KLA Special Meeting will be held at KLA's headquarters at 160 Rio
Robles, San Jose, California 95134, on Wednesday, April 30, 1997 at 10:00 a.m.
local time.
PURPOSE
The purpose of the KLA Special Meeting is to approve (i) the issuance of
shares of KLA Common Stock to the shareholders of Tencor pursuant to the
Reorganization Agreement ("Proposal One"); (ii) the amendment to the Certificate
to change the corporate name of KLA to "KLA-Tencor Corporation," subject to and
contingent upon consummation of the Merger ("Proposal Two"); and (iii) the
amendment to the Certificate to increase the authorized shares of KLA Common
Stock by 175 million shares to 250 million shares and to eliminate the
designation of a class of Junior Common Stock ("Proposal Three"). See "Terms of
the Merger" and "Additional Matters Being Submitted to a Vote of only KLA
Shareholders -- Proposal Two -- Amendment to Restated Certificate of
Incorporation -- Name Change" and "-- Proposal Three -- Amendment to Restated
Certificate of Incorporation -- Increase to Authorized Common Stock."
RECORD DATE AND OUTSTANDING SHARES
Only KLA shareholders of record on the KLA Record Date are entitled to
notice of and to vote at the KLA Special Meeting. As of the KLA Record Date,
there were approximately 1,285 shareholders of record holding an aggregate of
approximately 51,655,785 shares of KLA Common Stock.
On or about March 21, 1997, a notice meeting the requirements of Delaware
law was mailed to all shareholders of record as of the KLA Record Date.
VOTE REQUIRED
Under Delaware law, the charter documents of KLA and Nasdaq rules, approval
of (i) the issuance of shares of KLA Common Stock pursuant to the Reorganization
Agreement requires the affirmative vote of a majority of the total votes cast
regarding such proposal and (ii) each of the amendments of the Certificate
requires the affirmative vote of holders of a majority of the outstanding shares
of KLA Common Stock. Each shareholder of record of KLA Common Stock on the KLA
Record Date is entitled to cast one vote per share, exercisable in person or by
properly executed proxy, on each matter properly submitted for the vote of the
shareholders of KLA at the KLA Special Meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of KLA Common Stock entitled to vote at the
KLA Special Meeting shall constitute a quorum. Broker non-votes and shares held
by persons abstaining will be counted in determining whether a quorum is present
at the KLA Special Meeting. For Proposal One, abstentions are counted as votes
cast and accordingly have the same effect as votes against the proposal, whereas
broker non-votes are not counted as votes cast and therefore once a quorum is
present, will have no effect on the proposal. For purposes of Proposals Two and
Three, the effect of an abstention or broker non-vote is the same as a vote
against such proposals.
PROXIES
Each of the persons named in the proxy is an officer of KLA. All shares of
KLA Common Stock that are entitled to vote and are represented at the KLA
Special Meeting either in person or by properly executed proxies received prior
to or at the KLA Special Meeting and not duly and timely revoked will be voted
at the KLA Special Meeting in accordance with the instructions indicated on such
proxies. If no such instructions are indicated, such proxies will be voted for
the approval of the issuance of shares of KLA Common Stock and the amendments to
the Certificate.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of KLA at or before the taking of the vote at
19
the KLA Special Meeting, a written notice of revocation bearing a later date
than the proxy; (ii) duly executed a later-dated proxy relating to the same
shares and delivering it to the Secretary of KLA before the taking of the vote
at the KLA Special Meeting; or (iii) attending the KLA Special Meeting and
voting in person (although attendance at the KLA Special Meeting will not in and
of itself constitute a revocation of a proxy). Any written notice of revocation
or subsequent proxy should be sent so as to be delivered to KLA at 160 Rio
Robles, San Jose, California 95134, Attention: Secretary, or hand-delivered to
the Secretary of KLA, in each case at or before the taking of the vote at the
KLA Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of KLA shareholders will be borne by KLA. In
addition, KLA may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Proxies may also be solicited by certain
KLA directors, officers and regular employees personally or by telephone,
telegram, letter or facsimile. Such persons will not receive additional
compensation, but may be reimbursed for reasonable out-of-pocket expenses
incurred in connection with such solicitation. In addition, KLA has retained
Skinner & Company, Inc. to assist in the solicitation of proxies from brokers,
nominees, institutions and individuals at an estimated fee of $3,500 plus
reimbursement of reasonable expenses. Arrangements will also be made with
custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and KLA will reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith.
RECOMMENDATIONS OF KLA BOARD OF DIRECTORS
The KLA Board has unanimously approved the Reorganization Agreement and the
transactions contemplated thereby and has determined that the Merger is fair to,
and in the best interests of, KLA and its shareholders. After careful
consideration, the KLA Board unanimously recommends a vote in favor of (i) the
issuance of shares of KLA Common Stock pursuant to the Reorganization Agreement;
(ii) the amendment of the Certificate to change the corporate name of KLA to
"KLA-Tencor Corporation" subject to and contingent upon consummation of the
Merger; and (iii) the amendment to the Certificate to increase the number of
authorized shares of KLA Common Stock by 175 million shares to 250 million
shares and to eliminate the designation of a class of Junior Common Stock.
20
TENCOR SPECIAL MEETING
DATE, TIME AND PLACE OF TENCOR SPECIAL MEETING
The Tencor Special Meeting will be held at Tencor's headquarters at One
Technology Drive, Milpitas, California 95035, on Wednesday, April 30, 1997 at
10:00 a.m. local time.
PURPOSE
The purpose of the Tencor Special Meeting is to approve and adopt the
Reorganization Agreement.
RECORD DATE AND OUTSTANDING SHARES
Only shareholders of record of Tencor Common Stock on the Tencor Record
Date are entitled to notice of, and to vote at, the Tencor Special Meeting. As
of the Tencor Record Date, there were approximately 830 shareholders of record
holding an aggregate of approximately 31,245,304 shares of Tencor Common Stock.
On or about March 21, 1997, a notice meeting the requirements of California
law is being mailed to all shareholders of record as of the Tencor Record Date.
VOTE REQUIRED
Pursuant to the CCC and the Tencor Restated Articles of Incorporation, as
amended, the affirmative vote of the holders of a majority of the Tencor Common
Stock outstanding as of the Tencor Record Date is required to approve and adopt
the Reorganization Agreement. Each shareholder of record of Tencor Common Stock
on the Tencor Record Date, will be entitled to cast one vote per share on each
matter to be acted upon at the Tencor Special Meeting.
The representation, in person or by proxy, of at least a majority of the
outstanding shares of Tencor Common Stock entitled to vote at the Tencor Special
Meeting is necessary to constitute a quorum for the transaction of business. For
purposes of obtaining the required vote of a majority of the outstanding shares
of Tencor Common Stock for approval of the Merger, the effect of an abstention
or a broker non-vote is the same as that of a vote against the proposal.
PROXIES
Each of the persons named in the proxy is an officer of Tencor. All shares
of Tencor Common Stock that are entitled to vote and are represented at the
Tencor Special Meeting either in person or by properly executed proxies received
prior to or at the Tencor Special Meeting and not duly and timely revoked will
be voted at the Tencor Special Meeting in accordance with the instructions
indicated on such proxies. If no such instructions are indicated, such proxies
will be voted for to approve and adopt the Reorganization Agreement.
Execution of a proxy does not in any way affect a shareholder's right to
attend the meeting and vote in person. Any proxy may be revoked by a shareholder
at any time before it is exercised by delivering a written revocation or a
later-dated proxy to the Secretary of Tencor, or by attending the meeting and
voting in person. Any written notice of revocation or subsequent proxy should be
sent so as to be delivered to Tencor at One Technology Drive, Milpitas,
California 95035, Attention: Secretary, or hand-delivered to the Secretary of
Tencor, in each case at or before the taking of the vote at the Tencor Special
Meeting.
SOLICITATION OF PROXIES; EXPENSES
All costs of solicitation of proxies will be borne by Tencor. Brokers,
custodians and fiduciaries will be requested to forward proxy soliciting
material to the owners of stock held in their names, and Tencor will reimburse
them for their reasonable out-of-pocket costs. In addition, proxies may also be
solicited by certain directors, officers and employees of Tencor personally or
by mail, telephone or telegraph following the original solicitation. Such
persons will not receive additional compensation for such solicitation. Tencor
has retained Corporate Investor Communications, Inc., an independent proxy
solicitation firm, to assist in soliciting proxies at an estimated fee of $6,000
plus reimbursement of reasonable expenses.
21
DISSENTERS' RIGHTS
If the Reorganization Agreement is approved by the shareholders of Tencor
at the Tencor Special Meeting and the Merger is effected by Tencor, Tencor may
have obligations under Chapter 13 of the CCC to dissenting shareholders
("Dissenting Shareholders"). To qualify as a Dissenting Shareholder, a
shareholder must (i) provide a Notice to Tencor no later than the day of the
Tencor Special Meeting requesting that Tencor purchase and pay the fair market
value in cash for the Tencor Common Stock held by said shareholder, and (ii)
vote such shares against the Merger. In addition, holders of at least 5% of the
outstanding shares of Tencor Common Stock must file Notices. If less than 5% of
the outstanding shares of Tencor Common Stock send Notices to Tencor, under
Chapter 13 of the CCC, there shall be no Dissenting Shareholders and all shares
of Tencor Common Stock shall be exchanged for common stock of the Combined
Company in the Merger. If holders of more than 10% of the outstanding shares of
Tencor Common Stock are Dissenting Shareholders, the Merger will be precluded
from being accounted for as a pooling-of-interests and accordingly, one of the
closing conditions of the Merger will not be satisfied. See "Terms of the
Merger -- Dissenters' Rights."
RECOMMENDATIONS OF TENCOR BOARD OF DIRECTORS
The Tencor Board has unanimously approved the Reorganization Agreement and
the transactions contemplated thereby and has determined that the Merger is fair
to, and in the best interests of, Tencor and its shareholders. After careful
consideration, the Tencor Board unanimously recommends a vote in favor of
approval and adoption of the Reorganization Agreement.
22
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
THE FOLLOWING DISCUSSION SUMMARIZES THE PROPOSED MERGER AND RELATED
TRANSACTIONS. THE FOLLOWING IS NOT, HOWEVER, A COMPLETE STATEMENT OF ALL
PROVISIONS OF THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS. DETAILED
TERMS OF AND CONDITIONS TO THE MERGER AND CERTAIN RELATED TRANSACTIONS ARE
CONTAINED IN THE REORGANIZATION AGREEMENT, A CONFORMED COPY OF WHICH IS ATTACHED
TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX A. REFERENCE IS ALSO MADE TO
THE KLA OPTION AGREEMENT AND THE TENCOR OPTION AGREEMENT ATTACHED TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AS ANNEX B, AND TO THE OTHER ANNEXES HERETO.
STATEMENTS MADE IN THIS JOINT PROXY STATEMENT/PROSPECTUS WITH RESPECT TO THE
TERMS OF THE MERGER AND SUCH RELATED TRANSACTIONS ARE QUALIFIED IN THEIR
RESPECTIVE ENTIRETIES BY REFERENCE TO THE MORE DETAILED INFORMATION SET FORTH IN
THE REORGANIZATION AGREEMENT AND THE OTHER ANNEXES HERETO. OTHER THAN STATEMENTS
OF HISTORICAL FACT, STATEMENTS MADE IN THIS SECTION INCLUDING STATEMENTS AS TO
THE BENEFITS EXPECTED TO RESULT FROM THE MERGER AND AS TO FUTURE FINANCIAL
PERFORMANCE AND THE ANALYSES PERFORMED BY THE FINANCIAL ADVISORS OF KLA AND
TENCOR ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN RISK FACTORS AND
ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
JOINT REASONS FOR THE MERGER
The Boards of Directors of KLA and Tencor believe that by combining the
highly complementary product lines of the two companies, the Combined Company
would have the potential to realize long-term improved operating and financial
results and a stronger position in the industry. By offering customers a nearly
complete complement of yield management, measurement and analysis products,
supported by an extensive, well-trained staff of service, applications and yield
management engineers, the Combined Company may be better able to serve customer
requirements and improve the return on investment in yield management for
customers. The Merger is expected to allow the Combined Company to eliminate
duplicative research and development and to redeploy these funds to other
research and development activities. Additionally, KLA and Tencor believe that
the Merger will enhance the ability of the Combined Company to compete
effectively against their larger competitors, including Applied Materials, which
has recently entered the yield management market by acquiring Orbot Instruments,
Ltd. ("Orbot") and Opal Inc. ("Opal"). By creating efficiencies that increase
technological development, KLA and Tencor believe that the Merger will greatly
enhance the ability of the Combined Company to be a financially viable
competitor in the highly dynamic market for yield management, measurement and
analysis products.
Each of the Boards of Directors of KLA and Tencor has identified additional
potential mutual benefits of the Merger that they believe will contribute to the
success of the Combined Company. These potential benefits include principally
the following:
- The combination of Tencor's monitoring products with KLA's yield
management products will allow the Combined Company to offer a more
comprehensive and integrated set of yield management tools to its
customers and may enhance its ability to compete more effectively.
- The creation of a larger field sales and service organization, the
expansion of the companies' dedicated sales teams, a higher profile with
customers and greater financial strength may present greater
opportunities for marketing the products of the Combined Company.
- The combined experience, financial resources, size and breadth of product
offerings of the Combined Company may allow the Combined Company to
respond more quickly and effectively to technological change, increased
competition and industry demands in an industry which requires rapid
innovation and change.
- The creation of a combined customer service and technical support system
may permit the Combined Company to provide more effective support
coverage to its customers.
- The combination may allow the Combined Company to sell more products to
customers outside of the semiconductor industry.
23
KLA and Tencor have each identified additional reasons for the Merger,
which are discussed below. Each Board of Directors has recognized that the
potential benefits of the Merger may not be realized. See "Risk Factors."
KLA'S REASONS FOR THE MERGER
At its January 13, 1997 board meeting, the KLA Board unanimously approved
the Reorganization Agreement and the transactions contemplated thereby. KLA's
Board unanimously recommends that the KLA shareholders vote for the issuance of
shares of KLA Common Stock pursuant to the Merger and the related proposals. In
addition to the anticipated joint benefits described above, the KLA Board
believes that the following are additional reasons the Merger will be beneficial
to KLA and its shareholders and for KLA shareholders to vote FOR the proposals
set forth herein:
- Given the complementary nature of the product lines of KLA and Tencor,
the Merger will enhance the opportunity for the potential realization of
KLA's strategic objective of achieving greater scale and presence in the
semiconductor equipment industry.
- Combining with Tencor would provide an opportunity for increased sales to
and support of current KLA and Tencor customers by offering an integrated
and broader product line.
- The KLA shareholders would have the opportunity to participate in the
potential for growth of the Combined Company after the Merger.
The KLA Board considered a number of factors relating to the Merger,
including, but not limited to, the following: (i) the strategic benefits of the
Merger; (ii) historical information concerning KLA's and Tencor's respective
businesses, prospects, financial performance and condition, operations,
technology, management and competitive position, including public reports
concerning results of operations during the most recent fiscal year and fiscal
quarter for each company filed with the SEC; (iii) KLA management's view of the
financial condition, results of operations and businesses of KLA and Tencor
before and after giving effect to the Merger; (iv) current financial market
conditions and historical market prices, volatility and trading information with
respect to KLA Common Stock and Tencor Common Stock; (v) the consideration to be
received by Tencor shareholders in the Merger and the relationship between the
market value of the KLA Common Stock to be issued in exchange for each share of
Tencor Common Stock and a comparison of comparable merger transactions; (vi) the
belief that the terms of the Reorganization Agreement, including the parties'
representations, warranties and covenants, and the conditions to their
respective obligations, are reasonable; (vii) KLA management's view of the
prospects of KLA as an independent company; (viii) the potential for other third
parties to enter into strategic relationships with or to acquire KLA or Tencor;
(ix) the financial analysis and pro forma and other information with respect to
the Merger presented by DMG and Merrill Lynch in KLA Board presentations and
DMG's and Merrill Lynch's opinions, each dated January 14, 1997, that, as of
such date, the Exchange Ratio pursuant to the Reorganization Agreement was fair
from a financial point of view to KLA; (x) the expected impact of the Merger on
KLA's customers and employees; (xi) reports from KLA management, legal and
financial advisors as to the results of the due diligence investigation of
Tencor; and (xii) the expectation that the Merger will be accounted for as a
pooling-of-interests.
The KLA Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including, but not
limited to: (i) the risk that the potential benefits sought in the Merger might
not be fully realized; (ii) the possibility that the Merger might not be
consummated and the effect of public announcement of the Merger on (a) KLA's
sales and operating results, (b) KLA's ability to attract and retain key
management, marketing and technical personnel and (c) progress of certain
development projects; (iii) the potential dilutive effect of the issuance of KLA
Common Stock in the Merger; (iv) the substantial charges to be incurred,
primarily in the quarter ending June 30, 1997, in connection with the Merger,
including costs of integrating the businesses and transaction expenses arising
from the Merger; (v) the risk that despite the efforts of the Combined Company,
key technical and management personnel might not remain employed by the Combined
Company; (vi) various other risks. The KLA Board believed that these risks were
outweighed by the potential benefits of the Merger.
24
TENCOR'S REASONS FOR THE MERGER
At its January 14, 1997 board meeting, the Tencor Board unanimously
approved the Reorganization Agreement and the transactions contemplated thereby.
Tencor's Board unanimously recommends that the Tencor shareholders vote FOR the
proposal to approve the Reorganization Agreement. In addition to the anticipated
joint benefits described above, the Tencor Board believes that the following are
additional reasons the Merger will be beneficial to Tencor and its shareholders
and for Tencor shareholders to vote for the proposal set forth herein:
- The complementary product lines of the two companies and the potential
long-term benefits that could result from the combination of their
businesses. The Tencor Board believes that the Merger presents an
opportunity for the Combined Company to offer broader and stronger
product lines than either company can offer on its own.
- The ability of the Combined Company to provide better solutions for
semiconductor manufacturers by providing integrated products which more
efficiently address customer needs.
- Combining the technological and engineering resources of KLA and Tencor
would be expected to allow the Combined Company to better utilize its
research and development efforts to further innovate and enhance new and
existing product offerings.
- The benefits to Tencor shareholders from owning part of a larger and
financially stronger enterprise.
In the course of its deliberations during Tencor Board meetings held on
December 20, 1996, January 11 and 14, 1997, and the meetings of a Special
Committee of the Board on January 6 and 9, 1997, the Tencor Board and Special
Committee reviewed with Tencor management a number of additional factors
relevant to the Merger, including the strategic overview and prospects for
Tencor, its products and its finances. The Tencor Board and Special Committee
also considered, among other matters (i) historical information concerning
Tencor's and KLA's respective businesses, prospects, financial performance and
condition, operations, technology, management and competitive position,
including public reports concerning results of operations during the most recent
fiscal year and fiscal quarter for each company with the SEC; (ii) Tencor
management's view as to the financial condition, results of operations and
businesses of KLA and Tencor before and after giving effect to the Merger based
on management due diligence and publicly available financial information; (iii)
current financial market conditions and historical market prices, volatility and
trading information with respect to KLA Common Stock and Tencor Common Stock;
(iv) the consideration to be received by Tencor shareholders in the Merger and
the relationship between the market value of the KLA Common Stock to be issued
in exchange for each share of Tencor Common Stock and a comparison of comparable
merger transactions; (v) the belief that the terms of the Reorganization
Agreement, including the parties' representations, warranties and covenants, and
the conditions to their respective obligations, are reasonable; (vi) Tencor
management's view as to the prospects of Tencor as an independent company; (vii)
Tencor management's view as to the potential for other third parties to enter
into strategic relationships with or to acquire KLA or Tencor; (viii) the impact
of the Merger on Tencor's customers and employees; and (ix) reports from Tencor
management, legal and financial advisors as to the results of their due
diligence investigation of KLA. The Tencor Board also considered the terms of
the proposed Reorganization Agreement regarding KLA's and Tencor's respective
rights to consider and negotiate other acquisition proposals in certain
circumstances, as well as the possible effects of the provisions regarding the
termination fees and the KLA and Tencor Option Agreements. In addition, the
Tencor Board noted that the Merger is expected to be accounted for as a
pooling-of-interests and that no goodwill is expected to be created on the books
of the Combined Company as a result thereof. The Tencor Board considered
financial presentations by Lehman Brothers, including the opinion of Lehman
Brothers delivered at the January 14, 1997 meeting of the Tencor Board, which
concluded that the Exchange Ratio provided in the Reorganization Agreement was
fair to Tencor shareholders from a financial point of view on such date (a copy
of this opinion is annexed hereto, and shareholders are urged to carefully
review this opinion).
The Tencor Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Merger, including, but not
limited to, (i) the risk that the potential benefits
25
sought in the Merger might not be fully realized; (ii) the possibility that the
Merger would not be consummated and the effect of the public announcement of the
Merger on (a) Tencor's sales and operating results, (b) Tencor's ability to
attract and retain key management, marketing and technical personnel and (c)
progress of certain development projects; (iii) the substantial charges to be
incurred, primarily in the quarter ending June 30, 1997, in connection with the
Merger, including costs of integrating the businesses and transaction expenses
arising from the Merger; (iv) the risk that despite the efforts of the Combined
Company, key technical and management personnel may not remain employed by the
Combined Company; and (v) various other risks. The Tencor Board believed that
these risks were outweighed by the potential benefits of the Merger.
MATERIAL CONTACTS AND BOARD DELIBERATIONS
KLA and Tencor have been familiar with each others' products for many
years. During 1992, KLA and Tencor discussed merging but never agreed to final
terms.
On November 8, 1996, Mr. Kenneth Levy, Chairman of the Board and Chief
Executive Officer of KLA, and Mr. Jon D. Tompkins, Chairman of the Board,
President and Chief Executive Officer of Tencor had a meeting at which Mr. Levy
proposed that KLA and Tencor explore a business combination transaction.
In November 1996, KLA engaged DMG and Merrill Lynch to act as its financial
advisors in connection with the possible strategic business combination with
Tencor.
On December 4, 1996, Mr. Tompkins and Mr. Schroeder met at an industry
trade show in Japan and briefly discussed the effect on the industry of recent
acquisitions by Applied Materials.
On December 17, 1996, Mr. Levy again met with Mr. Tompkins to discuss a
possible business combination, delivering to him for discussion purposes
proposed terms of such a combination. Mr. Tompkins and Mr. Levy met again on
December 19, 1996 and continued their discussions regarding a possible
combination.
On December 20, 1996, the Tencor Board had a special meeting where it
discussed the industry in which Tencor operates, and in that context, strategic
alternatives available to Tencor in order to enhance its long term strategic
position. The possible merger with KLA was discussed, and the Tencor Board
authorized Tencor's management to continue discussions with KLA and
preliminarily approved the principal terms of KLA's proposal, subject to
completion of due diligence, negotiation of a definitive agreement, further
board deliberation and receipt of a fairness opinion. The Tencor Board also
established a Special Committee of the Tencor Board to review and evaluate the
terms of the merger proposal. On December 21, 1996, Mr. Tompkins telephoned Mr.
Levy advising him of the Tencor Board's actions described above.
On December 26, 1996, Tencor contacted Lehman Brothers regarding Lehman
Brothers' representation of Tencor in connection with the transaction.
On January 3, 1997, representatives of the two companies and their
respective technical, legal and financial advisors met to discuss the timetable
for completing the transaction. Certain members of senior management of each
company were advised of the transaction and began preparing for the due
diligence meetings the following week.
On January 5, 1997, Mr. Tompkins and Mr. Schroeder met to discuss various
operational issues related to the possible merger transaction.
On January 6, 1997, a special meeting of the KLA Board was held. KLA
management reported that an agreement in principle had been reached with respect
to the Exchange Ratio and described the timetable and due diligence schedule.
The KLA Board unanimously agreed that management should continue its
investigation and negotiation of the proposed transaction. On January 6, 1997,
the Special Committee of the Tencor Board met to review the due diligence to
date, including a preliminary presentation from Lehman Brothers, and to discuss
the terms of the transaction. In addition, on January 6, 1997, Mr. Tompkins met
with Mr. Levy and Mr. Schroeder to further discuss the terms of the transaction
and operational issues associated with the combination of the businesses.
26
Between January 7, 1997 and January 9, 1997, representatives of each
company and its respective technical, legal and financial advisors met to
conduct due diligence as to the business of the other company. On January 9,
1997, the Special Committee of the Tencor Board met again to discuss the terms
and status of the transaction.
On January 10, 1997, KLA's and Tencor's legal counsel, financial advisors
and certain executive officers met to discuss the terms of the Reorganization
Agreement and related documents and to discuss various regulatory requirements.
On January 11, 1997, a special meeting of the KLA Board was held to review
the status of negotiations and to review KLA's due diligence of Tencor. The
Board deliberations included various terms of the Reorganization Agreement, the
proposed management of the Combined Company and management retention
arrangements. KLA management reported on the results of its due diligence
investigation. Representatives of DMG and Merrill Lynch gave a financial
presentation concerning the Merger. At this time, the KLA Board unanimously
agreed that management should continue to proceed with negotiation and
investigation of the proposed combination.
On January 11, 1997, a special meeting of the Tencor Board was held to
review the status of negotiations. The Tencor Board discussed the status of
Tencor's due diligence review of KLA and the status of the merger negotiations.
Issues discussed at the meeting included certain terms of the transaction,
including termination events, breakup fees and closing conditions, governance of
the Combined Company, the structure of the proposed merger, and management
retention arrangements. Tencor management and legal advisors reported on the
results of due diligence investigations and responded to questions regarding the
Merger. Representatives of Lehman Brothers gave a preliminary presentation
concerning the Merger. At the conclusion of the discussions, the Tencor Board
unanimously agreed that management, with the assistance of the Special Committee
of the Board, should continue to proceed with negotiation and investigation of
the proposed combination.
On January 12 and 13, 1997, KLA and Tencor, together with their respective
legal and financial advisors continued to negotiate the terms of definitive
agreements relating to the transaction, including a telephone discussion on
January 12, 1997 between Mr. Tompkins and Mr. Levy to finalize the terms of the
transaction. Final due diligence by KLA of Tencor, and Tencor of KLA also took
place.
On January 13, 1997, at a specially scheduled meeting of the KLA Board, the
management of KLA made further presentations to the Board regarding the risks
and benefits of the Merger and KLA's legal advisors reviewed proposed definitive
terms of the Reorganization Agreement and related documents. DMG and Merrill
Lynch each delivered to the KLA Board their oral opinions (subsequently
confirmed in writing on January 14, 1997) regarding the fairness to KLA from a
financial point of view of the Exchange Ratio; and reviewed detailed financial
analyses and pro forma and other information with respect to the Merger. See
"-- Opinions of KLA's Financial Advisors." The KLA Board approved the
Reorganization Agreement and the transactions and agreements related thereto
subject to final negotiations and to delivery of written fairness opinions by
January 14, 1997 by the financial advisors.
On January 14, 1997, DMG and Merrill Lynch each delivered a written opinion
to the effect that, as of such date, the Exchange Ratio was fair to KLA from a
financial point of view. Copies of such opinions are annexed hereto and
shareholders are urged to carefully review the opinions.
On January 14, 1997, the Tencor Board convened to consider and vote upon
the proposed merger and related transactions. At this specially scheduled
meeting, management of Tencor reported on the terms of the proposed Merger;
management responded to questions regarding various aspects of the proposed
Merger; Tencor's legal advisors reviewed proposed definitive terms of the
Reorganization Agreement and related documents, including the KLA and Tencor
Stock Option Agreements; Lehman Brothers made a presentation to the Tencor Board
regarding the Exchange Ratio, reviewed its detailed financial analysis and pro
forma and other information with respect to the companies and delivered its
written opinion to the effect that, as of such date, the Exchange Ratio was fair
from a financial point of view to Tencor shareholders (a copy of this opinion is
annexed hereto, and shareholders are urged to carefully review the opinion); and
the Tencor Board approved
27
the Reorganization Agreement and the transactions and agreements related
thereto. See "-- Opinion of Tencor's Financial Advisor."
On January 14, 1997, following final approval by the KLA Board and the
Tencor Board, the Reorganization Agreement and the Stock Option Agreements were
executed by both companies, and at the close of trading KLA and Tencor issued a
joint press release announcing the proposed Merger.
OPINIONS OF KLA'S FINANCIAL ADVISORS
Opinion of DMG
KLA retained DMG to act as one of its financial advisors in connection with
the Merger. DMG was selected by KLA's Board of Directors to act as KLA's
financial advisor based on DMG's qualifications, expertise and reputation, as
well as DMG's investment banking relationship and familiarity with KLA.
At the meeting of KLA's Board of Directors on January 13, 1997, DMG
rendered its oral opinion, subsequently confirmed in writing on January 14, 1997
(the "DMG Opinion"), that, as of such date, based upon and subject to the
various considerations set forth in the DMG Opinion, the Exchange Ratio pursuant
to the Reorganization Agreement was fair from a financial point of view to KLA.
The full text of the DMG Opinion, which sets forth, among other things,
assumptions made, procedures followed, matters considered, and limitations on
the scope of the review undertaken by DMG in rendering the DMG Opinion, is
attached as Annex D to this Joint Proxy Statement/Prospectus. KLA shareholders
are urged to read the DMG Opinion carefully and in its entirety. DMG did not
recommend to KLA that any specific exchange ratio constituted the appropriate
exchange ratio for the Merger. The DMG Opinion addresses only the fairness of
the Exchange Ratio from a financial point of view to KLA as of the date of the
DMG Opinion, and does not constitute a recommendation to any shareholder as to
how such shareholder should vote at the KLA Special Meeting. This summary of the
DMG Opinion is qualified in its entirety by reference to the full text of the
DMG Opinion set forth in Annex D to this Joint Proxy Statement/Prospectus.
In rendering the DMG Opinion, DMG, among other things: (i) analyzed certain
publicly available financial statements and other information of KLA and Tencor,
respectively; (ii) analyzed certain internal financial statements and other
financial and operating data concerning Tencor prepared by the management of
Tencor; (iii) discussed the past and current operations and financial condition
and the prospects of Tencor with senior executives of Tencor and KLA; (iv)
analyzed certain internal financial statements and other financial and operating
data concerning KLA prepared by the management of KLA; (v) discussed the past
and current operations and financial condition and the prospects of KLA with
senior executives of KLA; (vi) analyzed the pro forma impact of the Merger on
the earnings per share and consolidated capitalization of KLA; (vii) reviewed
the reported prices and trading activity for the Tencor Common Stock; (viii)
compared the financial performance of Tencor and the prices and trading activity
of the Tencor Common Stock with that of certain other publicly-traded companies
that DMG deemed were relevant and their securities; (ix) reviewed the reported
prices and trading activity for the KLA Common Stock; (x) compared the financial
performance of KLA and the prices and trading activity of the KLA Common Stock
with that of certain other publicly-traded companies that DMG deemed were
relevant and their securities; (xi) reviewed the financial terms, to the extent
publicly available, of certain merger and acquisition transactions that DMG
deemed were relevant; (xii) reviewed and discussed with the senior management of
KLA (a) the strategic rationale for the Merger and their assessment of the
synergies and other benefits expected to be derived from the Merger and (b)
certain alternatives to the Merger; (xiii) participated in discussions and
negotiations among representatives of Tencor and KLA and their respective
financial and legal advisors; (xiv) reviewed the Reorganization Agreement, the
Tencor Stock Option Agreement and the KLA Stock Option Agreement; and (xv)
performed such other analyses and considered such other factors as DMG deemed
appropriate.
In rendering the DMG Opinion, DMG assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by it for the purposes of the DMG Opinion. DMG was not provided with
and therefore did not review, any internal financial projections or forecasts
relating to future operations or prospects of KLA or Tencor, and therefore, upon
the advice of KLA and Tencor, DMG assumed
28
that the publicly available estimates of research analysts were a reasonable
basis upon which to evaluate and analyze the future financial performance of KLA
and Tencor. With respect to the information furnished by KLA and Tencor, and
with respect to information discussed with the managements of KLA and Tencor
regarding their views of future operations, DMG assumed that such information
had been reasonably prepared and reflected the best then available estimates and
judgments of KLA's or Tencor's management as to the competitive, operating and
regulatory environments and related financial performance of KLA or Tencor, as
applicable, for the relevant periods. DMG also relied upon, without independent
verification, the assessment by KLA management of the cost savings and other
synergies as well as the strategic and other benefits expected to be derived
from the Merger. DMG did not make any independent valuation or appraisal of the
assets, liabilities or technology of KLA or Tencor and was not furnished with
any such appraisals. DMG assumed that the Merger will be accounted for as a
pooling-of-interests business combination in accordance with generally accepted
accounting principles and will be consummated in accordance with the terms set
forth in the Reorganization Agreement. The DMG Opinion was necessarily based on
economic, market and other conditions in effect on, and the information made
available to DMG as of, the date of the DMG Opinion.
The following is a summary of the analysis performed by DMG in preparation
of the DMG Opinion, and reviewed with the Board of Directors of KLA at a meeting
held on January 13, 1997.
Historical Exchange Ratio Analysis. DMG reviewed the historical trading
prices for KLA Common Stock and Tencor Common Stock, separately and in
comparison to each other. DMG also reviewed the ratios of the daily closing
stock prices of Tencor Common Stock to KLA Common Stock for each day over
various periods, starting as far back as March 9, 1993 (the date of the initial
public offering of Tencor Common Stock) and ending January 10, 1997 (the trading
date preceding DMG's presentation at the January 13, 1997 meeting of the KLA
Board) and computed the premiums represented by the Exchange Ratio over the
average of these ratios. The average of the ratios of the daily closing stock
prices of Tencor Common Stock to KLA Common Stock for the various periods ending
on January 10, 1997 were 0.733 for the period since March 9, 1993; 0.800 for the
previous year; 0.807 for the previous 180 days; 0.773 for the previous 90 days;
0.730 for the previous 60 days; 0.721 for the previous 30 days; 0.725 for the
previous 10 days; and 0.720 for January 10, 1997. DMG observed that the Exchange
Ratio represented a premium of 36.4%, 25.0%, 23.9%, 29.4%, 36.9%, 38.7%, 37.9%
and 38.8%, respectively, over the aforementioned ratios of the prices of Tencor
Common Stock and KLA Common Stock.
Selected Precedent Transactions. DMG reviewed the publicly available
financial terms of two recent transactions in the yield management sector of the
semiconductor equipment industry: the acquisition by Applied Materials of Opal
and the acquisition by Applied Materials of Orbot. DMG observed multiples of
aggregate value to the latest twelve months revenue of 2.2 times and 3.1 times
for Opal and Orbot, respectively, aggregate value to the latest twelve months
operating income of 11.7 times for Opal, latest twelve months price-to-earnings
multiple (adjusted for taxes) of 20.0 times for Opal, and calendar 1997
price-to-earnings multiple of 15.6 times for Opal. DMG also observed the
multiples implied by the Merger of 2.6 times the latest twelve months revenue,
9.5 times the latest twelve months operating income, 17.0 times the latest
twelve months price-to-earnings and 27.2 times calendar 1997 earnings based on
First Call's estimates for Tencor. First Call is a financial data service that
monitors and publishes a compilation of earnings estimates produced by selected
research analysts regarding companies of interest to institutional investors.
DMG also noted the premiums to the closing stock price prior to announcement of
52.6% for Opal and 38.8% for Tencor based on the Exchange Ratio and KLA's and
Tencor's closing stock prices on January 10, 1997.
Premium Analysis. DMG reviewed 46 stock-for-stock merger and acquisition
transactions involving companies in the technology sector since 1987, none of
which were deemed directly comparable to the Merger. Such analysis showed
transaction exchange ratios resulting in average premiums of approximately
21.6%, 33.1%, 38.7%, 41.9%, 38.1% and 32.7% over the average of the ratios of
the closing stock prices of the companies involved in such mergers over the one
year, 90 day, 60 day, 30 day, 10 day and one day periods ending the day
preceding the public announcement of these transactions, respectively. DMG
observed that the Exchange Ratio represented premiums of approximately 25.0%,
29.4%, 36.9%, 38.7%, 37.9% and 38.8% over the average of the ratios of the daily
closing stock prices of Tencor Common Stock to KLA Common Stock for the
respective comparable periods ending on January 10, 1997.
29
DMG also reviewed 25 selected stock-for-stock "merger-of-equals"
transactions since 1987, none of which were deemed directly comparable to the
Merger. Such analysis indicated that, for these selected mergers, the mean
premium paid by the company issuing stock over the market price of the company
receiving stock the day prior to the announcement of such mergers was 16.4% and
the mean pro forma ownership percentage of the company issuing stock was 57%,
compared to 38.8% and 62%, respectively, for the Merger based on the Exchange
Ratio and KLA's and Tencor's closing share prices on January 10, 1997.
Contribution Analysis. DMG analyzed the pro forma contribution by each of
KLA and Tencor to the revenue, gross profit, operating income and net income of
the Combined Company (adjusted to reflect the companies' respective net cash
balances) if the Merger were to be consummated. Such analysis was based on
analysts' consensus forecasts for each of KLA and Tencor. DMG observed that, for
the calendar years 1995, 1996 and estimated 1997, Tencor would contribute
approximately 36.9%, 36.9% and 37.7% of the revenues, respectively, 39.6%, 38.8%
and 39.6% of the gross profit, respectively, 44.7%, 38.6% and 34.3% of the
operating income, respectively, and 39.2%, 38.1% and 33.0% of the net income,
respectively, of the Combined Company. These figures compared to the pro forma
ownership of the Tencor shareholders in the Combined Company of 37.8%. DMG
observed that the contribution analysis does not take into account the different
price-earnings multiples of revenue, operating profit or earnings that the
market ascribes to KLA and Tencor.
Pro Forma Analysis of the Merger. DMG analyzed certain pro forma effects
of the Merger on the earnings and capitalization of KLA. With respect to 1997,
such analysis was based on analysts' consensus earnings estimates as well as
First Call consensus estimates for KLA and Tencor both with and without assumed
pre-tax annual synergies. Based on such analysis, DMG observed that, based on
the Exchange Ratio and assuming that the Merger was treated as a
pooling-of-interests business combination for accounting purposes, before taking
into account any one-time restructuring charges, the Merger would result (i) for
the analysts' consensus cases, in earnings per share dilution for KLA
shareholders of 7.3% and 3.6% for calendar years 1997 and 1998, respectively,
without the assumed synergies, and earnings per share accretion of 0.7% and 2.6%
for calendar years 1997 and 1998, respectively, with the assumed synergies and
(ii) for the First Call consensus cases, earnings per share dilution for KLA
shareholders of 6.6% for calendar year 1997 without the assumed synergies, and
earnings per share accretion of 2.1% for calendar year 1997, with the assumed
synergies.
In connection with the review of the Merger by the KLA Board, DMG performed
a variety of financial and comparative analyses for purposes of the DMG Opinion.
While the foregoing summary describes all material analyses and factors reviewed
by DMG with the KLA Board, it does not purport to be a complete description of
the presentations by DMG to the KLA Board or the analyses performed by DMG in
arriving at the DMG Opinion. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial analysis or summary
description. DMG believes that its analyses must be considered as a whole and
that selecting portions of its analyses and of the factors considered by it,
without considering all analyses and factors, could create a misleading view of
the processes underlying the DMG Opinion. In addition, DMG may have given
various analyses more or less weight than other analyses, and may have deemed
various assumptions more or less probable than other assumptions, so that the
range of valuation resulting from any particular analysis described above should
not be taken to be DMG's view of the actual value of KLA or Tencor. In
performing its analyses, DMG made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of KLA or Tencor. The analyses performed by DMG are
not necessarily indicative of actual values or actual future results, which may
be significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses or assets do not purport
to be appraisals or to necessarily reflect the prices at which businesses or
assets may actually be sold. The analyses performed were prepared solely as part
of DMG's analysis of the fairness of the Exchange Ratio, from a financial point
of view, to KLA and were provided to the KLA Board in connection with the
delivery of the DMG Opinion.
DMG is an internationally recognized investment banking and advisory firm.
DMG, as part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In
30
the ordinary course of its business, DMG may actively trade the securities and
loans of KLA and Tencor for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities and loans.
KLA has agreed to pay DMG a fee for its financial advisory services in
connection with the Merger, including, among other things, rendering the DMG
Opinion and making the presentation referred to above. Pursuant to a letter
agreement between KLA and DMG, KLA has agreed to pay DMG (i) a retainer fee of
$100,000 upon execution of the engagement letter; (ii) a termination fee of (a)
$1,500,000 in the event that the Merger is not consummated and KLA receives a
termination fee from Tencor or (b) $750,000 in the event that the Merger is not
consummated and KLA is reimbursed for its transaction expenses in connection
therewith; and (iii) in the event the Merger is consummated, a fee of 0.4% of
the aggregate purchase price paid in the Merger, consisting of a transaction fee
and an advisory fee (in consideration for prior financial advisory services
rendered by DMG to KLA in connection with a potential transaction with Tencor),
each of 0.2% of the aggregate purchase price paid in the Merger, against which
the amount referred to in clause (i) would be credited. The amount of the
transaction fee and the advisory fee will depend on the closing share price of
KLA Common Stock over the ten trading days prior to and including the Closing
Date of the Merger. In addition, KLA has agreed to reimburse DMG for its
out-of-pocket expenses (including fees and expenses of its legal counsel)
incurred in connection with its engagement, and to indemnify DMG and certain
related persons against certain liabilities and expenses arising out of or in
conjunction with its rendering of services under its engagement, including
certain liabilities under the federal securities laws.
Opinion of Merrill Lynch
KLA retained Merrill Lynch to render financial advisory services with
respect to KLA's proposed business combination with Tencor.
At the meeting of KLA's Board on January 13, 1997, Merrill Lynch rendered
its oral opinion, subsequently confirmed in writing on January 14, 1997 (the
"Merrill Lynch Opinion") to the effect that, as of January 14, 1997 and based
upon the assumptions made, matters considered and limits of review, as set forth
in such opinion, the Exchange Ratio was fair to KLA from a financial point of
view.
A copy of the Merrill Lynch Opinion dated January 14, 1997, which sets
forth the assumptions made, matters considered and certain limitations on the
scope of review undertaken by Merrill Lynch, is attached hereto as Annex E and
is incorporated herein by reference. The description of the Merrill Lynch
Opinion set forth herein is qualified in its entirety by reference to the full
text of the Merrill Lynch Opinion. Shareholders of KLA are urged to read the
Merrill Lynch Opinion in its entirety. The Merrill Lynch Opinion is addressed to
the KLA Board and addresses only the fairness from a financial point of view of
the Exchange Ratio. The Exchange Ratio was determined on the basis of
negotiations between KLA and Tencor. The Merrill Lynch Opinion does not address
the underlying decision by KLA to engage in the Merger and does not constitute a
recommendation to any KLA shareholder as to how such shareholder should vote at
the KLA Special Meeting.
In arriving at its opinion, set forth in the Merrill Lynch Opinion, Merrill
Lynch, among other things: (i) reviewed KLA's Annual Reports, Forms 10-K and
related financial information for the three fiscal years ended June 30, 1996 and
KLA's Form 10-Q and the related unaudited financial information for the
quarterly period ending September 30, 1996; (ii) reviewed Tencor's Annual
Reports, Forms 10-K and related financial information for the three fiscal years
ended December 31, 1995 and Tencor's Forms 10-Q and the related unaudited
financial information for the quarterly periods ending March 31, 1996, June 30,
1996 and September 30, 1996; (iii) reviewed certain information relating to
prior periods concerning the business, earnings and assets of KLA and Tencor
furnished to Merrill Lynch by KLA and Tencor; (iv) conducted due diligence
discussions with members of senior management of KLA and Tencor and discussed
with members of senior management of KLA and Tencor their views regarding future
business, financial and operating benefits arising from the Merger; (v) reviewed
the historical market prices and trading activity for KLA Common Stock and
Tencor Common Stock and compared them with those of certain publicly traded
companies which Merrill Lynch deemed to be relevant to KLA and Tencor,
respectively; (vi) compared the
31
results of operations of KLA and Tencor with those of certain companies which
Merrill Lynch deemed to be relevant to KLA and Tencor, respectively; (vii)
compared the proposed financial terms of the Merger with the financial terms of
certain other mergers and acquisitions which Merrill Lynch deemed to be
relevant; (viii) considered the pro forma financial effect of the Merger on
KLA's capitalization ratios and earnings, cash flow and book value per share;
(ix) participated in certain discussions and negotiations among representatives
of KLA and Tencor and their financial and legal advisors; (x) reviewed the
Reorganization Agreement, the KLA Option Agreement and the Tencor Option
Agreement; and (xi) reviewed such other financial studies and analyses and
performed such other investigations and took into account such other matters as
Merrill Lynch deemed necessary, including its assessment of general economic,
market and monetary conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the
accuracy and completeness of all information supplied or otherwise made
available to it by KLA and Tencor, and did not assume responsibility for
independent verification of such information. Merrill Lynch did not assume
responsibility for undertaking an independent valuation or appraisal of the
assets of KLA or Tencor and no such valuation or appraisal was provided to it.
Merrill Lynch was not provided with, and did not review, any internal financial
projections or forecasts relating to future operations or prospects of KLA and
Tencor. With respect to the information furnished by KLA and Tencor, and with
respect to information discussed with managements of KLA and Tencor, regarding
their views of future operations, Merrill Lynch assumed that such information
had been reasonably prepared and reflected the best then available estimates and
judgments of KLA's or Tencor's management as to the competitive, operating and
regulatory environments and related financial performance of KLA or Tencor, as
the case may be, for the relevant periods and as to the strategic rationale for
the Merger. In addition, Merrill Lynch assumed that the Merger would qualify for
pooling-of-interests accounting treatment in accordance with generally accepted
accounting principles and as a reorganization within the meaning of Section
368(a) of the Code. Merrill Lynch assumed that the Merger would be consummated
on the terms set forth in the Reorganization Agreement without waiver or
amendment of any of the terms or conditions thereof. The Merrill Lynch Opinion
was necessarily based upon market, economic, financial and other conditions as
they existed and could be evaluated as of the date of such opinion. In rendering
such opinion, Merrill Lynch observed that it was not expressing any opinion as
to the price at which KLA Common Stock would actually trade at any time.
The matters considered by Merrill Lynch in arriving at its opinion are
based on numerous macroeconomic, operating and financial assumptions with
respect to industry performance, general business and economic conditions, many
of which are beyond the control of KLA and Tencor, and involve the application
of complex methodologies and educated judgment. Any estimates incorporated in
the analyses performed by Merrill Lynch are not necessarily indicative of actual
past or future results or values, which may be significantly more or less
favorable than such estimates. Estimated values do not purport to be appraisals
and do not necessarily reflect the prices at which businesses or companies may
be sold in the future. The Merrill Lynch Opinion does not present a discussion
of the relative merits of the Merger as compared with any other business plan or
opportunity that might be presented to KLA, or the effect of any other
arrangement in which KLA might engage.
At the meeting of the KLA Board held on January 13, 1997, Merrill Lynch
presented certain financial analyses accompanied by written materials in
connection with the delivery of its oral opinion. The following is a summary of
the material financial and comparative analyses performed by Merrill Lynch in
arriving at the Merrill Lynch Opinion, which was delivered on January 14, 1997.
Historical Exchange Ratio Analysis. Merrill Lynch reviewed the historical
trading prices for KLA Common Stock and Tencor Common Stock, separately, and in
comparison to each other. Merrill Lynch also reviewed the ratios of the daily
closing prices of Tencor to KLA over various periods, starting as far back as
March 9, 1993 and ending January 10, 1997 and computed the premium represented
by the Exchange Ratio of 1.0 over the average of these ratios over various
periods of time ending January 10, 1997. The average of the ratios of the daily
closing prices of Tencor to KLA for the various periods ending on January 10,
1997 were 0.78 for the previous three years; 0.88 for the previous two years;
0.80 for the previous one year; 0.80 for the previous 180 days; 0.71 for the
previous 60 days; 0.72 for the previous 30 days; and 0.73 for the previous one
32
week. The Exchange Ratio of 1.0 represented a premium of 28.2%, 13.0%, 24.7%,
25.3%, 40.3%, 39.7%, and 37.7%, respectively, over the aforementioned average
ratios of Tencor to KLA stock prices.
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call, Merrill Lynch compared certain financial and operating information
and ratios for both KLA and Tencor with the corresponding financial and
operating information for a group of six publicly traded companies engaged
primarily in businesses which Merrill Lynch deemed to be relevant for the
purpose of its analysis, including Applied Materials, Credence Systems
Corporation, Lam Research Corporation, Novellus Systems, Inc., Silicon Valley
Group, Inc. and Teradyne, Inc. (the "Merrill Comparable Companies").
Merrill Lynch's calculations resulted in the following relevant ranges for
the Merrill Comparable Companies: total enterprise value (defined as market
value of common equity plus book value of total debt and preferred stock less
cash) as a multiple of latest twelve months ("LTM") revenue (as of September 30,
1996) of 1.40x to 2.00x (with KLA at 2.52x and Tencor at 1.71x); total
enterprise value as a multiple of LTM (as of September 30, 1996) earnings before
interest and tax ("EBIT") of 6.0x to 8.0x (with KLA at 10.4x and Tencor at
6.3x); total market value as a multiple of projected calendar 1997 net income of
17.0x to 22.0x (with KLA at 22.5x and Tencor at 19.6x); and total market value
as a multiple of projected calendar 1998 net income of 11.0x to 15.0x (with KLA
at 16.3x and Tencor at 13.0x). Applying the ranges of multiples derived from the
Merrill Comparable Companies' information analyzed by Merrill Lynch, Merrill
Lynch calculated implied per share equity values of KLA ranging from $29.64 to
$42.77, and of Tencor ranging from $23.49 to $31.03.
None of the companies utilized in the above analysis for comparative
purposes is, of course, identical to KLA or Tencor. Accordingly, a complete
analysis of the results of the foregoing calculations cannot be limited to a
quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the Merrill Comparable Companies and other factors that could affect the public
trading value of the Merrill Comparable Companies.
Comparable Acquisition Analysis. Merrill Lynch also reviewed the financial
terms of seven transactions in the semiconductor equipment industry (the
"Comparable Acquisitions"). The Comparable Acquisitions reviewed, in reverse
chronological order of announcement date, were: (i) the acquisition by Applied
Materials of Opal; (ii) the acquisition by Applied Materials of Orbot; (iii) the
acquisition by Plasma & Materials Technologies, Inc. of Electrotech, Inc. and
Electrotech Equipments Ltd.; (iv) the acquisition by Teradyne, Inc. of Megatest
Corporation; (v) the acquisition by MEMC Electronic Materials, Inc. of the
Electronic division of Albemarle Corporation; (vi) the acquisition by Credence
Systems Corporation of Epro Corporation; and (vii) the acquisition by Tencor of
Prometrix Corporation.
Merrill Lynch then analyzed offer value and transaction consideration
multiples implied by the prices paid in these transactions. The analyses
resulted in the following relevant ranges: offer value as a multiple of LTM net
income (as of September 30, 1996) of 13.0x to 16.0x; and transaction value as a
multiple of LTM EBIT (as of September 30, 1996) of 8.0x to 12.0x, and LTM
revenues (as of September 30, 1996) of 2.0x to 3.0x. Applying the ranges of
multiples derived from Comparable Acquisitions information analyzed by Merrill
Lynch, Merrill Lynch calculated implied per share equity values of KLA ranging
from $33.39 to $46.52 and of Tencor ranging from $31.03 to $43.09.
No transaction utilized in the comparable acquisition transaction analysis
was identical to the Merger. Accordingly, an analysis of the results of the
foregoing is not purely mathematical. Rather, it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies included in the comparable acquisition transaction analysis and
other factors that could affect the offer value and the transaction
consideration.
Premium Analysis. Merrill Lynch reviewed the premiums paid in acquisition
transactions (the "Merrill Comparable Transactions") in the technology sector
since January 1, 1990 with a transaction value in excess of $500 million in
which the consideration was the common stock of the acquiror. Such analysis
indicated that, in such transactions, the mean and median premiums to the
closing market price one day, one week and
33
one month prior to announcement were 40.4%, 46.6% and 59.5%, and 33.8%, 37.8%
and 54.2%, respectively. Merrill Lynch also reviewed the premiums paid in recent
transactions involving "merger of equals." Such analysis indicated that, in such
transactions, the median and maximum premiums to the closing market price one
day, one week and one month prior to announcement were 14.1%, 15.8% and 15.3%,
and 40.6%, 46.9% and 54.0%, respectively.
Merrill Lynch's analyses of the premiums paid in the Merrill Comparable
Transactions indicated that, assuming a value of $28.00 per share of Tencor
Common Stock, which was the closing price on January 10, 1997 (the working
assumptions utilized by Merrill Lynch in conducting its analyses), the mean or
median imputed offer price for a share of Tencor Common Stock would range from
$37.45 to $44.67.
Discounted Cash Flow Analysis. Merrill Lynch also performed discounted
cash flow analyses (i.e., an analysis of the present value for the projected
unlevered free cash flows and terminal value for the periods and at the discount
rates indicated) of both KLA and Tencor for the years 1997 through 2001,
inclusive, using discount rates reflecting a weighted average cost of capital
ranging from 12.0% to 16.0% and terminal value multiples of calendar year 2002
unlevered earnings (before interest and after taxes) ranging from 13.0x to
17.0x.
Applying the results of such discounted cash flow analysis, and assuming no
synergies arising out of the Merger, Merrill Lynch calculated the implied per
share equity values of Tencor ranging from $36.35 to $50.28, and of KLA ranging
from $40.65 to $55.31.
Applying the same results but assuming synergies arising out of the Merger
in a pre-tax annual amount equal to $20 million beginning in the quarter ending
September 30, 1997, Merrill Lynch calculated the implied per share equity values
of Tencor ranging from $38.44 to $53.25, and of KLA ranging from $40.65 to
$55.31.
Contribution Analysis. Merrill Lynch observed that, after giving effect to
the issuance of KLA Common Stock in the Merger, Tencor shareholders would
receive 37.8% of the outstanding KLA Common Stock. Merrill Lynch analyzed the
relative contributions of KLA and Tencor to the revenues, EBIT and net income of
the combined entity. Using projections based on analysts' consensus for Tencor
and analysts' consensus and discussion with KLA management for KLA, Merrill
Lynch observed that in estimated calendar 1996, 1997 and 1998, respectively:
Tencor would contribute 36.8%, 35.5% and 38.2% to the revenue of the combined
entity; 39.0%, 31.9% and 35.8% to the EBIT of the combined entity; and 38.0%,
31.1% and 34.5% to the net income of the combined entity.
Pro Forma Earnings Analysis. Merrill Lynch analyzed certain pro forma
earnings effects resulting from the Merger, both with and without assumed
pre-tax annual synergies beginning in the quarter ending September 30, 1997. In
its analyses, Merrill Lynch assumed that the Merger was treated as a pooling-of-
interests business combination for accounting purposes and excluded any one-time
restructuring charges that may result from the Merger. Among the analyses it
performed, Merrill Lynch gave weight to the following cases: (i) projections of
KLA based on analysts' consensus and discussions with KLA management, and
analysts' consensus for Tencor; (ii) analysts' consensus for both KLA and
Tencor; and (iii) projections of KLA and Tencor, each based on analysts'
consensus and discussions with KLA and Tencor management, respectively.
The analyses described in the preceding sentence indicated that: (i)
without the assumed synergies, the Merger would be dilutive (ranging from 3.5%
to 9.2%) in all cases for each of calendar years 1997 and 1998 and each of the
KLA fiscal years 1997 and 1998 and (ii) with the assumed synergies, the Merger
would be dilutive (ranging from 2.1% to 5.2%) in all cases for both calendar and
KLA fiscal years 1997, but would be accretive (ranging from 1.0% to 3.2%) in all
cases for both calendar and KLA fiscal years 1998.
The summary set forth above does not purport to be a complete description
of the analyses performed by Merrill Lynch in arriving at its opinion. The
preparation of a fairness opinion is a complex process and not necessarily
susceptible to partial or summary description. In arriving at its opinion,
Merrill Lynch did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Merrill Lynch believes that its
analyses must
34
be considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all factors and analyses, could
create a misleading view of the processes underlying its analyses set forth in
its opinion.
The KLA Board selected Merrill Lynch to render a fairness opinion because
Merrill Lynch is an internationally recognized investment banking firm with
substantial experience in transactions similar to the Merger. Merrill Lynch is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and for other purposes and has
substantial experience in transactions similar to the Merger.
Pursuant to a letter agreement, KLA has agreed to pay Merrill Lynch (i) a
$100,000 retainer fee on the date of the letter agreement; (ii) a termination
fee of (a) $1,500,000 if the Merger is not consummated and KLA receives a
termination fee from Tencor or (b) $750,000 in the event that the Merger is not
consummated and KLA is reimbursed for its transaction expenses in connection
therewith; and (iii) if the Merger is consummated, a transaction fee of 0.2% of
the aggregate purchase price paid in the Merger upon consummation of the Merger.
The amount referred to in the preceding clause (i) would be credited against the
payment under clause (ii) or (iii), as the case may be. The fees paid or payable
to Merrill Lynch are not contingent upon the contents of the opinion delivered.
In addition, KLA has agreed to reimburse Merrill Lynch for its reasonable
out-of-pocket expenses (including reasonable fees and expenses of its legal
counsel) incurred in connection with its engagement, and to indemnify Merrill
Lynch and certain related persons against certain liabilities arising out of or
in conjunction with its rendering of services under its engagement, including
certain liabilities under the federal securities laws.
In the ordinary course of its business, Merrill Lynch may actively trade
the securities and loans of KLA and Tencor for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities and loans.
OPINION OF TENCOR'S FINANCIAL ADVISOR
Lehman Brothers has acted as financial advisor to Tencor in connection with
the Merger. As part of its role as financial advisor to Tencor, Lehman Brothers
was engaged to render its opinion as to the fairness, from a financial point of
view, to Tencor's shareholders of the Exchange Ratio to be offered to such
shareholders in the Merger. The full text of the written opinion of Lehman
Brothers dated January 14, 1997, which sets forth assumptions made, factors
considered and limitations on the review undertaken by Lehman Brothers, is set
forth in Annex F to this Joint Proxy Statement/Prospectus. The summary of Lehman
Brothers' opinion set forth in this Joint Proxy Statement/Prospectus is
qualified in its entirety by reference to the full text of said opinion.
On January 14, 1997, in connection with the evaluation of the Merger
Agreement by the Tencor Board, Lehman Brothers made a presentation to the Board
with respect to the Merger and rendered a written opinion that, as of the date
of such opinion, and subject to certain assumptions, factors and limitations set
forth in such written opinion as described below, the Exchange Ratio to be
offered to Tencor's shareholders in the Merger is fair, from a financial point
of view, to such shareholders.
No limitations were imposed by Tencor on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion, except that (i) Lehman Brothers was not provided with and did not
have any access to any financial forecasts or projections prepared by the
managements of Tencor or KLA as to the future financial performance of Tencor,
KLA or the Combined Company and (ii) Lehman Brothers was not authorized to
solicit, and did not solicit, any indications of interest from any third party
with respect to a purchase of all or a part of Tencor's business. Lehman
Brothers was not requested to and did not make any recommendation to the Tencor
Board as to the form or amount of consideration to be received by Tencor's
shareholders in the Merger, which was determined through arm's-length
negotiations between Tencor and KLA. In arriving at its opinion, Lehman Brothers
did not ascribe a specific range of value to Tencor, but made its determination
as to fairness, from a financial point of view, to Tencor's shareholders of the
Exchange Ratio to be offered, on the basis of the financial and comparative
analyses described below. Lehman Brothers' opinion was for the use and benefit
of the Tencor Board and was
35
rendered to the Tencor Board in connection with its consideration of the Merger.
Lehman Brothers' opinion is not intended to be and does not constitute a
recommendation to any shareholder of Tencor as to how such shareholder should
vote with respect to the Merger. Lehman Brothers was not requested to opine as
to, and its opinion does not in any manner address, Tencor's underlying business
decision to proceed with or effect the Merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed; (i) the
Reorganization Agreement and the specific terms of the Merger, including with
respect to the corporate governance and management of the Combined Company
following consummation of the Merger; (ii) publicly available information
concerning Tencor and KLA that it believed to be relevant to its analysis; (iii)
financial and operating information with respect to the business, operations and
prospects of Tencor and KLA furnished to it by Tencor and KLA; (iv) a trading
history of Tencor's and KLA's Common Stock since Tencor's initial public
offering on March 9, 1993 to the present and a comparison of that trading
history with those of other companies that it deemed relevant; (v) a comparison
of the historical financial results and present financial condition of Tencor
and KLA with those of other companies that it deemed relevant; (vi) the
potential pro forma financial effects of the Merger on Tencor and KLA and a
comparison of the relative financial contributions of Tencor and KLA to the
Combined Company following consummation of the Merger, each based on publicly
available estimates from third party research analysts of the future financial
performance of Tencor and KLA; and (vii) a comparison of the financial terms of
the Merger with the financial terms of certain other transactions that it deemed
relevant. In addition, Lehman Brothers had discussions with managements of
Tencor and KLA concerning their respective businesses, operations, assets,
financial conditions and prospects and undertook such other studies, analyses
and investigations as it deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information. Lehman Brothers further relied upon the assurances of the
managements of both Tencor and KLA that they were not aware of any facts or
circumstances that would make such information inaccurate or misleading. In
arriving at its opinion, at the direction of Tencor, Lehman Brothers was not
provided with and did not have any access to any financial forecasts or
projections prepared by the managements of Tencor or KLA as to the future
financial performance of Tencor, KLA or the Combined Company, and therefore,
upon advice of Tencor and KLA, it assumed that the publicly available estimates
of research analysts were a reasonable basis upon which to evaluate and analyze
the future financial performance of Tencor and KLA and that Tencor and KLA would
perform substantially in accordance with such estimates. In arriving at its
opinion, Lehman Brothers did not conduct a physical inspection of the properties
and facilities of Tencor or KLA, and Lehman Brothers did not make nor obtain any
evaluations or appraisals of the assets or liabilities of Tencor or KLA. In
arriving at its opinion, upon advice of Tencor and its legal and accounting
advisors, Lehman Brothers assumed that the Merger would qualify (i) for
pooling-of-interests accounting treatment and (ii) as a reorganization within
the meaning of the Code, and therefore as a tax-free transaction to the
shareholders of Tencor. Lehman Brothers' opinion necessarily was based upon
market, economic and other conditions as they existed on, and could be evaluated
as of, the date of its opinion.
In connection with preparing its presentations to the Tencor Board on
January 11 and 14, 1997, and its written opinion dated January 14, 1997, Lehman
Brothers performed a variety of financial and comparative analyses as summarized
below. The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial and comparative
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Furthermore, in arriving at its opinion, Lehman Brothers did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Lehman Brothers believes that its analyses
must be considered as a whole and that considering any portions of such analyses
and factors, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, Lehman Brothers made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Tencor and KLA. Any estimates contained in these
analyses are not necessarily indicative of actual values or predictive of
36
future results or values, which may be more or less favorable than as set forth
therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses actually
may be sold.
Contribution Analysis. Lehman Brothers utilized publicly available
historical financial data regarding Tencor and KLA and estimates of future
financial performance of Tencor and KLA by third party research analysts to
calculate the relative contributions of Tencor and KLA to the pro forma Combined
Company with respect to revenues, operating income (defined as income before
interest and taxes) and net income for the calendar years 1994, 1995, 1996 and
1997. In 1994, Tencor would have contributed 36.1%, 37.5% and 34.1% of revenues,
operating income and net income, respectively, to the Combined Company. In 1995,
Tencor would have contributed 36.7%, 41.8% and 40.4% of revenues, operating
income and net income, respectively, to the Combined Company. In 1996, Tencor
would have contributed 36.7%, 39.0% and 37.9% of revenues, operating income and
net income, respectively, to the Combined Company. In 1997, Tencor was estimated
to contribute 33.8%, 31.3% and 31.2% of revenues, operating income and net
income, respectively, to the Combined Company. Lehman Brothers compared such
contributions to the pro forma ownership of the Combined Company by Tencor
shareholders. Such ownership would be approximately 37.5%, assuming exercise of
all outstanding Tencor and KLA options.
Pro Forma Analysis. Based on the Exchange Ratio and the financial
projections of unaffiliated research analysts for Tencor and KLA on a standalone
basis, Lehman Brothers calculated the estimated pro forma financial results for
the Combined Company. Lehman Brothers noted that, assuming no cost savings as a
result of the Merger and excluding extraordinary charges, the Merger (i) would
have been 1.2% dilutive to Tencor's standalone earnings per share ("EPS") and
0.4% accretive to KLA's standalone EPS in calendar year 1996 and (ii) was
estimated to be 20.4% accretive to Tencor's standalone EPS and 8.8% dilutive to
KLA's standalone EPS in calendar year 1997.
Stock Trading History. Lehman Brothers considered various historical data
concerning the history of the trading prices and volumes for Tencor and KLA
Common Stock for the period from March 9, 1993 (the date of the initial public
offering of Tencor) to January 13, 1997 (the last trading date prior to the
delivery of the opinion) and the relative stock price performances during this
same period of Tencor, KLA and of selected companies engaged in businesses
considered by Lehman Brothers to be comparable to that of Tencor and KLA.
Specifically, Lehman Brothers included in its review certain semiconductor
equipment companies, including Applied Materials, Inc.; Lam Research
Corporation; Novellus Systems, Inc.; Silicon Valley Group, Inc.; and Teradyne,
Inc. (the "Lehman Comparable Companies"). During this period, the closing stock
price of Tencor ranged from $3.750 to $47.125 per share, and the closing stock
price of KLA ranged from $5.625 to $47.125 per share. During the one year period
prior to the announcement of the Merger, the closing stock price of Tencor
ranged from $14.750 to $30.063 per share, and the closing stock price of KLA
ranged from $17.750 to $40.000 per share.
Comparable Company Analysis. Using publicly available information, Lehman
Brothers compared selected financial data of Tencor and KLA with similar data of
the Lehman Comparable Companies. For each of Tencor, KLA and the Lehman
Comparable Companies, Lehman Brothers calculated the multiple of the current
stock price to (i) the latest twelve months earnings per share (the "LTM P/E
Multiple"); (ii) the estimated 1996 earnings per share (the "1996 P/E
Multiple"), based on data from I/B/E/S International, Inc. ("IBES"), a service
company used widely by the investment community to gather earnings estimates
from various research analysts; and (iii) the estimated 1997 earnings per share
(the "1997 P/E Multiple"), also based on IBES data. Lehman Brothers noted that,
as of January 13, 1997, (i) the LTM P/E Multiple for Tencor (based on the
Exchange Ratio) was 17.5x versus 17.8x for KLA and 10.1x for the median of the
Lehman Comparable Companies; (ii) the 1996 P/E Multiple for Tencor (based on the
Exchange Ratio) was 19.1x versus 19.4x for KLA and 11.4x for the median of the
Lehman Comparable Companies; and (iii) the 1997 P/E Multiple for Tencor (based
on the Exchange Ratio) was 27.2x versus 20.6x for KLA and 20.5x for the median
of the Lehman Comparable Companies. In addition, Lehman Brothers calculated the
Firm Value (defined as market value of the respective company's equity plus
total debt less cash and cash equivalents) as a multiple of the latest twelve
months revenues (the "LTM Revenue Multiple"). Lehman Brothers noted
37
that, as of January 13, 1997, the LTM Revenue Multiple for Tencor (based on the
Exchange Ratio) was 2.82x versus 2.48x for KLA and 1.25x for the median of the
Lehman Comparable Companies.
However, because of the inherent differences between the businesses,
operations and prospects of Tencor and KLA and the business, operations and
prospects of the companies included in the Comparable Companies, Lehman Brothers
believed that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the comparable company analysis, and accordingly also
made qualitative judgments concerning differences between the financial and
operating characteristics and prospects of the companies included in the Lehman
Comparable Companies and Tencor and KLA that would affect the public trading
values of each.
Comparable Transaction Analysis and Transaction Premium Analysis. Using
publicly available information, Lehman Brothers compared selected financial data
for Tencor to similar data for three selected transactions in the semiconductor
equipment industry (the "Lehman Comparable Transactions"). The Lehman Comparable
Transactions included the following transactions: the acquisition of Orbot by
Applied Materials; the acquisition of Opal by Applied Materials; and the
acquisition of Megatest Corporation by Teradyne, Inc. Lehman Brothers reviewed
the prices paid in the Lehman Comparable Transactions in terms of the multiple
of the Transaction Enterprise Value (defined as the total consideration paid
including total debt less cash and cash equivalents assumed) to the latest
twelve months revenues (the "LTM Transaction Revenue Multiple"). Lehman Brothers
noted that the LTM Transaction Revenue Multiple associated with the Merger was
2.82x versus 3.05x for the median of the Lehman Comparable Transactions. Lehman
Brothers also noted the limited number of transactions and the limited amount of
financial data which it believed were relevant for the purposes of this
analysis.
In addition, Lehman Brothers reviewed the premium paid in selected
acquisitions in the technology sector with transaction values greater than $500
million from January 1, 1996 through January 13, 1997 (the "Technology
Transactions"). Lehman Brothers calculated the premium per share paid by the
acquiror compared to the share price of the target company prevailing (i) one
month (the "One Month Premium"); (ii) one week (the "One Week Premium") and;
(iii) one day (the "One Day Premium") prior to the announcement of the
transaction. Lehman Brothers noted that (i) the One Month Premium associated
with the Merger was 65.8% versus 37.5% for the median of the Technology
Transactions; (ii) the One Week Premium associated with the Merger was 42.9%
versus 34.8% for the median of the Technology Transactions; and (iii) the One
Day Premium was 33.1% versus 32.6% for the median of the Technology
Transactions.
However, because the reasons for and the circumstances surrounding each of
the Lehman Comparable Transactions and the Technology Transactions were specific
to such transaction, and because of the inherent differences among the
businesses, operations and prospects of Tencor and the selected acquired
companies analyzed, Lehman Brothers believed that it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the comparable
transactions analysis and, accordingly, also made qualitative judgments
concerning differences between the terms and characteristics of these
transactions and the Merger that would affect the transaction values of Tencor
and such acquired companies.
Engagement of Lehman Brothers. Lehman Brothers is an internationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements, and valuations for corporate and other purposes.
The Tencor Board selected Lehman Brothers because of its expertise, reputation
and familiarity with Tencor and the semiconductor equipment industry in general.
Pursuant to an engagement letter between Tencor and Lehman Brothers, Tencor
has agreed to pay Lehman Brothers (1) a fee of $1,000,000 for rendering its
opinion and (2) a fee of 0.525% of the aggregate value of the consideration
received by Tencor's shareholders upon consummation of the Merger against which
the $1,000,000 opinion fee would be credited. Tencor also has agreed to
reimburse Lehman Brothers for reasonable expenses incurred by Lehman Brothers
and to indemnify Lehman Brothers for certain liabilities that may arise out of
its engagement and the rendering of this opinion.
Lehman Brothers has performed various investment banking services for
Tencor in the past, including lead-managing Tencor's initial public offering in
March 1993, advising it with respect to its acquisition of
38
Prometrix Corporation in February 1994, lead-managing the Tencor Common Stock
offering in September 1994 and lead-managing the Tencor Common Stock offering in
April 1995, and has received customary fees for such services. In the ordinary
course of its business, Lehman Brothers actively trades in the securities of
Tencor and KLA for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of Tencor
Common Stock. This discussion does not deal with all income tax considerations
that may be relevant to particular Tencor shareholders in light of their
particular circumstances, such as shareholders who are dealers in securities,
foreign persons, shareholders who acquired their shares in connection with
previous mergers involving Tencor or an affiliate, or shareholders who acquired
their shares in connection with stock option or stock purchase plans or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of transactions effectuated prior to or after the
Merger (whether or not such transactions are in connection with the Merger),
including without limitation transactions in which shares of Tencor Common Stock
were or are acquired or shares of KLA Common Stock or common stock of the
Combined Company were or are disposed of. Furthermore, no foreign, state or
local tax considerations are addressed herein. ACCORDINGLY, TENCOR SHAREHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES
OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER.
The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code, with each of KLA, Merger Sub and Tencor intended
to qualify as a "party to the reorganization" under Section 368(b) of the Code,
in which case the following tax consequences will result (subject to the
limitations and qualifications referred to herein):
(a) No gain or loss will be recognized by holders of Tencor Common Stock
solely upon their receipt of common stock of the Combined Company in the Merger
in exchange therefor;
(b) The aggregate tax basis of the common stock of the Combined Company
received in the Merger by a Tencor shareholder will be the same as the aggregate
tax basis of Tencor Common Stock surrendered in exchange therefor;
(c) The holding period of the common stock of the Combined Company received
in the Merger by a Tencor shareholder will include the period during which the
shareholder held the Tencor Common Stock surrendered in exchange therefor,
provided that the Tencor Common Stock is held as a capital asset at the time of
the Merger;
(d) A Tencor shareholder who exercises Dissenters' Rights with respect to
all of such holder's shares of Tencor Common Stock will generally recognize gain
or loss for federal income tax purposes, measured by the difference between the
holder's basis in such shares and the amount of cash received, provided that the
payment is neither essentially equivalent to a dividend within the meaning of
Section 302 of the Code nor has the effect of a distribution of a dividend
within the meaning of Section 356(a)(2) of the Code (collectively, a "Dividend
Equivalent Transaction"). Such gain or loss will be capital gain or loss,
provided that the Tencor Common Stock is held as a capital asset at the time of
the Merger. A sale of Tencor Common Stock pursuant to an exercise of Dissenters'
Rights will generally not be a Dividend Equivalent Transaction if, as a result
of such exercise, the shareholder exercising appraisal rights owns no shares of
KLA Common Stock or Tencor Common Stock (either actually or constructively
within the meaning of Section 318 of the Code). If, however, a shareholder's
sale for cash of Tencor Common Stock pursuant to an exercise of Dissenters'
Rights is a Dividend Equivalent Transaction, then such shareholder will
generally recognize income for federal income tax purposes in an amount up to
the entire amount of cash so received; and
(e) None of KLA, Merger Sub or Tencor will recognize gain or loss solely as
a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. KLA and Tencor have each received an
opinion from their respective legal counsel, Wilson Sonsini Goodrich & Rosati
Professional Corporation, and Heller Ehrman White & McAuliffe, respectively, to
39
the effect that, for federal income tax purposes, the Merger will qualify as a
"reorganization" within the meaning of Section 368(a) of the Code. These
opinions, which are collectively referred to herein as the "Tax Opinions,"
neither bind the IRS nor preclude the IRS from adopting a contrary position. In
addition, the Tax Opinions are subject to certain assumptions and qualifications
and are based on the truth and accuracy of certain representations made by KLA,
Merger Sub and Tencor, including representations in certificates delivered to
counsel by the respective managements of KLA, Merger Sub and Tencor. Of
particular importance are those assumptions and representations relating to the
"continuity of interest" requirement.
To satisfy the continuity of interest requirement, Tencor shareholders must
not, pursuant to a plan or intent existing at or prior to the Merger, dispose of
or transfer so much of either (i) their Tencor Common Stock in anticipation of
the Merger or (ii) the Common Stock received in the Merger (collectively,
"Planned Dispositions"), such that the Tencor shareholders, as a group, would no
longer have a substantial proprietary interest in the Tencor business being
conducted by the Combined Company after the Merger. Planned Dispositions
include, among other things, shares disposed of pursuant to the exercise of
Dissenters' Rights. Tencor shareholders will generally be regarded as having
retained a substantial proprietary interest as long as the common stock of the
Combined Company received in the Merger (after reduction for any Planned
Dispositions), in the aggregate, represents a substantial portion of the entire
consideration received by the Tencor shareholders in the Merger. If the
continuity of interest requirement were not satisfied, the Merger would not be
treated as a "reorganization."
A successful IRS challenge to the "reorganization" status of the Merger (as
a result of a failure of the "continuity of interest" requirement or otherwise)
would result in a Tencor shareholder recognizing gain or loss with respect to
each share of Tencor Common Stock surrendered equal to the difference between
the shareholder's basis in such share and the fair market value, as of the
Effective Time of the Merger, of the common stock of the Combined Company
received in exchange therefor. In such event, a shareholder's aggregate basis in
the common stock of the Combined Company so received would equal such fair
market value and his holding period for such stock would begin the day after the
Merger.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until notifications have been given and certain
information has been furnished to the FTC or the Antitrust Division and the
specified waiting period has been satisfied. The notifications required under
the HSR Act as well as certain information have been furnished to the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Department of
Justice (the "Antitrust Division") and the specified waiting period under the
HSR Act for the Merger has expired. At any time before or after consummation of
the Merger, and notwithstanding that the HSR Act waiting period has expired, the
Antitrust Division, the FTC or any state or foreign governmental authority,
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest. Such action could include seeking to enjoin
the consummation of the Merger or seeking divestiture of Tencor or businesses of
KLA or Tencor by KLA. Private parties may also seek to take legal action under
the antitrust laws under certain circumstances.
Based on information available to them, KLA and Tencor believe that the
Merger will be effected in compliance with federal, state and foreign antitrust
laws. However, there can be no assurance that a challenge to the consummation of
the Merger on antitrust grounds will not be made or that, if such a challenge
were made, KLA and Tencor would prevail.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling-of-interests for financial
reporting purposes in accordance with generally accepted accounting principles.
Consummation of the Merger is conditioned upon receipt at the closing of the
Merger by KLA and Tencor of letters from Price Waterhouse LLP, KLA's and
Tencor's independent accountants, reaffirming the firm's concurrence with KLA
management's and Tencor management's conclusions, respectively, as to the
appropriateness of pooling-of-interests accounting for the Merger under APB No.
16, if consummated in accordance with the Reorganization Agreement.
40
TERMS OF THE MERGER
The following is a brief summary of the material provisions of the
Reorganization Agreement, a copy of which is attached as Annex A to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. This summary
is qualified in its entirety by reference to the full and complete text of the
Reorganization Agreement.
EFFECTIVE TIME
Subject to the provisions of the Reorganization Agreement, KLA, Tencor and
Merger Sub shall cause the Merger to be consummated by filing an Agreement of
Merger, with the Secretary of State of the State of California in accordance
with the relevant provisions of California law as soon as practicable on or
after the Closing Date. The closing of the Merger (the "Closing") shall take
place at the offices of Wilson Sonsini Goodrich & Rosati Professional
Corporation at a time and date to be specified by the parties, which shall be no
later than the second business day after the satisfaction or waiver of the
conditions set forth in the Reorganization Agreement, or at such other time,
date and location as the parties hereto agree in writing. The Closing is
anticipated to occur after the close of business on April 30, 1997.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, by virtue of the Merger and without any action on
the part of Merger Sub, Tencor or the holders of any of the following securities
each share of Tencor Common Stock issued and outstanding immediately prior to
the Effective Time, (other than any shares of Tencor Common Stock to be canceled
and any Dissenting Shares) will be canceled and extinguished and automatically
converted into the right to receive one share of KLA Common Stock upon surrender
of the certificate representing such share of Tencor Common Stock in the manner
provided below (or in the case of a lost, stolen or destroyed certificate, upon
delivery of an affidavit (and bond, if required)), including, with respect to
each share of KLA Common Stock to be received, the associated Rights.
Each share of Tencor Common Stock owned by Merger Sub, KLA or any direct or
indirect wholly-owned subsidiary of Tencor or of KLA immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof.
At the Effective Time, all options to purchase Tencor Common Stock then
outstanding under Tencor's Second Amended and Restated 1984 Stock Option Plan,
the Prometrix 1983 Employee Incentive Stock Option Plan, as amended, the
Prometrix 1993 Employee Incentive Stock Option Plan, Tencor's 1993 Equity
Incentive Plan and Tencor's 1993 Non-Employee Director Stock Plan (collectively,
the "Tencor Stock Option Plans") shall be assumed by KLA. At the Effective Time,
in accordance with actions expected to be approved by the KLA Board and Tencor
Board prior to the Effective Time, the rights to purchase common stock under
Tencor's 1993 Employee Stock Purchase Plan and 1993 Foreign Employee Stock
Purchase Plan (the "Tencor Employee Stock Purchase Plans"), shall be assumed by
KLA until a transition to the KLA Employee Stock Purchase Plan is arranged for
Tencor employees.
Each share of Common Stock, no par value, of Merger Sub issued and
outstanding immediately prior to the Effective Time shall be converted into one
validly issued, fully paid and nonassessable share of Common Stock, no par
value, of the Surviving Corporation. Each certificate evidencing ownership of
shares of Merger Sub Common Stock shall continue to evidence ownership of such
shares of capital stock of the Surviving Corporation.
The Exchange Ratio shall be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend or
distribution of securities convertible into KLA Common Stock or Tencor Common
Stock), reorganization, recapitalization or other like change with respect to
KLA Common Stock or Tencor Common Stock occurring on or after the date hereof
and prior to the Effective Time.
At or promptly after the Effective Time, KLA, acting through the Exchange
Agent, will deliver to each Tencor shareholder of record as of such date a
letter of transmittal with instructions to be used by such
41
shareholder in surrendering certificates which, prior to the Merger, represented
shares of Tencor Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE
HOLDERS OF TENCOR COMMON STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the capitalization of Tencor as of the close of business on
March 7, 1997 (including the number of shares of Tencor Common Stock outstanding
and the number of shares issuable upon exercise of outstanding options to
purchase Tencor Common Stock), and assuming that no holder of Tencor Common
Stock exercises Dissenters' Rights, an aggregate of approximately 31,245,304
shares of common stock of the Combined Company will be issued to Tencor
shareholders in the Merger and KLA will assume options for up to approximately
3,054,604 additional shares of common stock of the Combined Company. Based upon
the number of shares of KLA Common Stock issued and outstanding as of March 7,
1997, and after giving effect to the issuance of common stock of the Combined
Company as described in the previous sentence, the former holders of Tencor
Common Stock would hold, and have voting power with respect to, approximately
37.7% of the Combined Company's total issued and outstanding shares, and holders
of former Tencor options would hold options exercisable for approximately 3.6%
of the Combined Company's total issued and outstanding shares (assuming the
exercise of only such options). The foregoing numbers of shares and percentages
are subject to change in the event that the capitalization of either KLA or
Tencor changes subsequent to March 7, 1997 and prior to the Effective Time, and
there can be no assurance as to the actual capitalization of KLA or Tencor at
the Effective Time or of the Combined Company at any time following the
Effective Time.
CONDUCT FOLLOWING THE MERGER
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and all of the business, assets, liabilities and obligations of
Merger Sub will be merged into Tencor with Tencor remaining as the Surviving
Corporation.
Pursuant to the Reorganization Agreement, the Articles of Incorporation of
Merger Sub in effect immediately prior to the Effective Time will become the
Articles of Incorporation of the Surviving Corporation and the Bylaws of Merger
Sub will become the Bylaws of the Surviving Corporation. The Board of Directors
of the Surviving Corporation will consist of the directors who are serving as
directors of Merger Sub immediately prior to the Effective Time. The officers of
Merger Sub immediately prior to the Effective Time will remain as officers of
the Surviving Corporation, until their successors are duly elected or appointed
or qualified.
Pursuant to the Reorganization Agreement, the Combined Company Board
following the Merger will be increased to twelve members, seven of whom will be
the current directors of KLA, and five of whom will be current directors of
Tencor. The designees of Tencor will be James W. Bagley, Richard J. Elkus, Jr.,
Dean O. Morton, Jon D. Tompkins and Lida Urbanek. The Combined Company will have
a staggered board, with three classes of directors: Class I, II and III. The
classes are elected sequentially. At the Combined Company's next Annual Meeting,
currently expected to take place in November 1997, the Class II directors will
stand for election. If, prior to the Effective Time, any of the KLA or Tencor
designees decline or are unable to serve as directors of the Combined Company,
then the company designating such person will designate another person to serve
in such person's stead, which person will be reasonably acceptable to the other
company. In addition, the KLA Board will take action to cause its Audit
Committee, immediately after the Effective Time, to consist of three members,
two of whom will have served on the KLA Board immediately prior to the Effective
Time and one who will have served on the Tencor Board immediately prior to the
Effective Time. Moreover, the KLA Board will take action to cause its
Compensation Committee, immediately after the Effective Time, to consist of
three members, two of whom will have served on the Tencor Board immediately
prior to the Effective Time and one of whom will have served on the KLA Board
immediately prior to the Effective Time. In addition, the KLA Board will take
action to cause its Nominating Committee, immediately after the Effective Time,
to include one person who served on the Tencor Board immediately prior to the
Effective Time.
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Pursuant to the Reorganization Agreement, at the Effective Time, the
officers of the Combined Company shall be as follows: Kenneth Levy, currently
Chairman of the Board and Chief Executive Officer of KLA, will be Chairman of
the Board; Jon D. Tompkins, currently Chairman of the Board, President and Chief
Executive Officer of Tencor, will be Chief Executive Officer; Kenneth L.
Schroeder, currently President, and Chief Operating Officer of KLA, will be
President and Chief Operating Officer; Graham Siddall, Ph.D., currently
Executive Vice President and Chief Operating Officer of Tencor, will be
Executive Vice President responsible for Wafer Inspection Operations.
CONDUCT OF KLA'S AND TENCOR'S BUSINESS PRIOR TO THE MERGER
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, Tencor (and each of its subsidiaries) and KLA (and each of its
subsidiaries) agree, except (i) as indicated in the respective disclosure
schedules or (ii) to the extent that the other of them shall otherwise consent
in writing, to carry on its business diligently and in accordance with good
commercial practice and to carry on its business in the usual, regular and
ordinary course, in substantially the same manner as heretofore conducted and in
compliance with all applicable laws and regulations, to pay its debts and taxes
when due subject to good faith disputes over such debts or taxes, to pay or
perform other material obligations when due, and use its commercially reasonable
efforts consistent with past practices and policies to preserve intact its
present business organization, keep available the services of its present
officers and employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. In addition, each of Tencor and KLA will promptly notify the other of
any material event involving its business or operations. In addition, except as
permitted by the terms of the Reorganization Agreement or the KLA Option
Agreement or Tencor Option Agreement, or as provided in the respective
disclosure schedules, without the prior written consent of the other, neither
Tencor nor KLA (except for KLA in connection with the KLA Rights Plan) shall do
any of the following, and neither Tencor nor KLA shall permit its subsidiaries
to do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize cash
payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing, on the date
hereof and as previously disclosed in writing to the other, or adopt any new
severance plan;
(c) Transfer or license to any person or entity or otherwise extend, amend
or modify in any material respect any rights to the Tencor intellectual property
rights as indicated in the Reorganization Agreement or the KLA intellectual
property rights as indicated in the Reorganization Agreement, as the case may
be, or enter into grants to future patent rights, other than in the ordinary
course of business;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any capital stock or split,
combine or reclassify any capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for any
capital stock, other than pursuant to the KLA Rights Plan;
(e) Repurchase or otherwise acquire, directly or indirectly, any shares of
capital stock except pursuant to rights of repurchase of any such shares under
any employee, consultant or director stock plan existing on the date hereof
other than pursuant to the KLA Rights Plan;
(f) Issue, deliver, sell, authorize or propose the issuance, delivery or
sale of, any shares of capital stock or any securities convertible into shares
of capital stock, or subscriptions, rights, warrants or options to acquire any
shares of capital stock or any securities convertible into shares of capital
stock, or enter into other agreements or commitments of any character obligating
it to issue any such shares or convertible securities, other than (i) the
issuance of shares of Tencor Common Stock or KLA Common Stock, as the case may
be, pursuant to the exercise of stock options therefor outstanding as of the
date of the Reorganization Agreement; (ii) options to purchase shares of Tencor
Common Stock or KLA Common Stock, as the case may be, to be
43
granted at fair market value in the ordinary course of business, consistent with
past practice and in accordance with stock option plans existing on the date of
the Reorganization Agreement; (iii) shares of Tencor Common Stock or KLA Common
Stock, as the case may be, issuable upon the exercise of the options referred to
in clause (ii); (iv) shares of Tencor Common Stock or KLA Common Stock, as the
case may be, issuable to participants in the KLA 1981 Employee Stock Purchase
Plan, as amended, or the Tencor Employee Stock Purchase Plans consistent with
past practice and the terms thereof; and (v) shares of Tencor Common Stock or
KLA Common Stock, as the case may be, issuable pursuant to the Tencor and KLA
Stock Option Agreements; and (vi) pursuant to the KLA Rights Plan;
(g) Cause, permit or propose any amendments to any charter document or
bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of, or by
any other manner, any business or any corporation, partnership interest,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to the business of Tencor or KLA, as the case may be, or enter
into any material joint ventures, strategic partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the business
of Tencor or KLA, as the case may be, except in the ordinary course of business
consistent with past practice;
(j) Incur any indebtedness for borrowed money (other than ordinary course
trade payables or pursuant to existing credit facilities in the ordinary course
of business) or guarantee any such indebtedness or issue or sell any debt
securities or warrants or rights to acquire debt securities of Tencor or KLA, as
the case may be, or guarantee any debt securities of others;
(k) Adopt or amend any employee benefit or stock purchase or option plan,
or enter into any employment contract, pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its officers or employees other than in the ordinary course of business,
consistent with past practice, or change in any material respect any management
policies or procedures;
(l) Pay, discharge or satisfy any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business;
(m) Make any grant of exclusive rights to any third party;
(n) Take any action that would be reasonably likely to interfere with KLA's
ability to account for the Merger as a pooling-of-interests; or
(o) Agree in writing or otherwise to take any of the actions described in
(a) through (n) above.
NO SOLICITATION
Under the terms of the Reorganization Agreement, until the earlier of the
Effective Time or termination of the Reorganization Agreement pursuant to its
terms, each of KLA and Tencor has agreed that it will not, its subsidiaries will
not, and it will instruct its respective directors, officers, employees,
representatives, investment bankers, agents and affiliates not to, directly or
indirectly, (i) solicit or knowingly encourage submission of, any proposals or
offers by any person, entity or group (other than Tencor or KLA, as the case may
be, and its affiliates, agents and representatives), or (ii) participate in any
discussions or negotiations with, or disclose any non-public information
concerning itself or any of its subsidiaries to, or afford any access to the
properties, books or records of itself or any of its subsidiaries to, or
otherwise assist or facilitate, or enter into any agreement or understanding
with, any person, entity or group (other than Tencor or KLA, as the case may be,
and its affiliates, agents and representatives), in connection with any
Acquisition Proposal with respect to itself. For the purposes of the
Reorganization Agreement, an "Acquisition Proposal" with respect to an entity
means any proposal or offer relating to (i) any merger, consolidation, sale of
substantial assets or similar transactions involving the entity or any
subsidiaries of the entity (other than sales of assets or inventory in the
ordinary course of business or as permitted under the terms of the
Reorganization Agreement); (ii) sale of
44
15% or more of the outstanding shares of capital stock of the entity (including
without limitation by way of a tender offer or an exchange offer); (iii) the
acquisition by any person of beneficial ownership or a right to acquire
beneficial ownership of, or the formation of any "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder)
which beneficially owns, or has the right to acquire beneficial ownership of,
15% or more of the then outstanding shares of capital stock of the entity
(except for acquisitions for passive investment purposes only in circumstances
where the person or group qualifies for and files a Schedule 13G with respect
thereto); or (iv) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing. Under
the terms of the Reorganization Agreement, each of KLA and Tencor have agreed to
immediately cease any and all existing activities, discussions or negotiations
with any parties with respect to any of the foregoing. In addition, KLA and
Tencor have agreed to (i) notify the other as promptly as practicable if any
inquiry or proposal is made or any information or access is requested in writing
in connection with an Acquisition Proposal or potential Acquisition Proposal and
(ii) as promptly as practicable notify the other of the significant terms and
conditions of any such Acquisition Proposal. In addition, subject to the other
provisions set forth in the section of the Reorganization Agreement summarized
here, each of KLA and Tencor has agreed, until the earlier of the Effective Time
or termination of the Reorganization Agreement pursuant to its terms, that it
and its subsidiaries will not, and it and its subsidiaries will instruct their
respective directors, officers, employees, representatives, investment bankers,
agents and affiliates not to, directly or indirectly, make or authorize any
public statement, recommendation or solicitation in support of any Acquisition
Proposal made by any person, entity or group (other than Tencor or KLA, as the
case may be); provided, that KLA and Tencor have agreed that the Boards of
Directors of KLA and Tencor may take and disclose to the shareholders of KLA or
Tencor, respectively, a position with respect to a tender offer pursuant to
Rules 14d-9 and 14e-2 promulgated under the Exchange Act.
Notwithstanding the foregoing, KLA and Tencor have agreed that, prior to
the Effective Time, each of KLA and Tencor may, to the extent its Board of
Directors determines, in good faith, after consultation with outside legal
counsel, that the Board's fiduciary duties under applicable law require it to do
so, participate in discussions or negotiations with, and, subject to the
requirements of the following paragraph, furnish information to any person,
entity or group after such person, entity or group has delivered to KLA or
Tencor, as the case may be, in writing, an unsolicited bona fide Acquisition
Proposal which the Board of Directors of KLA or Tencor, respectively, in its
good faith reasonable judgment determines, after consultation with its
independent financial advisors, would result in a transaction more favorable
than the Merger to the shareholders of KLA or Tencor, respectively (a "Superior
Proposal"). In addition, notwithstanding the provisions of the preceding
paragraph, in connection with a possible Acquisition Proposal, each of KLA and
Tencor may refer any third party to the section of the Reorganization Agreement
summarized here or make a copy of such section available to a third party. In
the event either KLA or Tencor receives a Superior Proposal, nothing contained
in the Reorganization Agreement (but subject to the terms of the Reorganization
Agreement) will prevent the Board of Directors of KLA or Tencor, as the case may
be, from recommending such Superior Proposal to the shareholders of such
company, if such Board determines, in good faith, after consultation with
outside legal counsel, that such action is required by its fiduciary duties
under applicable law; in such case, the Board of Directors of such company may
withdraw, modify or refrain from making its recommendations concerning the
Merger, and, to the extent the Board of Directors of such company so changes its
recommendations, such company may refrain from soliciting proxies and taking
such other action necessary to secure the vote of its shareholders as may be
required by the Reorganization Agreement; provided, however, that each of KLA
and Tencor has agreed that it will not recommend a Superior Proposal to its
shareholders for a period of not less than 48 hours after the other's receipt of
a copy of such Superior Proposal (or a description of the significant terms and
conditions thereof, if not in writing); and provided further, that nothing
contained in the section of the Reorganization Agreement summarized here limits
the obligations of KLA and Tencor to hold and convene the KLA Special Meeting or
the Tencor Special Meeting, as the case may be (regardless of whether the
recommendations of the Board of Directors of KLA or Tencor have been withdrawn,
modified or not yet made).
Notwithstanding the foregoing, each of KLA and Tencor has agreed that it
will not provide any non-public information to a third party unless: (i) it
provides such non-public information pursuant to a
45
nondisclosure agreement with terms regarding the protection of confidential
information at least as restrictive as the terms in a certain confidentiality
agreement between KLA and Tencor; and (ii) such non-public information is the
same information previously delivered to the other.
BREAK UP FEES
Each of KLA and Tencor has agreed that if (i) its Board of Directors
withholds, withdraws or modifies, in a manner adverse to the other, its
recommendation in favor of adoption and approval of the Merger, and at that time
there has not occurred a material adverse effect on the other party, or (ii) its
Board of Directors recommends a Superior Proposal to its shareholders, then it
will pay to the other party an amount equal to $60 million, in the case of
payment by KLA, or $40 million, in the case of payment by Tencor, within one
business day following the earlier to occur of (A) termination of the
Reorganization Agreement by the other party in connection with such action or
(B) a Negative Vote (as defined below) with regard to KLA or Tencor,
respectively. A "Negative Vote" with regard to KLA means the vote of the
shareholders of KLA in favor of (i) an increase in the authorized number of
shares of KLA Common Stock so as to permit the issuance of shares of KLA Common
Stock by virtue of the Merger, or (ii) the issuance of KLA Common Stock by
virtue of the Merger is not obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of shareholders duly convened
therefor or at any adjournment thereof; and a "Negative Vote" with regard to
Tencor means the vote of the shareholders of Tencor in favor of approving and
adopting the Reorganization Agreement and approving the Merger is not obtained
by reason of the failure to obtain the required vote upon a vote taken at a
meeting of shareholders duly convened therefor or at any adjournment thereof.
KLA and Tencor have also agreed that if no payment is required pursuant to
the foregoing paragraph, and if (i) a Negative Vote with regard to it occurs
and; (ii) prior to such Negative Vote there shall have occurred an Acquisition
Proposal with respect to it which has been publicly disclosed and not withdrawn
(a "Competing Proposal"); and (iii) within 12 months following such Negative
Vote, it enters into a definitive agreement with respect to an Acquisition
Proposal with the party (or any affiliate of the party) that made the Competing
Proposal or an Acquisition Proposal with such party (or any such affiliate) is
consummated, then, provided that no material adverse effect on the other party
had occurred prior to the Negative Vote, it will pay to the other party, within
one business day following demand for such payment, an amount equal to $60
million, in the case of payment by KLA, or $40 million, in the case of payment
by Tencor.
If no payment is required pursuant to the provisions of either of the
preceding two paragraphs and if there is a Negative Vote with regard to either
KLA or Tencor then such company has agreed to pay to the other party an amount
equal to $5 million within one business day following demand for such payment.
KLA and Tencor have agreed that payment of the fees described in this
section will not be in lieu of damages incurred in the event of breach of the
Reorganization Agreement.
Except as set forth above, KLA and Tencor have agreed that all fees and
expenses incurred in connection with the Reorganization Agreement and the
transactions contemplated thereby will be paid by the party incurring such
expenses whether or not the Merger is consummated, except that KLA and Tencor
will share equally all fees and expenses, other than attorneys' and accountants
fees and expenses, incurred in connection with the printing and filing of this
Joint Proxy Statement/Prospectus.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Reorganization Agreement to
effect the Merger are subject to the satisfaction at or prior to the Effective
Time of the following conditions: (i) certain approvals by the shareholders of
KLA and Tencor shall have been obtained; (ii) the SEC shall have declared the
Registration Statement effective and no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose, and no similar proceeding in respect of the Joint
Proxy Statement/Prospectus shall have been initiated or threatened in writing by
the SEC; (iii) no Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent)
46
which is in effect and which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger and all waiting periods under
the HSR Act relating to the transactions contemplated by the Reorganization
Agreement will have expired or terminated early; (iv) KLA and Tencor shall each
have received written opinions from legal counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code; provided, however, that if the legal counsel to either KLA or Tencor does
not render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders such
opinion to such party; (v) the shares of Common Stock issuable to shareholders
of Tencor pursuant to the Reorganization Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on Nasdaq and (vi) each of KLA and Tencor shall have
received a letter from its independent accountant reaffirming the firm's
concurrence with KLA management's and Tencor management's conclusions as to the
appropriateness of pooling-of-interests accounting for the Merger under APB No.
16.
In addition, the obligation of Tencor to consummate and effect the Merger
is subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, exclusively by
Tencor: (i) the representations and warranties of KLA and Merger Sub contained
in the Reorganization Agreement shall be true and correct; (ii) KLA and Merger
Sub shall have performed or complied in all material respects with all
agreements and covenants required by the Reorganization Agreement to be
performed or complied with by them on or prior to the Effective Time; and (iii)
no material adverse effect with respect to KLA shall have occurred since the
date of the Reorganization Agreement.
Further, the obligations of KLA and Merger Sub to consummate and effect the
Merger are subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, exclusively
by KLA: (i) the representations and warranties of Tencor contained in the
Reorganization Agreement shall be true and correct; (ii) Tencor shall have
performed or complied in all material respects with all agreements and covenants
required by the Reorganization Agreement to be performed or complied with by it
on or prior to the Effective Time; and (iii) no material adverse effect with
respect to Tencor shall have occurred since the date of the Reorganization
Agreement.
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time (i) by mutual written consent duly authorized by the
Boards of Directors of KLA and Tencor; (ii) by either Tencor or KLA if the
Merger has not been consummated by July 31, 1997; provided, that the right to
terminate the Reorganization Agreement under this provision is not available to
any party whose action or failure to act has been a principal cause of or
resulted in the failure of the Merger to occur on or before such date and such
action or failure to act constitutes a breach of the Reorganization Agreement;
(iii) by either Tencor or KLA if a governmental entity issues an order, decree
or ruling or takes any other action, in any case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger, which
order, decree or ruling is final and nonappealable; (iv) by either Tencor or KLA
if the required approvals of the shareholders of Tencor or KLA contemplated by
the Reorganization Agreement have not been obtained by reason of the failure to
obtain the required vote upon a vote taken at a meeting of shareholders duly
convened therefor or at any adjournment thereof (provided that the right to
terminate the Reorganization Agreement under this provision is not available to
any party where the failure to obtain shareholder approval of such party was
caused by the action or failure to act of such party in breach of the
Reorganization Agreement); (v) by KLA, if the Tencor Board recommends a Superior
Proposal with regard to Tencor to the shareholders of Tencor, or if the Tencor
Board withholds, withdraws or modifies in a manner adverse to KLA its
recommendations concerning the Merger; (vi) by Tencor, if the KLA Board
recommends a Superior Proposal with regard to KLA to the shareholders of KLA, or
if the KLA Board withholds, withdraws or modifies in a manner adverse to Tencor
its recommendations concerning the Merger; (vii) by Tencor, upon certain
breaches of any representation, warranty, covenant or agreement on the part of
KLA set forth in the Reorganization Agreement, or if any representation or
warranty of KLA shall become untrue (provided that if such inaccuracy in KLA's
representations and warranties or breach by KLA is curable by KLA through the
47
exercise of its commercially reasonable efforts, then Tencor may not terminate
the Reorganization Agreement provided KLA continues to exercise such
commercially reasonable efforts to cure such breach); or (viii) by KLA, upon
certain breaches of any representation, warranty, covenant or agreement on the
part of Tencor set forth in the Reorganization Agreement, or if any
representation or warranty of Tencor shall become untrue (provided that if such
inaccuracy in Tencor's representations and warranties or breach by Tencor is
curable by Tencor through the exercise of its commercially reasonable efforts,
then KLA may not terminate the Reorganization Agreement provided Tencor
continues to exercise such commercially reasonable efforts to cure such breach).
OPTION AGREEMENTS
As an inducement to the other party, each of KLA and Tencor entered into a
stock option agreement with the other dated as of January 14, 1997, pursuant to
which, subject to certain conditions, KLA granted to Tencor (the "Tencor
Option") and Tencor granted to KLA (the "KLA Option") rights to acquire up to a
number of shares of KLA Common Stock or Tencor Common Stock, as the case may be,
equal to 19.9% of the issued and outstanding shares as of the first date, if
any, upon which an Exercise Event (as defined below) with regard to such Stock
Option Agreement occurs, provided that KLA and Tencor have agreed that such
shares shall not upon timely issuance constitute more than 19.9% of the then
issued and outstanding shares of KLA Common Stock in the case of the Tencor
Option, or Tencor Common Stock in the case of the KLA Option. The exercise price
for the Tencor Option or the KLA Option is, at the option of the exercising
party, paid either (i) in cash at a price of $40.00 per share in the case of the
Tencor Option and $30.0625 per share in the case of the KLA Option (the
"Exercise Price") or (ii) by exchange of shares of Tencor Common Stock or KLA
Common Stock, as the case may be, at a rate, for each share of KLA Common Stock
or Tencor Common Stock purchased, of a number of shares of Tencor Common Stock
or KLA Common Stock, respectively, equal to the applicable Exercise Price
divided by the closing sale price of Tencor Common Stock or KLA Common Stock,
respectively, on Nasdaq for the trading day immediately preceding the date of
the closing of the particular option exercise.
The Tencor Option and the KLA Option, as applicable, may be exercised in
whole or in part, at any time or from time to time, (i) immediately prior to the
consummation of a tender or exchange offer for 25% or more of any class of KLA's
capital stock or Tencor's capital stock, respectively; (ii) if the shareholders
of KLA or Tencor, respectively, fail to give certain approvals in connection
with the Merger at a time when a Competing Proposal is in effect, and within 12
months following such failure, such company enters into a definitive agreement
with respect to an Acquisition Proposal with the party that made the Competing
Proposal or any affiliate of such party, or an Acquisition Proposal with respect
to such company is consummated with such party or any affiliate of such party;
(iii) if the KLA Board or Tencor Board, respectively, withholds or withdraws or
modifies in a manner adverse to the other party its recommendation in favor of
the Merger after receipt of and in connection with an Acquisition Proposal with
respect to it; or (iv) if the KLA Board or Tencor Board, respectively,
recommends a Superior Proposal with respect to it to its shareholders (any of
the events specified in clauses (i), (ii), (iii) or (iv) of this sentence being
referred to as an "Exercise Event"). If Tencor or KLA, respectively, receives in
the aggregate pursuant to certain provisions of the Reorganization Agreement
with regard to fees and expenses, together with proceeds in connection with any
sales or other dispositions of shares of stock received upon exercise of the
Tencor Option or the KLA Option, as the case may be, (and any dividends received
by it on such shares) more than the sum of (a) $60,000,000 in the case of Tencor
or $40,000,000 in the case of KLA plus (b) the applicable Exercise Price
multiplied by the number of shares of KLA Common Stock or Tencor Common Stock,
as the case may be, purchased pursuant to such option, then all proceeds to such
party in excess of such sum shall be remitted to the other party.
The Tencor Option or the KLA Option, as the case may be, will terminate
upon the earliest of (i) the Effective Time; (ii) 180 days following the
termination of the Reorganization Agreement if an Exercise Event has occurred on
or prior to the date of such termination; (iii) 12 months following the date on
which the Reorganization Agreement is terminated if a Negative Vote with respect
to KLA or Tencor, respectively, has occurred and prior to such Negative Vote an
Acquisition Proposal with respect to KLA or Tencor, respectively, has occurred
which was publicly disclosed and not withdrawn; (iv) 12 months following the
date
48
on which the Reorganization Agreement is terminated if a tender or exchange
offer for 25% or more of any class of KLA's capital stock or Tencor's capital
stock, respectively, was commenced prior thereto; and (v) subject to certain
exceptions, the date on which the Reorganization Agreement is terminated if
neither an Exercise Event, nor both of the events specified in subclauses and of
clause (iii) hereof, nor the commencement of a tender or exchange offer for 25%
or more of any class of KLA's capital stock or Tencor's capital stock,
respectively, has occurred on or prior to such date of termination; provided,
however, that if either of the KLA Option or Tencor Option cannot be exercised
by reason of any applicable government order or because the waiting period
related to the issuance of such option shares under the HSR Act shall not have
expired or been terminated, then the KLA Option and the Tencor Option, as the
case may be, shall not terminate until the tenth business day after such
impediment to exercise shall have been removed or shall have become final and
not subject to appeal. Notwithstanding the foregoing, the Tencor Option or the
KLA Option, as the case may be, may not be exercised if (i) Tencor or KLA,
respectively, has breached in any material respect any of its covenants or
agreements contained in the Reorganization Agreement or (ii) the representations
and warranties of Tencor or KLA, respectively, contained in the Reorganization
Agreement were not true in all material respects on and as of the date when
made.
At the request of and upon notice by Tencor or KLA, as the case may be (the
"Put Notice"), at any time during the period during which the Tencor Option or
the KLA Option, respectively, is exercisable, each of KLA or Tencor,
respectively, has agreed to purchase (i) the Tencor Option or the KLA Option,
respectively, to the extent not previously exercised, at a price equal to the
number of shares issuable upon exercise of such option multiplied by the
difference between (a) the greater of the highest price per share offered as of
such date pursuant to any public and not-withdrawn Acquisition Proposal with
respect to KLA or Tencor, respectively, or the highest closing sale price of KLA
Common Stock or Tencor Common Stock, respectively, on Nasdaq during the 20
trading days ending on the trading day immediately preceding such date (the
"Market/Tender Offer Price") and (b) the Exercise Price; and (ii) the shares
issued upon exercise of the Tencor Option or the KLA Option, respectively, if
any, at a price per share equal to the applicable Exercise Price plus the
difference between the applicable Market/Tender Offer Price and such Exercise
Price. Notwithstanding the foregoing, KLA or Tencor, respectively, will not be
required to pay the other party in connection with the events set forth in this
paragraph in excess of an aggregate of (i) $60,000,000 in the case of payment by
KLA or $40,000,000 in the case of payment by Tencor; plus (ii) any Exercise
Price paid; minus (iii) any amounts paid to Tencor or KLA, respectively,
pursuant to certain provisions of the Reorganization Agreement involving fees
and expenses.
KLA and Tencor have further agreed that, if the other party has acquired
shares pursuant to the exercise of the Tencor Option or the KLA Option, as the
case may be, (the date of any Closing relating to any such exercise referred to
as an "Exercise Date") and no Acquisition Proposal with respect to KLA or
Tencor, as the case may be, has been consummated at any time after the date of
the Tencor Option Agreement or the KLA Option Agreement, respectively, and prior
to the date one year following such Exercise Date (nor has KLA or Tencor,
respectively, entered into a definitive agreement or letter of intent with
respect to such an Acquisition Proposal which agreement or letter of intent
remains in effect at the end of such year), then, at any time after the date one
year following such Exercise Date and prior to the date 18 months following such
Exercise Date, KLA or Tencor, as the case may be, may require the other party to
sell to it any shares of KLA Common Stock or Tencor Common Stock, respectively,
held by Tencor or KLA, respectively, as of the day that is 10 business days
after the date of such notice, up to a number of shares equal to the number of
such shares acquired by Tencor or KLA, respectively, pursuant to exercise of the
Tencor Option or the KLA Option, as the case may be. The per share purchase
price for such sale will be equal to the appropriate Exercise Price less any
dividends paid on the shares to be purchased (the "Call Price"), payable in cash
or by the return of a number of shares of Tencor Common Stock or KLA Common
Stock, as the case may be, equal to the Call Price divided by the closing sale
price of a share of Tencor Common Stock or KLA Common Stock, respectively, on
Nasdaq for the trading day immediately preceding the date of the Exercise Date
on which the shares to be purchased were originally issued.
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AFFILIATE AGREEMENTS
Each of the members of the KLA Board and certain officers of KLA have
entered into agreements restricting sales, dispositions or other transactions
reducing their risk of investment in respect of the shares of KLA Common Stock
held by them to help ensure that the Merger will be treated as a
pooling-of-interests for accounting and financial reporting purposes. Each of
the members of the Tencor Board and certain officers of Tencor have entered into
agreements restricting sales, dispositions or other transactions reducing their
risk of investment in respect of the shares of Tencor Common Stock held by them
prior to the Merger and the shares of KLA Common Stock received by them in the
Merger so as to comply with the requirements of applicable federal securities
and tax laws and to help ensure that the Merger will be treated as a
pooling-of-interests for accounting and financial reporting purposes.
INTERESTS OF CERTAIN PERSONS
Indemnification
From and after the Effective Time, KLA will cause the Surviving Corporation
to fulfill and honor in all respects the obligations of Tencor pursuant to any
indemnification agreements between Tencor and its directors and officers
existing prior to January 14, 1997. The Articles of Incorporation and Bylaws of
the Surviving Corporation will contain the provisions with respect to
indemnification set forth in the articles of incorporation and bylaws of Tencor,
which provisions will not be amended, repealed or otherwise modified for a
period of six years from the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who, immediately prior to the
Effective Time, were directors, officers, employees or agents of Tencor, unless
such modification is required by law.
After the Effective Time, KLA will cause the Surviving Corporation, to the
fullest extent permitted under applicable law or under the Surviving
Corporation's Articles of Incorporation or Bylaws, to indemnify and hold
harmless, each present director or officer of Tencor (collectively, the
"Indemnified Parties") against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, to the
extent arising out of or pertaining to any action or omission in his or her
capacity as a director or officer of Tencor arising out of or pertaining to the
transactions contemplated by the Merger for a period of six years after the date
hereof. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) any
counsel retained by the Indemnified Parties for any period after the Effective
Time must be reasonably satisfactory to the Surviving Corporation and the
Combined Company; (ii) after the Effective Time, the Combined Company will cause
the Surviving Corporation to pay the reasonable fees and expenses of such
counsel, promptly after statements therefor are received; and (iii) the Combined
Company will cause the Surviving Corporation to cooperate in the defense of any
such matter; provided, however, that neither the Combined Company nor the
Surviving Corporation will be liable for any settlement effected without its
written consent (which consent will not be unreasonably withheld); and provided,
further, that, in the event that any claim or claims for indemnification are
asserted or made within such six-year period, all rights to indemnification in
respect of any such claim or claims will continue until the disposition of any
and all such claims; provided, further, that any determination required to be
made with respect to whether an Indemnified Party's conduct complies with the
standards set forth under California law, Tencor's articles of incorporation or
bylaws, as the case may be, shall be made by independent legal counsel selected
by the Indemnified Party and reasonably acceptable to the Combined Company; and
provided, further, that nothing shall impair any rights or obligations of any
present or former employees, agents, directors or officers of Tencor. The
Indemnified Parties as a group may retain only one law firm (in addition to
local counsel) to represent them with respect to any single action unless there
is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties.
In the event the Combined Company or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger, or (ii) transfers or conveys all or substantially
all of its properties and assets to any person, then, and in each such case, to
the extent necessary to effectuate the purposes of the Reorganization Agreement,
proper provision shall be made so that the successors and assigns of KLA and
Tencor assume the obligations set forth
50
in the Reorganization Agreement relating to indemnification and none of the
actions described in clause (i) or (ii) above shall be taken until such
provision is made.
For a period of six years after the Effective Time, the Combined Company
will cause the Surviving Corporation to use its commercially reasonable efforts
to maintain in effect, if available, directors' and officers' liability
insurance covering those persons who are currently covered by Tencor's
directors' and officers' liability insurance policy on terms comparable to those
applicable to the then current directors and officers of the Combined Company;
provided, however, that in no event will the Combined Company or the Surviving
Corporation be required to expend in excess of 200% of the annual premium
currently paid by Tencor for such coverage (or such coverage as is available for
such 200% of the annual premium).
The indemnification and insurance obligations of the Reorganization
Agreement will survive any termination of the Reorganization Agreement and the
consummation of the Merger at the Effective Time, is intended to benefit Tencor,
the Surviving Corporation and the Indemnified Parties, and will be binding on
all successors and assigns of the Surviving Corporation.
Retention Arrangements
The Combined Company intends to enter into Retention and Non-Competition
Agreements (the "Retention Agreements") with each of Messrs. Levy, Tompkins and
Schroeder (each, an "Executive") which provide for the continuation of certain
benefits and obligations upon the termination of full-time employment.
Following the termination of full-time employment (other than for cause)
during the term of the Retention Agreements (five years from the Effective
Time), the Executive shall become a part-time employee and during such period
shall provide certain agreed upon services. In consideration of the Executive
not working for either a non-competing company or a competing company so as to
be available to provide the mutually agreed upon services, the Executive will be
paid his base salary, or under certain circumstances, a lesser amount, and
certain bonuses. In addition, as long as an Executive's part-time employment
continues, certain of the Executive's options will continue to vest in
accordance with the terms of the original option agreements and the Combined
Company will provide group health insurance for the Executive. If, during the
term of the Retention Agreements, an Executive voluntarily terminates his
full-time employment with the Combined Company other than for Good Reason, the
Executive shall remain employed as a part-time employee for a period of up to
thirty-six months depending on the date of delivery of such notice. If, during
the term of the Retention Agreements, an Executive voluntarily terminates his
full-time employment with the Combined Company for Good Reason or if the
Combined Company terminates an Executive's full-time employment other than for
cause, then the Executive shall remain employed as a part-time employee for a
period of up to twenty-four months. "Good Reason" is defined to include certain
reductions in the Executive's authority, responsibility or compensation or
requiring the Executive to relocate 100 miles or more from the Combined
Company's headquarters. Following the Effective Time, if an Executive's
employment is terminated for cause, subject to said Executive entering into a
release of claims, the Executive will receive a lump-sum payment equal to
twenty-five percent of his base salary, and shall not be entitled to any other
benefits or continued vesting of options.
In the event that during part-time employment an Executive becomes employed
by an entity that is not a competing company, Executive shall continue with his
part-time employment, but he (i) shall have his base salary reduced, (ii) shall
not be eligible to receive any further bonuses, and (iii) shall not be eligible
to participate or receive benefits under any other employee benefit plans,
policies, practices or arrangements of the Combined Company or its predecessors.
An Executive's part-time employment relationship with the Combined Company
may not be terminated by the Combined Company prior to the end of the identified
term, except (i) upon the death or permanent disability of Executive, (ii) by
written agreement between both the Combined Company and Executive; provided,
however, that Executive's employment with the Combined Company, whether
full-time or part-time, shall immediately and automatically terminate upon the
Executive rendering services to any competing company. No additional benefits or
payments will become payable to Executive upon a termination of Executive's
part-time employment.
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The Combined Company also intends to adopt a Corporate Officers Retention
Plan (the "Retention Plan") which will provide benefits to certain corporate
officers of the Combined Company not covered by the Retention Agreements.
Under the Retention Plan, if the full-time employment of a corporate
officer, including an executive officer, who participates in the Retention Plan
("Participant") terminates, either voluntarily or involuntarily, other than for
cause, due to the elimination of the Participant's job and either no other
position of significant responsibility is offered by the Combined Company or
another such position is offered and the Participant thereafter resigns, subject
to certain conditions, the Retention Plan will provide part-time employment with
certain benefits for periods of up to twenty-four months. The payments during
the part-time employment periods are in consideration of the Participant not
working for either a non-competing company or a competing company and being
available to provide agreed upon services to the Combined Company upon request.
Such benefits will include continued payment of base salary for up to twelve
months, and in certain circumstances, a reduced amount commensurate with
services being provided for certain additional periods and certain bonuses. If a
Participant is providing services to a competing company, the Participant's
part-time employment shall terminate immediately, with no salary or bonus paid
thereafter. So long as the Participant does not provide services to a competing
company, the Participant's stock options that were granted by KLA or Tencor
prior to January 15, 1997, shall continue to vest in accordance with the terms
of the original option agreements during the part-time employment period.
If the Participant's full-time employment terminates because of involuntary
termination following elimination of the Participant's job and the Participant
(i) refuses to accept the Combined Company's offer of a job of significant
responsibility, and (ii) following such refusal, the Participant refuses to
voluntarily terminate full-time employment with the Combined Company, or if the
Participant is terminated for cause, then the Participant shall not be entitled
to receive severance or other benefits under the Retention Plan and shall not be
eligible to receive any other benefits or payments from the Combined Company,
except as required by law.
The Retention Plan may be amended at any time by the Combined Company Board
and terminates on June 30, 1998.
DISSENTERS' RIGHTS
If the Merger is consummated, and if holders of 5% or more of the
outstanding Tencor Common Stock properly exercise the rights described herein,
holders of Tencor Common Stock which were outstanding on the Tencor Record Date
and who fully comply with all applicable provisions of Chapter 13 of the CCC,
are entitled to require Tencor to purchase such shares (any and all of such
shares being referred to in this Joint Proxy Statement/Prospectus as "Dissenting
Shares") for cash at their "fair market value" as of the day preceding the first
announcement of the terms of the proposed Merger, excluding any appreciation or
depreciation in consequence of the proposed Merger. The terms of the proposed
Merger were first publicly announced on January 14, 1997 (the "Merger
Announcement Date").
Dissenters' Rights are exercisable only by the holder of record, not by a
beneficial owner who does not hold the shares of record.
A Tencor shareholder who wishes to demand that Tencor purchase all or a
portion of his shares for cash at such value must do all of the following with
respect to such shares:
1. Vote such shares of Tencor Common Stock against the Merger.
2. Make a written demand on Tencor for the purchase of such shares and
for the payment in cash of the fair market value of such shares. Such
demand will not be effective unless it is received by Tencor not later than
the date of the Tencor Special Meeting.
3. Submit to Tencor, within 30 days after the date on which notice of
approval of the Merger is mailed to such shareholder by Tencor, the stock
certificates representing the shares which such
52
shareholder demands Tencor purchase. Tencor will endorse such certificate
to indicate they represent Dissenting Shares.
The written demand and the stock certificates should be delivered or
addressed to Tencor at One Technology Drive, Milpitas, California 95035,
Attention: Secretary.
The required written demand (the second-numbered requirement above) must
state: the number of shares held of record which the shareholder demands be
purchased and the amount that such shareholder claims to be the fair market
value of such shares as of the day preceding the Merger Announcement Date. The
statement of fair market value will constitute an offer by the shareholder to
sell such shares at the price set forth in the statement. Thereafter, the
shareholder may withdraw a demand for payment only if Tencor consents to such
withdrawal.
If the holders of 10% or more of the outstanding shares of Tencor Common
Stock are Dissenting Shareholders, the Merger will be precluded from being
accounted for as a pooling-of-interests and accordingly, one of the closing
conditions of the Merger will not be satisfied.
If Tencor and such shareholder agree that the shareholder has properly
exercised Dissenters' Rights in accordance with Chapter 13 of the CCC, and agree
upon the relevant fair market value of the Dissenting Shares, then Tencor, upon
timely surrender of the certificates representing such shares as set forth
above, will make payment of the agreed upon amount (plus interest at the legal
rate from the date of such agreement) within 30 days after such agreement (or
within 30 days after the Effective Date of the Merger, if later). If Tencor
denies that such shareholder has properly exercised Dissenters' Rights, or
Tencor and such shareholder fail to agree on the relevant fair market value of
such shares, such shareholder may, within six months after the date on which the
notice of shareholder approval is mailed to such shareholder, but not
thereafter, file a complaint in the Superior Court for the County of Santa
Clara, State of California, requesting the purchase of and payment for such
shares or to determine their fair market value or both. The cost of any such
action would be assessed or apportioned as the court considered equitable.
However, if the court were to determine that the fair market value exceeded the
price offered to the shareholder by Tencor by at least 25%, then Tencor would be
required to pay costs (including, in the court's discretion, attorneys' fees,
fees of expert witnesses and interest at the legal rate).
The foregoing is merely a summary and does not purport to be a complete
statement of the rights of Dissenting Shareholders. It is qualified in its
entirety by reference to the applicable statutory provisions of Chapter 13 of
the CCC which are set forth in full in Annex C to this Joint Proxy
Statement/Prospectus.
Shareholders of KLA
Shareholders of KLA are not entitled to appraisal rights under the Delaware
General Corporation Law in connection with the Merger.
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF KLA CAPITAL STOCK
The authorized capital stock of KLA consists of 74,000,000 shares of Common
Stock, $0.001 par value per share, 1,000,000 shares of Junior Common Stock,
$0.001 par value per share, and 1,000,000 shares of Preferred Stock, $0.001 par
value per share. At the KLA Special Meeting, shareholders will be asked to
approve an amendment to KLA's Restated Certificate of Incorporation to increase
the authorized Common Stock of KLA by 175 million shares to 250 million shares
and to eliminate the designated class of Junior Common Stock. See "Additional
Matters Being Submitted to a Vote of only KLA Shareholders -- Proposal
Three -- Amendment to Restated Certificate of Incorporation -- Increase to
Authorized Common Stock."
KLA Common Stock
As of the KLA Record Date, there were approximately 51,655,785 shares of
KLA Common Stock outstanding held of record by approximately 1,285 shareholders.
KLA Common Stock is listed on Nasdaq under the symbol KLAC. The holders of KLA
Common Stock are entitled to one vote per share on all matters to be voted upon
by the shareholders. The shareholders do not have a right to take action by
written consent nor may they cumulate votes in connection with the election of
directors. The holders of KLA Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of KLA, the holders of KLA Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities. The KLA Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the KLA Common Stock. All outstanding shares of KLA Common Stock
are fully paid and non-assessable, and the shares of KLA Common Stock to be
outstanding upon completion of the Merger will be fully paid and non-assessable.
Junior Common Stock
KLA has 1,000,000 shares of Junior Common Stock authorized, of which, as of
the KLA Record Date, no shares were outstanding. In conjunction with the Merger,
the Junior Common Stock will be eliminated.
Preferred Stock
KLA has 1,000,000 shares of Preferred Stock authorized, of which, as of the
KLA Record Date, no shares were outstanding. The KLA Board has the authority to
issue these shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
unissued and undesignated shares of Preferred Stock and to fix the number of
shares constituting any series and the designations of such series, without any
further vote or action by the shareholders. Although it presently has no
intention to do so, the KLA Board, without shareholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power or other rights of the holders of KLA Common Stock and the
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of KLA.
Transfer Agent and Registrar
The Transfer Agent and Registrar of the KLA Common Stock is Boston
EquiServe, LP and its telephone number is (617) 575-2000.
KLA SHAREHOLDER RIGHTS PLAN
The KLA Rights Plan provides that each holder of record of a Right, other
than an Acquiring Person (as defined below), will thereafter have the right to
receive, upon payment of the Exercise Price (currently $160.00 per Right), that
number of shares of KLA Common Stock having a market value at the time of the
transaction equal to twice the Exercise Price. The Rights will expire on the
earliest of (i) April 24, 2006 or (ii) the redemption or exchange of the Rights
by KLA (the earliest to occur being the "Expiration Date").
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The Rights will become exercisable and will trade separately from the KLA Common
Stock (unless postponed by action of KLA's disinterested directors) on the
earlier of (i) ten days following a public announcement that a person or group
("Acquiring Person") has acquired or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding KLA Common Stock or (ii) ten days
following the commencement or announcement of a tender offer or exchange offer
which, if consummated, would result in the beneficial ownership by a person or
group of 15% or more of the outstanding KLA Common Stock (the earlier of which
to occur being the "Distribution Date"). For example, if any person or group
acquires 15% or more of the KLA Common Stock without approval of the KLA Board,
each Right not held by such Acquiring Person would entitle its holder to
purchase, at the current Exercise Price, shares of KLA Common Stock having a
fair market value of $320.00. In addition, the Exercise Price, number of Rights,
and number of shares of KLA Common Stock or common stock of any Acquiring
Person, as the case may be, that may be acquired for the Exercise Price are
subject to adjustment from time to time to prevent dilution.
KLA may redeem the Rights for $.01 per Right, at its option and with the
approval of the KLA Board, at any time on or prior to the earlier of (i) the
tenth day following a public announcement that a person or group has acquired
beneficial ownership of 15% or more of the KLA Common Stock then outstanding
(the "Shares Acquisition Date") or such later date as may be determined by a
majority of the directors of KLA not affiliated with the acquiring person or
group and publicly announced or (ii) the Expiration Date. The Rights are also
redeemable after the Shares Acquisition Date, if the KLA Board authorizes such
redemption, there are directors not affiliated with the Acquiring Persons or
group, and a majority of such unaffiliated directors concur with such
authorization.
The issuance of the Rights is not taxable to KLA or to shareholders under
currently existing federal income tax law. If the Rights should become
exercisable, shareholders, depending on then existing circumstances, may
recognize taxable income. The issuance of the Rights will not affect the manner
in which the KLA Common Stock can be traded. The Rights have certain
anti-takeover effects. Under certain circumstances the Rights could cause
substantial dilution to a person or group who attempts to acquire KLA on terms
not approved by the KLA Board. The Rights should not interfere with any merger
or other business combination approved by the Board.
DESCRIPTION OF TENCOR CAPITAL STOCK
The authorized capital stock of Tencor consists of 60,000,000 shares of
Common Stock, no par value per share, and 1,000,000 shares of Preferred Stock,
no par value per share.
Tencor Common Stock
As of the Tencor Record Date, there were approximately 31,245,304 shares of
Tencor Common Stock outstanding held of record by approximately 830
shareholders. Tencor Common Stock is listed on Nasdaq under the symbol TNCR.
Holders of Tencor Common Stock are entitled to one vote per share on all matters
to be voted upon by the shareholders. Pursuant to the Tencor Restated Articles
of Incorporation, as amended (the "Tencor Articles") the shareholders do not
have a right to take action by written consent nor may they cumulate votes in
connection with the election of directors. The holders of Tencor Common Stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Tencor Board out of funds legally available therefor. In the
event of a liquidation, dissolution or winding up of Tencor, the holders of
Tencor Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities. The Tencor Common Stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Tencor Common Stock. All outstanding shares of
Tencor Common Stock are fully paid and non-assessable, and the shares of Common
Stock which are received in exchange for the Tencor Common Stock to be
outstanding upon completion of the Merger will be fully paid and non-assessable.
55
Preferred Stock
Tencor has 1,000,000 shares of Preferred Stock authorized, of which, as of
the Tencor Record Date, no shares were outstanding. The Tencor Board has the
authority to issue these shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued and undesignated shares of Preferred Stock and to fix the
number of shares constituting any series and the designations of such series,
without any further vote or action by the shareholders. Although it presently
has no intention to do so, the Tencor Board, without shareholder approval, can
issue Preferred Stock with voting and conversion rights which could adversely
affect the voting power or other rights of the holders of Tencor Common Stock
and the issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of Tencor.
Transfer Agent and Registrar
The Transfer Agent and Registrar of the Tencor Common Stock is Boston
EquiServe, LP and its telephone number is (617) 575-2000.
COMPARISON OF CAPITAL STOCK
After consummation of the Merger, the holders of Tencor Common Stock who
receive Common Stock under the terms of the Reorganization Agreement will become
shareholders of the Combined Company. As shareholders of Tencor, their rights
are presently governed by California law and by the Tencor Articles and the
Tencor Amended and Restated Bylaws (the "Tencor Bylaws"). As shareholders of the
Combined Company, their rights will be governed by Delaware law and by the
Certificate and KLA Amended and Restated Bylaws (the "KLA Bylaws"). The
following discussion summarizes the material differences between the rights of
holders of Tencor Common Stock and holders of KLA Common Stock and differences
between the charters and bylaws of Tencor and KLA. This summary does not purport
to be complete and is qualified in its entirety by reference to the Tencor
Articles and Tencor Bylaws, the Certificate and KLA Bylaws and the relevant
provisions of California and Delaware law.
Size of the Board of Directors. Under California law, although changes in
the number of directors must in general be approved by a majority of the
outstanding shares, the board of directors may fix the exact number of directors
within a stated range set forth in the articles of incorporation or bylaws, if
that stated range has been approved by the shareholders. The Tencor Bylaws
provide the Tencor Board the authority to set the exact number of directors
within the range of four to seven. Delaware law permits the board of directors
alone to change the authorized number, or the range, of directors by amendment
to the bylaws, unless the directors are not authorized to amend the bylaws or
the number of directors is fixed in the certificate of incorporation (in which
case a change in the number of directors may be made only by amendment to the
certificate of incorporation following approval of such change by the
shareholders). The KLA Certificate states that the number of directors will
initially be six, but authorizes the KLA Board to change the number by
resolution. The KLA Bylaws provide, consistent with Delaware law, that the size
of the KLA Board may be changed either by the approval of the KLA Board acting
alone or by KLA's shareholders.
Loans to Officers and Employees. Under California law, any loan or
guaranty to or for the benefit of a director or officer of the corporation or
its parent requires approval of the shareholders unless such loan or guaranty is
provided under a plan approved by shareholders owning a majority of the
outstanding shares of the corporation. In addition, under California law,
shareholders of any corporation with 100 or more shareholders of record may
approve a bylaw authorizing the board of directors alone to approve loans or
guaranties to or on behalf of officers (whether or not such officers are
directors) if the board determines that any such loan or guaranty may reasonably
be expected to benefit the corporation. Under Delaware law, a corporation may
make loans to, guarantee the obligations of or otherwise assist its officers or
other employees and those of its subsidiaries (including directors who are also
officers or employees) when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation. The KLA Bylaws are silent as
to whether KLA may make loans to, guarantee the obligations of or otherwise
assist its officers or other employees and
56
those of its subsidiaries (including directors who are also officers or
employees) and accordingly Delaware law governs the ability of KLA to make such
loans.
Voting by Ballot. California law provides that the election of directors
may proceed in the manner described in a corporation's bylaws. Tencor's Bylaws
provide that upon the demand of any shareholder made at a meeting before the
voting begins, the election of directors shall be by ballot. Under Delaware law,
the right to vote by written ballot may be restricted if so provided in the
certificate of incorporation. The Certificate provides that the election of
directors at a shareholders' meeting may be by voice vote or ballot, unless
prior to such vote a shareholder demands vote by ballot, in which case such vote
must be by ballot.
Cumulative Voting. Generally, under California law, if any shareholder has
given notice of his intention to cumulate votes for the election of directors,
he and any other shareholder of the corporation is also entitled to cumulate his
or her votes at such election, unless the corporation's articles of
incorporation abolish the right to cumulative voting. Under Delaware law,
cumulative voting in the election of directors is not mandatory. Both the Tencor
Articles and the Certificate abolish cumulative voting.
Classified Board of Directors. A classified board is one to which a
certain number, but not all, of the directors are elected on a rotating basis
each year. Under California law, California corporations meeting certain
qualifications may amend their articles of incorporation to provide for a
classified board, but for corporations not so qualified directors must be
elected annually and a classified board is not permitted. Delaware law permits,
but does not require, a classified board of directors, with staggered terms
under which one-half or one-third of the directors are elected for terms of two
or three years, respectively. This method of electing directors makes changes in
the composition of the board of directors, and thus a potential change in
control of a corporation, a lengthier and more difficult process. The
Certificate and KLA Bylaws provide for a classified board of directors with
three classes of directors. The Combined Company's staggered board will have
three classes.
Power to Call Special Shareholders' Meetings; Advance Notice of Shareholder
Business and Nominees. Under California law, a special meeting of shareholders
may be called by the board of directors, the chairman of the board, the
president, the holders of shares entitled to cast not less than 10% percent of
the votes at such meeting and such additional persons as are authorized by the
articles of incorporation or the bylaws. Under Delaware law, a special meeting
of shareholders may be called by the board of directors or by any other person
authorized to do so in the certificate of incorporation or the bylaws. Pursuant
to the Tencor Bylaws, special meetings may be called by shareholders holding 10%
of the voting stock, the Board of Directors, Chairman or President. The KLA
Bylaws eliminate the right of shareholders to call a special meeting of
shareholders; instead, the KLA Bylaws authorize only the KLA Board to call a
special meeting of shareholders. Such a limitation could make it more difficult
for shareholders to initiate action that is opposed by the KLA Board. Such
action on the part of shareholders could include the removal of an incumbent
director, the election of a shareholder nominee as a director or the
implementation of a rule requiring shareholder ratification of specific
defensive strategies that have been adopted by the KLA Board with respect to
unsolicited takeover bids. In addition, the KLA Bylaws require timely advance
notice in proper written form of shareholder nominees for election as director
or shareholder business to be brought before a meeting, and require that the
chairman of the meeting refuse to acknowledge the nomination of any person or
the proposal of any business not made in compliance with the procedures set
forth in the KLA Bylaws. The ability of the KLA Board under Delaware law to
limit or eliminate the right of shareholders to initiate action at shareholder
meetings may make it more difficult to change the existing KLA Board and
management.
Elimination of Actions by Written Consent of Shareholders. Under
California and Delaware law, shareholders may take action by written consent in
lieu of voting at a shareholders meeting. Both California law and Delaware law
permit a corporation to eliminate the ability of shareholders to act by written
consent in its charter. Elimination of written consents of shareholders could
lengthen the amount of time required to take shareholder actions because certain
actions by written consent are not subject to the minimum notice requirement of
a shareholders' meeting. The elimination of shareholders' written consents,
however, would deter hostile takeover attempts in an environment where a
corporation's stock is actively traded in a public market. Without the
stockholder's written consent provision, a holder or group of holders
controlling a
57
majority in interest of KLA's capital stock would not be able to amend the KLA
Bylaws or remove directors pursuant to a stockholder's written consent. Both the
Tencor Articles and the KLA Certificate provide for the elimination of the
ability of shareholders to act by written consent of shareholders.
Shareholder Approval of Certain Business Combinations. In the last several
years, a number of states (but not California) have adopted special laws
designed to make certain kinds of "unfriendly" corporate takeovers, or other
transactions involving a corporation and one or more of its significant
shareholders, more difficult. Under Section 203 of the Delaware General
Corporation Law ("Section 203"), certain "business combinations" by Delaware
corporations with "interested shareholders" are subject to a three-year
moratorium unless specified conditions are met. Under Section 1203 of the
California General Corporation Law, certain business combinations with a
majority shareholder are subject to specified conditions, but there is no
equivalent provision to Section 203, which addresses business combinations with
a significant but not majority shareholder.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested shareholder" for three years following the date
that such person becomes an interested shareholder. With certain exceptions, an
interested shareholder is a person or group who or which owns 15% or more of the
corporation's outstanding voting stock (including any rights to acquire stock
pursuant to an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which
the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner of 15% or more of such voting stock at any time
within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested shareholder; sales
or other dispositions to the interested shareholder (except proportionately with
the corporation's other shareholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or such
subsidiary to the interested shareholder (except for transfers in a conversion
or exchange or a pro rata distribution or certain other transactions, none of
which increase the interested shareholder's proportionate ownership of any class
or series of the corporation's or such subsidiary's stock); or receipt by the
interested shareholder (except proportionately as a shareholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date on which such shareholder becomes an
interested shareholder, the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested shareholder; (ii) the interested shareholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested shareholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the date such person becomes an interested shareholder, the board approves
the business combination and it is also approved at a shareholder meeting by
66 2/3% of the voting stock not owned by the interested shareholder.
Section 203 only applies to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, is quoted on an
interdealer quotation system such as Nasdaq (as is the KLA Common Stock) or is
held of record by more than 2,000 shareholders. However, a Delaware corporation
may elect not to be governed by Section 203 by a provision in its original
certificate of incorporation or an amendment thereto or to the bylaws, which
amendment must be approved by majority shareholder vote and may not be further
amended by the board of directors. KLA is governed by Section 203.
Removal of Directors. Under California law, any director or the entire
board of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; however, no individual
director may be removed (unless the entire board is removed) if the number of
votes cast against such removal would be sufficient to elect the director under
cumulative voting. Under Delaware law, a director of a corporation that has a
classified board of directors or cumulative voting may be removed
58
only with cause and with the approval of a majority of the outstanding shares
entitled to vote. The Certificate and KLA Bylaws provide for a classified board,
although they eliminate cumulative voting. Consequently, the Certificate permits
the removal of a director only for cause and with the approval of a majority of
the outstanding shares entitled to vote.
Filling Vacancies on the Board of Directors. Under California law, any
vacancy on the board of directors (other than one created by removal of a
director) may be filled by the board. If the number of directors is less than a
quorum, a vacancy may be filled by the unanimous written consent of the
directors then in office, by the affirmative vote of a majority of the directors
at a meeting held pursuant to notice or waivers of notice or by a sole remaining
director. A vacancy created by removal of a director may be filled by the board
only if the board is so authorized. The Tencor Articles and Tencor Bylaws permit
the Tencor Board and/or shareholders to fill any vacancies on the Tencor Board.
Under Delaware law, vacancies and newly created directorships may be filled by a
majority of the directors then in office (even though less than a quorum) unless
otherwise provided in the certificate of incorporation or bylaws (and unless the
certificate of incorporation directs that a particular class is to elect such
director, in which case any other directors elected by such class, or a sole
remaining director, shall fill such vacancy). The KLA Bylaws allow any vacancy
on the Board to be filled by a majority of the directors then in office.
Indemnification and Limitation of Liability. California and Delaware have
similar laws respecting indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states also permit
corporations to adopt a provision in their charters eliminating the liability of
a director to the corporation or its shareholders for monetary damages for
breach of the director's fiduciary duty of care. There are nonetheless certain
differences between the laws of the two states with respect to indemnification
and limitation of liability.
The Tencor Articles eliminate the liability of directors to the fullest
extent permissible under California law. California law does not permit the
elimination of monetary liability where such liability is based on: (i)
intentional misconduct or knowing and culpable violation of law; (ii) acts or
omissions that a director believes to be contrary to the best interests of the
corporation or its shareholders, or that involve the absence of good faith on
the part of the director; (iii) receipt of an improper personal benefit; (iv)
acts or omissions that show reckless disregard for the director's duty to the
corporation or its shareholders, where the director in the ordinary course of
performing a director's duties should be aware of a risk of serious injury to
the corporation or its shareholders; (v) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation and its shareholders; (vi) interested transactions
between the corporation and a director in which a director has a material
financial interest; and (vii) liability for improper distributions, loans or
guarantees.
The Certificate also eliminates the liability of directors to the fullest
extent permissible under Delaware law, as such law exists currently or as it may
be amended in the future. Under Delaware law, such provision may not eliminate
or limit director monetary liability for: (i) breaches of the director's duty of
loyalty to the corporation or its shareholders; (ii) acts or omissions not in
good faith or involving intentional misconduct or knowing violations of law;
(iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or (iv) transactions in which the director received an improper
personal benefit. Such limitation of liability provisions also may not limit a
director's liability for violation of, or otherwise relieve KLA or its directors
from the necessity of complying with, federal or state securities laws, or
affect the availability of non-monetary remedies such as injunctive relief or
rescission.
California corporations may include in their charter a provision which
extends the scope of indemnification through agreements, bylaws or other
corporate action beyond that specifically authorized by statute. The Tencor
Articles include a provision authorizing Tencor to indemnify its directors and
officers to the fullest extent permissible under California law.
Delaware law states that the indemnification provided by statute shall not
be deemed exclusive of any other rights under any bylaw, agreement, vote of
shareholders or disinterested directors or otherwise. The Certificate includes a
provision providing that KLA shall indemnify its directors to the fullest extent
permissible under Delaware law.
59
Inspection of Shareholders List. Both California and Delaware law allow
any shareholder to inspect and copy the shareholders list for a purpose
reasonably related to such person's interest as a shareholder. California law
provides, in addition, for an absolute right to inspect and copy the
corporation's shareholders list by persons holding an aggregate of 5% or more of
a corporation's voting shares, or, under certain other circumstances,
shareholders holding an aggregate of 1% or more of such shares. Delaware law
does not provide for any such absolute right of inspection, and no such right is
granted under the Certificate or KLA Bylaws. Restricted access to shareholder
records, even though unrelated to the shareholder's interests as a shareholder,
could result in impairment of the shareholder's ability to coordinate opposition
to management proposals, including proposals with respect to a change in control
of the Combined Company.
Dividends and Repurchases of Shares. California law dispenses with the
concepts of par value of shares as well as statutory definitions of capital,
surplus and the like. The concepts of par value, capital and surplus are
retained under Delaware law.
Under California law, a corporation may not make any distribution
(including dividends, whether in cash or other property, and repurchases of its
shares) unless either the corporation's retained earnings immediately prior to
the proposed distribution equal or exceed the amount of the proposed
distribution or, immediately after giving effect to such distribution, the
corporation's assets (exclusive of goodwill, capitalized research and
development expenses and deferred charges) would be at least equal to 1 1/4
times its liabilities (not including deferred taxes, deferred income and other
deferred credits), and the corporation's current assets would be at least equal
to its current liabilities (or 1 1/4 times its current liabilities if the
average pre-tax and pre-interest expense earnings for the preceding two fiscal
years were less than the average interest expense for such years). Such tests
are applied to California corporations on a consolidated basis.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation.
Shareholder Voting. Both California and Delaware law generally require
that the holders of a majority of the outstanding voting shares of the acquiring
and target corporations approve statutory mergers. Delaware law does not require
a shareholder vote of the surviving corporation in a merger (unless the
corporation provides otherwise in its certificate of incorporation) if (i) the
merger agreement does not amend the existing certificate of incorporation; (ii)
each share of the surviving corporation outstanding before the merger is equal
to an identical outstanding or treasury share after the merger; and (iii) the
number of shares to be issued by the surviving corporation in the merger does
not exceed 20% of the shares outstanding immediately prior to the merger.
California law contains a similar exception to its voting requirements for
reorganizations where shareholders or the corporation itself, or both,
immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity. The
Certificate does not require any special vote of the shareholders to approve the
Merger.
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved by
a majority vote of each class of shares outstanding. By contrast, Delaware law
generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation which adversely
affects a specific class of shares.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than 50% but less than 90% of such common stock or its affiliate
unless all of the holders of such common stock consent to the transaction. This
60
provision of California law may have the effect of making a "cash-out" merger by
a majority shareholder more difficult to accomplish. Although Delaware law does
not parallel California law in this respect, under some circumstances Section
203 of the Delaware General Corporation Law does provide similar protection
against coercive two-tiered bids for a corporation in which the shareholders are
not treated equally.
Interested Director Transactions. Under both California and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable because of such interest
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met. With
certain exceptions, the conditions are similar under California and Delaware
law. Under California and Delaware law, either (i) the shareholders or the board
of directors must approve any such contract or transaction after full disclosure
of the material facts, and in the case of board approval the contract or
transaction must also be "just and reasonable" (in California) or "fair" (in
Delaware) to the corporation, or (ii) the contract or transaction must have been
just and reasonable or fair as to the corporation at the time it was approved.
In the latter case, California law explicitly places the burden of proof on the
interested director. Under California law, if shareholder approval is sought,
the interested director is not entitled to vote his shares at a shareholder
meeting with respect to any action regarding such contract or transaction. If
board approval is sought, the contract or transaction must be approved by a
majority vote of a quorum of the directors, without counting the vote of any
interested directors (except that interested directors may be counted for
purposes of establishing a quorum).
Under Delaware law, if board approval is sought, the contract or
transaction must be approved by a majority of the disinterested directors (even
though less than a majority of a quorum). Therefore, certain transactions that
the Tencor Board would lack the authority to approve because of the number of
interested directors, could be approved by a majority of the disinterested
directors of KLA representing less than a majority of a quorum. Neither KLA nor
Tencor is aware of any plans to propose any transaction involving interested
directors of Tencor or KLA which the Tencor Board would lack the authority to
approve under California law but could approve under Delaware law.
Dissenters' Rights. Under both California and Delaware law, a shareholder
of a corporation participating in certain major corporate transactions may,
under varying circumstances, be entitled to appraisal rights pursuant to which
such shareholder may receive cash in the amount of the fair market value of his
or her shares in lieu of the consideration he or she would otherwise receive in
the transaction. Under Delaware law, such dissenters' rights are not available
(i) with respect to the sale, lease or exchange of all or substantially all of
the assets of a corporation; (ii) with respect to a merger or consolidation by a
corporation the shares of which are either listed on a national securities
exchange or are held of record by more than 2,000 holders if such shareholders
receive only shares of the surviving corporation or shares of any other
corporation which are either listed on a national securities exchange or held of
record by more than 2,000 holders, plus cash in lieu of fractional shares; or
(iii) to shareholders of a corporation surviving a merger if no vote of the
shareholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
merger is an identical outstanding or treasury share after the merger, and the
number of shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and if
certain other conditions are met.
In contrast, shareholders of a California corporation whose shares are
listed on a national securities exchange or on a list of over-the-counter margin
stocks issued by the Board of Governors of the Federal Reserve System generally
do not have appraisal rights unless the holders of at least 5% of the class of
outstanding shares claim the right or unless the corporation or any law
restricts the transfer of such shares. Dissenters' rights are unavailable,
however, if the shareholders of a corporation or the corporation itself, or
both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity, and
if the shares of the surviving corporation have the same rights, preferences,
privileges and restrictions as the shares of the disappearing corporation that
are surrendered in exchange.
61
Dissolution. Under California law, shareholders holding 50% or more of the
total voting power may authorize a corporation's dissolution, with or without
the approval of the corporation's board of directors, and this right may not be
modified by the articles of incorporation. Under Delaware law, unless the board
of directors approves the proposal to dissolve, the dissolution must be approved
by shareholders holding 100% of the total voting power of the corporation. Only
if the dissolution is initially approved by the board of directors may it be
approved by a simple majority of the corporation's shareholders. In the event of
such a board-initiated dissolution, Delaware law allows a Delaware corporation
to include in its certificate of incorporation a supermajority voting
requirement in connection with dissolutions. The Certificate contains no such
supermajority voting requirement, however, and a majority of shares voting at a
meeting at which a quorum is present would be sufficient to approve a
dissolution of KLA which had previously been approved by the KLA Board.
Shareholder Derivative Suits. California law provides that a shareholder
bringing a derivative action on behalf of a corporation need not have been a
shareholder at the time of the transaction in question, provided that certain
tests are met. Under Delaware law, a shareholder may only bring a derivative
action on behalf of the corporation if the shareholder was a shareholder of the
corporation at the time of the transaction in question or his or her stock
thereafter devolved upon him or her by operation of law. California law also
provides that the corporation or the defendant in a derivative suit may make a
motion to the court for an order requiring the plaintiff shareholder to furnish
a security bond. Delaware does not have a similar bonding requirement.
62
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the Merger, using the pooling-of-interests
method of accounting. KLA's fiscal year ends on June 30.
The unaudited pro forma combined condensed balance sheet gives effect to
the Merger as if it had occurred on December 31, 1996, and combines the
unaudited condensed consolidated balance sheet of KLA and the unaudited
condensed consolidated balance sheet of Tencor as of December 31, 1996.
The unaudited pro forma combined condensed statements of operations give
effect to the Merger as if it occurred as of the beginning of the earliest year
presented and combines the historical consolidated statements of operations of
KLA for each of the three fiscal years in the period ended June 30, 1996 and the
six month periods ended December 31, 1995 and 1996, with the results of
operations of Tencor for the same periods.
KLA and Tencor estimate that they will incur transaction costs of
approximately $40 million associated with the Merger, which will be charged to
operations when incurred. There can be no assurance that the Combined Company
will not incur additional charges to reflect costs associated with the Merger or
that management will be successful in its efforts to integrate the operations of
the two companies.
Such unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merger occurred at the beginning of the periods presented, nor
is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma combined condensed financial statements
are based upon the respective historical consolidated financial statements of
KLA and Tencor and should be read in conjunction with the respective historical
consolidated financial statements and notes thereto included elsewhere in this
Joint Proxy Statement/Prospectus, and do not incorporate, nor do they assume,
any benefits from cost savings or synergies of operations of the Combined
Company.
63
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
PRO FORMA PRO FORMA
KLA TENCOR ADJUSTMENTS COMBINED
-------- -------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents.................. $161,181 $141,407 $ -- $ 302,588
Short-term investments..................... 24,784 82,370 -- 107,154
Accounts receivable........................ 122,353 94,437 -- 216,790
Inventories................................ 126,349 51,668 -- 178,017
Deferred income taxes...................... 26,767 19,056 -- 45,823
Other current assets....................... 16,045 3,351 -- 19,396
-------- -------- ----------- ----------
Total current assets............... 477,479 392,289 -- 869,768
Land, property and equipment, net............ 74,647 41,601 -- 116,248
Marketable securities........................ 193,968 34,355 -- 228,323
Other assets................................. 12,665 16,174 -- 28,839
-------- -------- ----------- ----------
$758,759 $484,419 $ -- $1,243,178
======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................. $ 2,902 $ 28,162 $ -- $ 31,064
Accounts payable........................... 20,413 11,936 -- 32,349
Income taxes payable....................... 30,958 23,428 -- 54,386
Other current liabilities.................. 109,087 54,525 -- 163,612
-------- -------- ----------- ----------
Total current liabilities.......... 163,360 118,051 -- 281,411
-------- -------- ----------- ----------
Deferred income taxes........................ 6,316 -- -- 6,316
-------- -------- ----------- ----------
Long-term obligations........................ -- 1,335 -- 1,335
-------- -------- ----------- ----------
Shareholders' equity:
Common stock and additional paid-in
capital................................. 283,697 152,756 -- 436,453
Retained earnings.......................... 305,085 200,024 -- 505,109
Treasury stock............................. (581) -- -- (581)
Net unrealized gain on investments......... 810 14,602 -- 15,412
Cumulative translation adjustments......... 72 (2,349) -- (2,277)
-------- -------- ----------- ----------
Total shareholders' equity......... 589,083 365,033 -- 954,116
-------- -------- ----------- ----------
$758,759 $484,419 $ -- $1,243,178
======== ======== ========= =========
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
64
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------- --------------------
1994 1995 1996 1995 1996
-------- -------- ---------- -------- --------
Net sales.............................. $376,454 $695,950 $1,094,492 $498,751 $503,295
------- ------- --------- ------- -------
Costs and expenses:
Cost of sales........................ 190,903 299,571 469,681 210,061 230,238
Engineering, research and
development....................... 42,784 73,945 115,920 52,341 61,804
Selling, general and
administrative.................... 84,683 140,585 212,625 95,506 108,838
Write-off of acquired in-process
technology........................ -- 25,240 -- -- --
Restructuring and other charges...... 2,300 -- -- -- 8,500
------- ------- --------- ------- -------
Total costs and expenses..... 320,670 539,341 798,226 357,908 409,380
------- ------- --------- ------- -------
Income from operations................. 55,784 156,609 296,266 140,843 93,915
Interest income and other, net......... 1,195 10,417 17,834 11,102 11,010
------- ------- --------- ------- -------
Income before income taxes............. 56,979 167,026 314,100 151,945 104,925
Provision for income taxes............. 16,536 62,215 117,466 57,831 37,126
------- ------- --------- ------- -------
Net income............................. $ 40,443 $104,811 $ 196,634 $ 94,114 $ 67,799
======= ======= ========= ======= =======
Net income per share................... $ 0.59 $ 1.34 $ 2.34 $ 1.11 $ 0.80
======= ======= ========= ======= =======
Shares used in computing net income per
share................................ 69,076 78,427 84,195 84,452 84,403
======= ======= ========= ======= =======
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
65
KLA AND TENCOR
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. PERIODS PRESENTED
KLA's fiscal year ends on June 30. Tencor's fiscal year ends on December 31. The
unaudited pro forma combined condensed statements of operations combine the
results of operations of KLA for the each of the three years in the period ended
June 30, 1996 and the six months ended December 31, 1995 and 1996 with the
results of operations of Tencor for the same periods. The unaudited pro forma
combined condensed balance sheet is based upon the historical balance sheet data
of KLA and Tencor as of December 31, 1996.
2. PRO FORMA NET INCOME PER SHARE
The unaudited pro forma combined net income per share is based upon the weighted
average number of common and common equivalent shares outstanding of KLA and
Tencor for each period using an exchange ratio of one share of KLA Common Stock
for each share of Tencor Common Stock.
3. CONFORMING ADJUSTMENTS AND INTERCOMPANY TRANSACTIONS
There are no material intercompany transactions included in the unaudited pro
forma combined condensed financial statements. There were no material
adjustments required to conform the accounting policies of KLA and Tencor.
4. TRANSACTION COSTS
Total costs associated with the Merger are expected to be approximately $40
million. This amount is a preliminary estimate only and is, therefore, subject
to change. These expenses will be charged against net income in the period
subsequent to the unaudited pro forma combined condensed financial statements.
Accordingly, the effects of these expenses have not been reflected in these
unaudited pro forma combined condensed financial statements.
66
ADDITIONAL MATTERS BEING SUBMITTED TO A
VOTE OF ONLY KLA SHAREHOLDERS
PROPOSAL TWO -- AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION -- NAME
CHANGE
KLA's Certificate provides that the name of KLA is "KLA Instruments
Corporation." Pursuant to the Reorganization Agreement, KLA has agreed to
propose and recommend that the Certificate be amended at the Effective Time to
change KLA's name to "KLA-Tencor Corporation." The KLA Board has authorized such
amendment of the Certificate at the Effective Time, subject to shareholder
approval. Under the proposed amendment, subject to and upon consummation of the
Merger, Article FIRST of the Certificate would be amended and restated to read
as follows:
"The name of the corporation is KLA-Tencor Corporation."
The KLA shareholders are being asked to approve such amendment. The
affirmative vote of the holders of a majority of the shares of KLA Common Stock
issued and outstanding on the KLA Record Date will be required to approve the
amendment of the Certificate. The effect of an abstention and a broker non-vote
is the same as that of a vote against the proposal.
THE KLA BOARD UNANIMOUSLY RECOMMENDS THAT KLA SHAREHOLDERS VOTE "FOR" THE
AMENDMENT OF THE CERTIFICATE TO CHANGE THE CORPORATE NAME OF KLA TO "KLA-TENCOR
CORPORATION" SUBJECT TO AND CONTINGENT UPON CONSUMMATION OF THE MERGER.
PROPOSAL THREE -- AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION -- INCREASE
TO AUTHORIZED
COMMON STOCK
On January 11, 1997, the KLA Board approved an amendment (the "Amendment")
to the Certificate to increase the number of authorized shares of Common Stock
by 175 million shares to 250 million shares and to eliminate KLA's Junior Common
Stock. Under the Amendment, subject to shareholder approval, Article FOURTH of
the Certificate would be amended and restated to read as follows:
"Fourth: The aggregate number of shares of stock which the corporation
shall have authority to issue shall be 251,000,000 shares, with the par value of
each of such shares being $0.001. These shares shall be divided into the
following classes: (1) 250,000,000 shares shall be designated as Common Stock;
and (2) 1,000,000 shall be designated as Preferred Stock. The Board of Directors
is authorized, subject to any limitations prescribed by law, to provide for the
issuance of shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences, and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the then outstanding shares of Common Stock,
without a vote of the holders of the Preferred Stock, or of any series thereof,
unless a vote of any such holders is required pursuant to the certificate or
certificates establishing the series of Preferred Stock."
As of March 7, 1997, there were 75,000,000 shares of KLA Common Stock
authorized, of which approximately 51,655,785 shares were issued and outstanding
and approximately 6,200,000 of which were reserved for issuance under KLA's
stock benefit plans, leaving only approximately 17,200,000 authorized shares
available for future issuance. The issuance of KLA Common Stock to the
shareholders and option-holders of Tencor pursuant to Proposal One herein will
require at least 31,245,304 shares of KLA Common Stock. Therefore, unless
Proposal Three is approved, the Merger cannot be consummated and one of the
conditions of closing of the Merger would not be met.
In addition, although KLA has no specific plans to use the additional
authorized shares of KLA Common Stock other than as described above, the KLA
Board believes that it is prudent to increase the number of authorized shares of
KLA Common Stock to the proposed level in order to provide a reserve of shares
available for issuances in connection with possible future actions. Such actions
may include, but are not limited to, annual three percent increases in the
number of shares available for issuance pursuant to KLA's
67
evergreen provision in its 1982 Stock Option Plan, stock splits or stock
dividends if the KLA Board were to determine that such would be desirable to
facilitate a broader base of shareholders. The KLA Board also believes that the
increased number of shares will provide the flexibility to effect other possible
actions such as financings, corporate mergers, acquisitions of property,
employee benefit plans and for other general corporate purposes. Having such
additional authorized KLA Common Stock available for issuance in the future
would allow the KLA Board to issue shares of KLA Common Stock without the delay
and expense associated with seeking shareholder approval. Elimination of such
delays and expense occasioned by the necessity of obtaining shareholder approval
will better enable KLA, among other things, to engage in financing transactions
and acquisitions as well as to take advantage of changing market and financial
conditions on a more competitive basis as determined by the KLA Board.
The KLA shareholders are being asked to approve such amendment. The
affirmative vote of the holders of a majority of the shares of KLA Common Stock
issued and outstanding on the KLA Record Date will be required to approve the
amendment of the Certificate. The effect of an abstention and broker non-vote is
the same as that of a vote against the proposal.
The increase in authorized KLA Common Stock will not have any immediate
effect on the rights of existing shareholders. To the extent that the additional
authorized shares are issued in the future, they will decrease the existing
shareholders' percentage equity ownership and, depending on the price at which
they are issued, could be dilutive to the existing shareholders.
The increase in the authorized number of shares of KLA Common Stock could
have an anti-takeover effect. Shares of authorized and unissued KLA Common Stock
could (within the limits imposed by applicable law) be issued in one or more
transactions that would make a takeover of KLA more difficult, and therefore
less likely. Any such issuance of additional stock could have the effect of
diluting the earnings per share and book value per share of outstanding shares
of KLA Common Stock, and such additional shares could be used to dilute the
stock ownership or voting rights of persons seeking to obtain control of KLA.
KLA has previously adopted certain measures that may have the effect of
helping it to resist an unfriendly takeover attempt. These include (i) the KLA
Rights Plan, which was amended in April 1996, providing for the distribution of
rights to purchase additional shares of KLA stock in the event of certain
attempts to acquire control of KLA and (ii) provisions in the option plans of
KLA providing for the acceleration of vesting of outstanding options in the
event of a "change of control" of the KLA, unless otherwise determined by the
KLA Board.
THE KLA BOARD UNANIMOUSLY RECOMMENDS THAT KLA SHAREHOLDERS VOTE "FOR" THE
AMENDMENT OF THE CERTIFICATE TO INCREASE THE AUTHORIZED KLA COMMON STOCK TO
250,000,000 SHARES AND TO ELIMINATE KLA'S JUNIOR COMMON STOCK.
68
LEGAL MATTERS
The validity of the shares of KLA Common Stock to be issued in connection
with the Merger and the federal income tax consequences of the Merger will be
passed upon for KLA by Wilson Sonsini Goodrich & Rosati Professional
Corporation, Palo Alto, California. Certain legal matters in connection with the
Reorganization Agreement and the federal income tax consequences of the Merger
will be passed upon for Tencor by Heller Ehrman White & McAuliffe, Palo Alto,
California.
EXPERTS
The consolidated financial statements of KLA Instruments Corporation at
June 30, 1995 and 1996, and for each of the three years in the period ended June
30, 1996, incorporated in this Joint Proxy Statement/Prospectus by reference to
the Annual Report on Form 10-K of KLA Instruments Corporation for the year ended
June 30, 1996, have been so incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting. Representatives of Price Waterhouse LLP are
expected to be present at the KLA Special Meeting and will have the opportunity
to make a statement and are expected to be available to respond to appropriate
questions.
The consolidated financial statements of Tencor Instruments as of December
31, 1995 and 1996, and for each of the three years in the period ended December
31, 1996, incorporated in this Joint Proxy Statement/Prospectus by reference to
the Annual Report on Form 10-K of Tencor Instruments for the year ended December
31, 1996, have been so incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting. Representatives of Price Waterhouse LLP are
expected to be present at the Tencor Special Meeting and said representatives
will have the opportunity to make a statement if they should desire to do so and
they are expected to be available to respond to appropriate questions.
SHAREHOLDERS PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, KLA shareholders may present
proper proposals for inclusion in KLA's proxy statement and for consideration at
the next annual meeting of its shareholders by submitting such proposals to KLA
in a timely manner. As noted in KLA's proxy statement relating to its 1996
Annual Meeting of Shareholders, in order to be so included for the 1997 annual
meeting, shareholder proposals must be received by KLA no later than June 21,
1997, and must otherwise comply with the requirements of Rule 14a-8.
Pursuant to Rule 14a-8 under the Exchange Act, Tencor shareholders may
present proper proposals for inclusion in Tencor's proxy statement and for
consideration at the next annual meeting of its shareholders by submitting such
proposals to Tencor in a timely manner. As noted in Tencor's proxy statement
relating to its 1996 Annual Meeting of Shareholders, in order to be so included
for the 1997 annual meeting, in the event that the Merger has not been
consummated prior thereto, shareholder proposals must have been received by
Tencor no later than December 8, 1996, and must otherwise have complied with the
requirements of Rule 14a-8.
69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933.
Article 12 of the Registrant's Certificate and Article VIII of the Registrant's
Bylaws provide for indemnification of its directors, officers, employees and
other agents to the maximum extent permitted by the Delaware Law. In addition,
the Registrant has entered into Indemnification Agreements with its officers and
directors.
The Reorganization Agreement provides that commencing with the
effectiveness of the Merger, the Registrant will indemnify the current officers
and directors of Tencor for any action or inaction by such person prior to the
Merger.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization, dated as of January 14, 1997, among KLA
Instruments Corporation, Tiger Acquisition Corp. and Tencor Instruments.*
2.2 Stock Option Agreement, dated as of January 14, 1997, between KLA Instruments
Corporation and Tencor Instruments.*
2.3 Stock Option Agreement, dated as of January 14, 1997, between KLA Instruments
Corporation and Tencor Instruments.*
2.4 Form of Affiliate Agreement, dated as of January 14, 1997 for KLA Instruments
Corporation.*
2.5 Form of Affiliate Agreement, dated as of January 14, 1997 for Tencor Instruments.*
2.6 Form of Agreement of Merger between Tencor Instruments, Tiger Acquisition Corp.*
3.1 Restated Certificate of Incorporation of KLA Instruments Corporation, to be filed
upon approval of Proposals Two and Three.
4.1 Form of Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
8.2 Tax Opinion of Heller Ehrman White & McAuliffe.
10.1 Form of Retention and Non-Competition Agreement.
10.2 Form of KLA-Tencor Corporation Corporate Officers Retention Plan.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in
opinions filed as Exhibits 5.1 and 8.1).
23.2 Consent of Heller Ehrman White & McAuliffe (included in opinion filed as Exhibit
8.2).
23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Price Waterhouse LLP.
23.5 Consent of Deutsche Morgan Grenfell Inc.
23.6 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
23.7 Consent of Lehman Brothers Inc.
24.1 Power of Attorney (see Page II-4).
99.1 KLA Form of Proxy.
99.2 Tencor Form of Proxy.
99.3 Consents of Persons About to Become Directors.
- ------------------
* Incorporated herein by reference to Registrant's Current Report on Form 8-K
filed on January 22, 1997.
II-1
(B) FINANCIAL STATEMENT OF SCHEDULES
The information required to be set forth herein is incorporated by
reference to KLA's Annual Report on Form 10-K for the fiscal year ended June 30,
1996 and Tencor's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
II-2
(8) To supply by means of a post-effective amendment all required
information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the
registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 10th day of March
1997.
KLA INSTRUMENTS CORPORATION
By: /s/ KENNETH LEVY
------------------------------------
Kenneth Levy
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kenneth Levy and Lisa Berry and each of
them, jointly and severally, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution for him and in his name, place and
stead in any and all capacities, to sign any and all amendments to this
Registration Statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-of-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each said
attorneys-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY DATE
- ---------------------------------------- ----------------------------------- ---------------
/s/ KENNETH LEVY Chairman of the Board and Chief March 10, 1997
- ---------------------------------------- Executive Officer (Principal
(Kenneth Levy) Executive Officer)
/s/ KENNETH L. SCHROEDER President, Chief Operating Officer March 10, 1997
- ---------------------------------------- and
(Kenneth L. Schroeder) Director
/s/ ROBERT J. BOEHLKE Vice President, Finance and March 10, 1997
- ---------------------------------------- Administration, Chief Financial
(Robert J. Boehlke) Officer (Principal Financial and
Accounting Officer)
/s/ EDWARD W. BARNHOLT Director March 10, 1997
- ----------------------------------------
(Edward W. Barnholt)
/s/ LEO J. CHAMBERLAIN Director March 10, 1997
- ----------------------------------------
(Leo J. Chamberlain)
/s/ YOSHIO NISHI, PH.D Director March 10, 1997
- ----------------------------------------
(Yoshio Nishi, Ph.D)
/s/ SAMUEL RUBINOVITZ Director March 10, 1997
- ----------------------------------------
(Samuel Rubinovitz)
/s/ DAG TELLEFSEN Director March 10, 1997
- ----------------------------------------
(Dag Tellefsen)
II-4
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization, dated as of January 14, 1997,
among KLA Instruments Corporation, Tiger Acquisition Corp. and Tencor
Instruments.*
2.2 Stock Option Agreement, dated as of January 14, 1997, between KLA
Instruments Corporation and Tencor Instruments.*
2.3 Stock Option Agreement, dated as of January 14, 1997, between KLA
Instruments Corporation and Tencor Instruments.*
2.4 Form of Affiliate Agreement, dated as of January 14, 1997 for KLA
Instruments Corporation.*
2.5 Form of Affiliate Agreement, dated as of January 14, 1997 for Tencor
Instruments.*
2.6 Form of Agreement of Merger between Tencor Instruments, Tiger
Acquisition Corp.*
3.1 Restated Certificate of Incorporation of KLA Instruments Corporation,
to be filed upon approval of Proposals Two and Three.
4.1 Form of Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
8.2 Tax Opinion of Heller Ehrman White & McAuliffe.
10.1 Form of Retention and Non-Competition Agreement.
10.2 Form of KLA-Tencor Corporation Corporate Officers Retention Plan.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in opinions filed as Exhibits 5.1 and 8.1).
23.2 Consent of Heller Ehrman White & McAuliffe (included in opinion filed
as Exhibit 8.2).
23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Price Waterhouse LLP.
23.5 Consent of Deutsche Morgan Grenfell Inc.
23.6 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
23.7 Consent of Lehman Brothers Inc.
24.1 Power of Attorney (see Page II-4).
99.1 KLA Form of Proxy.
99.2 Tencor Form of Proxy.
99.3 Consents of Persons About to Become Directors.
- ------------------
* Incorporated herein by reference to Registrant's Current Report on Form 8-K
filed on January 22, 1997.
II-5
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
TENCOR INSTRUMENTS
TIGER ACQUISITION CORP.
AND
KLA INSTRUMENTS CORPORATION
DATED AS OF JANUARY 14, 1997
TABLE OF CONTENTS
PAGE
----
ARTICLE I THE MERGER................................................................... 1
1.1 The Merger..................................................................... 1
1.2 Effective Time; Closing........................................................ 2
1.3 Effect of the Merger........................................................... 2
1.4 Articles of Incorporation; Bylaws.............................................. 2
1.5 Directors and Officers......................................................... 2
1.6 Effect on Capital Stock........................................................ 2
1.7 Dissenting Shares.............................................................. 3
1.8 Surrender of Certificates...................................................... 4
1.9 No Further Ownership Rights in Tencor Common Stock............................. 5
1.10 Lost, Stolen or Destroyed Certificates......................................... 5
1.11 Tax and Accounting Consequences................................................ 5
1.12 Taking of Necessary Action; Further Action..................................... 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TENCOR.................................... 6
2.1 Organization of Tencor......................................................... 6
2.2 Tencor Capital Structure....................................................... 6
2.3 Obligations With Respect to Capital Stock...................................... 7
2.4 Authority...................................................................... 7
2.5 SEC Filings; Tencor Financial Statements....................................... 8
2.6 Absence of Certain Changes or Events........................................... 9
2.7 Tax............................................................................ 9
2.8 Intellectual Property.......................................................... 10
2.9 Compliance; Permits; Restrictions.............................................. 10
2.10 Litigation..................................................................... 11
2.11 Brokers' and Finders' Fees..................................................... 11
2.12 Employee Benefit Plans......................................................... 11
2.13 Absence of Liens and Encumbrances.............................................. 11
2.14 Environmental Matters.......................................................... 11
2.15 Labor Matters.................................................................. 12
2.16 Agreements, Contracts and Commitments.......................................... 12
2.17 Pooling of Interests........................................................... 13
2.18 Change of Control Payments..................................................... 13
2.19 Statements; Proxy Statement/Prospectus......................................... 13
2.20 Board Approval................................................................. 14
2.21 Fairness Opinion............................................................... 14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF KLA AND MERGER SUB....................... 14
3.1 Organization of KLA............................................................ 14
3.2 KLA and Merger Sub Capital Structure........................................... 14
3.3 Obligations With Respect to Capital Stock...................................... 15
3.4 Authority...................................................................... 15
3.5 Section 203 of the Delaware General Corporation Law Not Applicable............. 16
3.6 SEC Filings; KLA Financial Statements.......................................... 17
3.7 Absence of Certain Changes or Events........................................... 17
3.8 Taxes.......................................................................... 17
3.9 Intellectual Property.......................................................... 18
3.10 Compliance; Permits; Restrictions.............................................. 19
i
PAGE
----
3.11 Litigation..................................................................... 19
3.12 Brokers' and Finders' Fees..................................................... 19
3.13 Employee Benefit Plans......................................................... 19
3.14 Absence of Liens and Encumbrances.............................................. 20
3.15 Environmental Matters.......................................................... 20
3.16 Labor Matters.................................................................. 20
3.17 Agreements, Contracts and Commitments.......................................... 21
3.18 Pooling of Interests........................................................... 21
3.19 Change of Control Payments..................................................... 21
3.20 Statements; Proxy Statement/Prospectus......................................... 21
3.21 Board Approval................................................................. 22
3.22 Fairness Opinion............................................................... 22
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME......................................... 22
4.1 Conduct of Business............................................................ 22
ARTICLE V ADDITIONAL AGREEMENTS........................................................ 24
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; Board
Recommendations.............................................................. 24
5.2 Meetings of Shareholders and Stockholders...................................... 25
5.3 Confidentiality................................................................ 25
5.4 No Solicitation................................................................ 25
5.5 Public Disclosure.............................................................. 28
5.6 Legal Requirements............................................................. 28
5.7 Third Party Consents........................................................... 28
5.8 FIRPTA......................................................................... 28
5.9 Notification of Certain Matters................................................ 28
5.10 Best Efforts and Further Assurances............................................ 28
5.11 Stock Options and Employee Benefits............................................ 28
5.12 Form S-8....................................................................... 29
5.13 Indemnification and Insurance.................................................. 29
5.14 NMS Listing.................................................................... 30
5.15 KLA Affiliate Agreement........................................................ 30
5.16 Tencor Affiliate Agreement..................................................... 30
5.17 Regulatory Filings; Reasonable Efforts......................................... 31
5.18 Board of Directors of the Combined Company..................................... 31
5.19 Committees of the Board of Directors of KLA.................................... 31
5.20 Officers of Combined Company; Executive Committee.............................. 31
5.21 Change of Name; Increase in Authorized Shares.................................. 31
ARTICLE VI CONDITIONS TO THE MERGER.................................................... 32
6.1 Conditions to Obligations of Each Party to Effect the Merger................... 32
6.2 Additional Conditions to Obligations of Tencor................................. 32
6.3 Additional Conditions to the Obligations of KLA and Merger Sub................. 33
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER.......................................... 33
7.1 Termination.................................................................... 33
7.2 Notice of Termination; Effect of Termination................................... 34
7.3 Fees and Expenses.............................................................. 34
7.4 Amendment...................................................................... 36
7.5 Extension; Waiver.............................................................. 36
ii
PAGE
----
ARTICLE VIII GENERAL PROVISIONS........................................................ 36
8.1 Non-Survival of Representations and Warranties................................. 36
8.2 Notices........................................................................ 36
8.3 Interpretation; Knowledge...................................................... 37
8.4 Counterparts................................................................... 37
8.5 Entire Agreement; Third Party Beneficiaries.................................... 37
8.6 Severability................................................................... 37
8.7 Other Remedies; Specific Performance........................................... 37
8.8 Governing Law.................................................................. 38
8.9 Rules of Construction.......................................................... 38
8.10 Assignment..................................................................... 38
iii
INDEX OF EXHIBITS
Exhibit A...... KLA Stock Option Agreement (included as Exhibit 99.2 to the
Registration Statement)
Exhibit B...... Tencor Stock Option Agreement (included as Exhibit 99.3 to the
Registration Statement)
Exhibit C...... Agreement of Merger (included as Exhibit 2.6 to the Registration
Statement)
Exhibit D...... KLA Affiliate Agreement (included as Exhibit 2.4 to the Registration
Statement)
Exhibit E...... Tencor Affiliate Agreement (included as Exhibit 2.5 to the
Registration Statement)
INDEX OF ANNEXES
Annex 1........ Certain Definitions
iv
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
January 14, 1997 among KLA Instruments Corporation, a Delaware corporation
("KLA"), Tiger Acquisition Corp., a California corporation and a wholly-owned
subsidiary of KLA ("MERGER SUB"), and Tencor Instruments, a California
corporation ("TENCOR").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the California General
Corporation Law ("CALIFORNIA LAW"), KLA and Tencor intend to enter into a
business combination transaction to pursue their long-term business strategies.
B. The combined company following the Merger (as defined in Section 1.1)
will be called KLA-Tencor Corporation. In addition, immediately upon the
effectiveness of the Merger, the Board of Directors of the combined company
would consist of 12 members, with designees of Tencor to hold five of such seats
and designees of KLA to hold seven of such seats. It is also contemplated that
the senior management of the combined company would consist of senior management
from both Tencor and KLA.
C. The Board of Directors of Tencor (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of Tencor
and fair to, and in the best interests of, Tencor and its shareholders, (ii) has
approved this Agreement, the Merger and the other transactions contemplated by
this Agreement and (iii) has determined to recommend that the shareholders of
Tencor adopt and approve this Agreement and approve the Merger.
D. The Board of Directors of KLA (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of KLA and
fair to, and in the best interests of, KLA and its stockholders, (ii) has
approved this Agreement, the Merger and the other transactions contemplated by
this Agreement and (iii) has determined to recommend that the stockholders of
KLA vote to approve the issuance of shares of KLA Common Stock (as defined
below) to the shareholders of Tencor pursuant to the terms of the Merger.
E. Concurrently with the execution of this Agreement, and as a condition
and inducement to Tencor's and KLA's willingness to enter into this Agreement,
KLA shall execute and deliver a Stock Option Agreement in favor of Tencor in
substantially the form attached hereto as Exhibit A (the "KLA STOCK OPTION
AGREEMENT") and Tencor shall execute and deliver a Stock Option Agreement in
favor of KLA in substantially the form attached hereto as Exhibit B (the "TENCOR
STOCK OPTION AGREEMENT" and, together with the KLA Stock Option Agreement, the
"STOCK OPTION AGREEMENTS"). The Board of Directors of KLA and Tencor have each
approved the Stock Option Agreements.
F. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "CODE").
G. It is also intended by the parties hereto that the Merger shall qualify
for accounting treatment as a pooling of interests.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of California Law, Merger Sub shall be merged with and
into Tencor (the "MERGER"), the separate corporate existence of Merger Sub shall
cease
and Tencor shall continue as the surviving corporation. Tencor as the surviving
corporation after the Merger is hereinafter sometimes referred to as the
"SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing an
Agreement of Merger, substantially in the form of Exhibit C hereto (the
"AGREEMENT OF MERGER"), with the Secretary of State of the State of California
in accordance with the relevant provisions of California Law (the time of such
filing (or such later time as may be agreed in writing by the parties and
specified in the Agreement of Merger) being the "EFFECTIVE TIME") as soon as
practicable on or after the Closing Date (as herein defined). Unless the context
otherwise requires, the term "AGREEMENT" as used herein refers collectively to
this Agreement and Plan of Reorganization and the Agreement of Merger. The
closing of the Merger (the "CLOSING") shall take place at the offices of Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation at a time and date to be
specified by the parties, which shall be no later than the second business day
after the satisfaction or waiver of the conditions set forth in Article VI, or
at such other time, date and location as the parties hereto agree in writing
(the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
California Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of Tencor and Merger Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of Tencor and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Articles of Incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
Articles of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Articles of Incorporation of the
Surviving Corporation; provided, however, that at the Effective Time the
Articles of Incorporation of the Surviving Corporation shall be amended so
that the name of the Surviving Corporation shall be Tencor Instruments.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the
Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of Merger Sub immediately prior to the Effective Time, until their
respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, Tencor or the holders
of any of the following securities:
(a) Conversion of Tencor Common Stock. Each share of Common Stock, no
par value, of Tencor (the "TENCOR COMMON STOCK") issued and outstanding
immediately prior to the Effective Time, (other than any shares of Tencor
Common Stock to be canceled pursuant to Section 1.6(b) and any Dissenting
Shares (as defined in and to the extent provided in Section 1.7(a)) will be
canceled and extinguished and automatically converted (subject to Sections
1.6(e) and (f)) into the right to receive one (1) (the "EXCHANGE RATIO")
share of Common Stock, par value $0.001 per share, of KLA (the "KLA COMMON
STOCK") upon surrender of the certificate representing such share of Tencor
Common Stock in the manner provided in Section 1.8 (or in the case of a
lost, stolen or destroyed certificate, upon delivery of an affidavit (and
bond, if required) in the manner provided in Section 1.10), including, with
respect to each whole share of KLA Common Stock to be received, the
associated Rights (as defined in that certain Amended and Restated Rights
Agreement (the "KLA RIGHTS PLAN") dated as of April 25, 1996, between KLA
and First National Bank of Boston, as Rights Agent).
(b) Cancellation of KLA-Owned Stock. Each share of Tencor Common
Stock held by Tencor or owned by Merger Sub, KLA or any direct or indirect
wholly owned subsidiary of Tencor or of KLA
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immediately prior to the Effective Time shall be canceled and extinguished
without any conversion thereof.
(c) Stock Options; Employee Stock Purchase Plans. At the Effective
Time, all options to purchase Tencor Common Stock then outstanding under
Tencor's Second Amended and Restated 1984 Stock Option Plan, the Prometrix
1983 Employee Incentive Stock Option Plan, as amended, the Prometrix 1993
Employee Incentive Stock Option Plan, Tencor's 1993 Equity Incentive Plan
and Tencor's 1993 Non-Employee Director Stock Plan (collectively, the
"TENCOR STOCK OPTION PLANS") shall be assumed by KLA in accordance with
Section 5.11 hereof. At the Effective Time, in accordance with the terms of
Tencor's 1993 Employee Stock Purchase Plan and 1993 Foreign Employee Stock
Purchase Plan (the "TENCOR EMPLOYEE STOCK PURCHASE PLANS"), the option
periods then in progress shall be shortened by setting a new purchase date
which shall be the trading day immediately preceding the Effective Time
(the "NEW PURCHASE DATE"). The Tencor Employee Stock Purchase Plans shall
terminate immediately following the purchase of shares on the New Purchase
Date.
(d) Capital Stock of Merger Sub. Each share of Common Stock, no par
value, of Merger Sub (the "MERGER SUB COMMON STOCK") issued and outstanding
immediately prior to the Effective Time shall be converted into one validly
issued, fully paid and nonassessable share of Common Stock, no par value,
of the Surviving Corporation. Each certificate evidencing ownership of
shares of Merger Sub Common Stock shall continue to evidence ownership of
such shares of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect appropriately the effect of any stock split, reverse
stock split, stock dividend (including any dividend or distribution of
securities convertible into KLA Common Stock or Tencor Common Stock),
reorganization, recapitalization or other like change with respect to KLA
Common Stock or Tencor Common Stock occurring on or after the date hereof
and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of KLA Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Tencor Common Stock who would otherwise be entitled to a fraction
of a share of KLA Common Stock (after aggregating all fractional shares of
KLA Common Stock to be received by such holder) shall receive from KLA an
amount of cash (rounded to the nearest whole cent) equal to the product of
(i) such fraction, multiplied by (ii) the average closing price of one
share of KLA Common Stock for the ten most recent days that KLA Common
Stock has traded ending on the trading day immediately prior to the
Effective Time, as reported on the Nasdaq National Market.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
the shares of any holder of Tencor Common Stock who has demanded and
perfected appraisal rights for such shares in accordance with California
Law and who, as of the Effective Time, has not effectively withdrawn or
lost such appraisal rights ("DISSENTING SHARES"), shall not be converted
into or represent a right to receive KLA Common Stock pursuant to Section
1.6, but the holder thereof shall only be entitled to such rights as are
granted by California Law.
(b) Notwithstanding the foregoing, if any holder of shares of Tencor
Common Stock who demands appraisal of such shares under California Law
shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective
Time or the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive KLA
Common Stock and cash in lieu of fractional shares of KLA Common Stock in
accordance with Section 1.6 hereof, without interest thereon, upon
surrender of the certificate representing such shares of Tencor Common
Stock in the manner provided in Section 1.8 (or in the case of a lost,
stolen or destroyed certificate, upon delivery of an affidavit (and bond,
if required) in the manner provided in Section 1.10), including, with
respect to each whole share of KLA Common Stock to be received, the
associated Right under the KLA Rights Plan).
3
(c) Tencor shall give KLA (i) prompt notice of any written demands for
appraisal of any shares of Tencor Common Stock, withdrawals of such
demands, and any other instruments served pursuant to California Law and
received by Tencor which relate to any such demand for appraisal and (ii)
the opportunity to participate in all negotiations and proceedings which
take place prior to the Effective Time with respect to demands for
appraisal under California Law. Tencor shall not, except with the prior
written consent of KLA or as may be required by applicable law, voluntarily
make any payment with respect to any demands for appraisal of Tencor Common
Stock or offer to settle or settle any such demands. Any payments made in
respect of Dissenting Shares shall be made by Tencor or the Surviving
Corporation as the case may be.
1.8 Surrender of Certificates.
(a) Exchange Agent. KLA shall select an institution reasonably
satisfactory to Tencor to act as the exchange agent (the "EXCHANGE AGENT")
in the Merger.
(b) KLA to Provide Common Stock. Promptly after the Effective Time,
KLA shall make available to the Exchange Agent for exchange in accordance
with this Article I, the shares of KLA Common Stock issuable pursuant to
Section 1.6 in exchange for outstanding shares of Tencor Common Stock, and
cash in an amount sufficient for payment in lieu of fractional shares
pursuant to Section 1.6(f) and any dividends or distributions which holders
of shares of Tencor Common Stock may be entitled pursuant to Section
1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, KLA shall
cause the Exchange Agent to mail to each holder of record (as of the
Effective Time) of a certificate or certificates (the "CERTIFICATES") which
immediately prior to the Effective Time represented outstanding shares of
Tencor Common Stock whose shares were converted into the right to receive
shares of KLA Common Stock pursuant to Section 1.6, cash in lieu of any
fractional shares pursuant to Section 1.6(f) and any dividends or other
distributions pursuant to Section 1.8(d), (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as KLA may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for
certificates representing shares of KLA Common Stock, cash in lieu of any
fractional shares pursuant to Section 1.6(f) and any dividends or other
distributions pursuant to Section 1.8(d). Upon surrender of Certificates
for cancellation to the Exchange Agent or to such other agent or agents as
may be appointed by KLA, together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto,
the holders of such Certificates shall be entitled to receive in exchange
therefor certificates representing the number of whole shares of KLA Common
Stock, payment in lieu of fractional shares which such holders have the
right to receive pursuant to Section 1.6(f) and any dividends or
distributions payable pursuant to Section 1.8(d), and the Certificates so
surrendered shall forthwith be canceled. Until so surrendered, outstanding
Certificates will be deemed from and after the Effective Time, for all
corporate purposes, subject to Section 1.8(d) as to the payment of
dividends, to evidence the ownership of the number of full shares of KLA
Common Stock into which such shares of Tencor Common Stock shall have been
so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 1.6(f) and any
dividends or distributions payable pursuant to Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to KLA Common Stock with a record date after the Effective Time
will be paid to the holders of any unsurrendered Certificates with respect
to the shares of KLA Common Stock represented thereby until the holders of
record of such Certificates shall surrender such Certificates. Subject to
applicable law, following surrender of any such Certificates, the Exchange
Agent shall deliver to the record holders thereof, without interest,
certificates representing whole shares of KLA Common Stock issued in
exchange therefor along with payment in lieu of fractional shares pursuant
to Section 1.6(f) hereof and the amount of any such dividends or other
distributions with a record date after the Effective Time payable with
respect to such whole shares of KLA Common Stock.
4
(e) Transfers of Ownership. If certificates for shares of KLA Common
Stock are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of
the issuance thereof that the Certificates so surrendered will be properly
endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to KLA or any agent designated by
it any transfer or other taxes required by reason of the issuance of
certificates for shares of KLA Common Stock in any name other than that of
the registered holder of the Certificates surrendered, or established to
the satisfaction of KLA or any agent designated by it that such tax has
been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, neither the Exchange Agent, KLA, the Surviving Corporation nor
any party hereto shall be liable to a holder of shares of KLA Common Stock
or Tencor Common Stock for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Tencor Common Stock. All shares of KLA
Common Stock issued upon the surrender for exchange of shares of Tencor Common
Stock in accordance with the terms hereof (including any cash paid in respect
thereof pursuant to Section 1.6(f) and 1.8(d)) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Tencor
Common Stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Tencor Common Stock which were
outstanding immediately prior to the Effective Time. If after the Effective Time
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of KLA Common Stock,
cash for fractional shares, if any, as may be required pursuant to Section
1.6(f) and any dividends or distributions payable pursuant to Section 1.8(d);
provided, however, that KLA may, in its discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against KLA, Tencor or the Exchange
Agent with respect to the Certificates alleged to have been lost, stolen or
destroyed.
1.11 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall
constitute a reorganization within the meaning of Section 368 of the Code.
The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United
States Income Tax Regulations.
(b) It is intended by the parties hereto that the Merger shall qualify
for accounting treatment as a pooling of interests.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Tencor and Merger Sub, the officers and directors of Tencor
and Merger Sub will take all such lawful and necessary action, so long as such
action is consistent with this Agreement.
5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TENCOR
Tencor represents and warrants to KLA and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by Tencor to KLA dated as of the date hereof and certified by a duly authorized
officer of Tencor (the "TENCOR SCHEDULES"), as follows:
2.1 Organization of Tencor.
(a) Tencor and each of its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation; has the corporate power and authority to
own, lease and operate its assets and property and to carry on its business
as now being conducted and as proposed to be conducted; and is duly
qualified or licensed to do business and is in good standing in each
jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its activities makes such qualification or
licensing necessary, except where the failure to be so qualified would not
have a Material Adverse Effect (as defined below) on Tencor.
(b) Tencor has delivered to KLA a true and complete list of all of
Tencor's subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and Tencor's equity interest therein.
(c) Tencor has delivered or made available to KLA a true and correct
copy of the Articles of Incorporation and Bylaws of Tencor and similar
governing instruments of each of its subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither Tencor nor
any of its subsidiaries is in violation of any of the provisions of its
Articles of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with Tencor, the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect
that is materially adverse to the business, assets (including intangible
assets), financial condition or results of operations of Tencor and its
subsidiaries taken as a whole (except for those changes, events and effects
that are directly caused by (i) conditions affecting the United States
economy as a whole, or (ii) conditions affecting the semiconductor capital
equipment manufacturing industry as a whole, which conditions (in the case
of clause (i) or (ii)) do not affect Tencor in a disproportionate manner).
2.2 Tencor Capital Structure. The authorized capital stock of Tencor
consists of 60,000,000 shares of Common Stock, no par value, of which there were
31,073,715 shares issued and outstanding as of January 10, 1997 and 1,000,000
shares of Preferred Stock, no par value, of which no shares are issued or
outstanding. All outstanding shares of Tencor Common Stock are duly authorized,
validly issued, fully paid and nonassessable and are not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of Tencor or
any agreement or document to which Tencor is a party or by which it is bound. As
of December 31, 1996, Tencor had reserved an aggregate of 3,930,073 shares and
137,365 shares, respectively, of Tencor Common Stock, net of exercises, for
issuance to employees, consultants and non-employee directors pursuant to the
Tencor 1993 Equity Incentive Plan and the Tencor 1993 Non-Employee Director
Stock Plan, under which options are outstanding for an aggregate of 2,677,860
shares and 87,365 shares, respectively, and under which 1,262,295 shares and
50,000 shares, respectively, are available for grant as of December 31, 1996. As
of December 31, 1996, Tencor had reserved an aggregate of, and there were
outstanding options for 309,130 shares, 98,576 shares and 49,153 shares,
respectively, of Tencor Common Stock for issuance pursuant to the Second Amended
and Restated 1984 Stock Option Plan, the Prometrix 1983 Employee Incentive Stock
Option Plan, as amended, and the Prometrix 1993 Employee Incentive Stock Option
Plan. All shares of Tencor Common Stock subject to issuance as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, would be duly authorized, validly issued, fully paid
and nonassessable. The Tencor Schedules list for each person who held in the
aggregate options to acquire 10,000 or more shares of Tencor Common Stock at on
or about January 10, 1997, the name of the holder of such option, the exercise
price of such option, the number of shares as to which such option will have
vested at such date, the vesting schedule for such option and whether the
exercisability of such option will be accelerated in any way by the transactions
contemplated by this Agreement, and indicate the extent of acceleration, if any.
6
As of December 31, 1996, an aggregate of 522,919 shares of Tencor Common Stock
were reserved for issuance pursuant to Tencor's 1993 Employee Stock Purchase
Plan and Tencor's 1993 Foreign Employee Stock Purchase Plan, on a combined
basis.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of Tencor, or any securities exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities Tencor owns, directly or indirectly through
one or more subsidiaries, there are no equity securities, partnership interests
or similar ownership interests of any class of any subsidiary of Tencor, or any
security exchangeable or convertible into or exercisable for such equity
securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding. Except as set forth in Section 2.2, there
are no options, warrants, equity securities, partnership interests or similar
ownership interests, calls, rights (including preemptive rights), commitments or
agreements of any character to which Tencor or any of its subsidiaries is a
party or by which it is bound obligating Tencor or any of its subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase,
redeem or otherwise acquire, or cause the repurchase, redemption or acquisition,
of any shares of capital stock, partnership interests or similar ownership
interests of Tencor or any of its subsidiaries or obligating Tencor or any of
its subsidiaries to grant, extend, accelerate the vesting of or enter into any
such option, warrant, equity security, call, right, commitment or agreement.
There are no registration rights and, to the knowledge of Tencor, as of the date
of this Agreement, there are no voting trusts, proxies or other agreements or
understandings with respect to any equity security of any class of Tencor or
with respect to any equity security, partnership interest or similar ownership
interest of any class of any of its subsidiaries.
2.4 Authority.
(a) Tencor has all requisite corporate power and authority to enter
into this Agreement and the Tencor Stock Option Agreement and to consummate
the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby, and the execution and delivery of the Tencor Stock
Option Agreement and the consummation of the transactions contemplated
thereby, have been duly authorized by all necessary corporate action on the
part of Tencor, subject only to the approval and adoption of this Agreement
and the approval of the Merger by Tencor's shareholders and the filing and
recordation of the Agreement of Merger pursuant to California Law. A vote
of the holders of at least a majority of the outstanding shares of the
Tencor Common Stock is required for Tencor's shareholders to approve and
adopt this Agreement and approve the Merger. This Agreement and the Tencor
Stock Option Agreement have been duly executed and delivered by Tencor and,
assuming the due authorization, execution and delivery by KLA and, if
applicable, Merger Sub, constitute valid and binding obligations of Tencor,
enforceable in accordance with their respective terms, except as
enforceability may be limited by bankruptcy and other similar laws and
general principles of equity. The execution and delivery of this Agreement
and the Tencor Stock Option Agreement by Tencor do not, and the performance
of this Agreement and the Tencor Stock Option Agreement by Tencor will not,
(i) conflict with or violate the Articles of Incorporation or Bylaws of
Tencor or the equivalent organizational documents of any of its
subsidiaries, (ii) subject to obtaining the approval and adoption of this
Agreement and the approval of the Merger by Tencor's shareholders as
contemplated in Section 5.2 and compliance with the requirements set forth
in Section 2.4(b) below, conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to Tencor or any of its
subsidiaries or by which its or any of their respective properties is bound
or affected, or (iii) result in any breach of or constitute a default (or
an event that with notice or lapse of time or both would become a default)
under, or impair Tencor's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Tencor or any of its
subsidiaries pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument
or obligation to which Tencor or any of its subsidiaries is a party or by
which Tencor or any of its subsidiaries or its or any of their respective
properties are bound or affected. The Tencor Schedules list all material
consents, waivers and approvals under any of Tencor's or any of its
7
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions
contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission
or other governmental authority or instrumentality, foreign or domestic
("GOVERNMENTAL ENTITY"), is required by or with respect to Tencor in
connection with the execution and delivery of this Agreement and the Tencor
Stock Option Agreement or the consummation of the Merger, except for (i)
the filing of the Agreement of Merger with the Secretary of State of the
State of California, (ii) the filing of the Proxy Statement (as defined in
Section 2.19) with the Securities and Exchange Commission ("SEC") in
accordance with the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR ACT") and the securities or
antitrust laws of any foreign country, and (iv) such other consents,
authorizations, filings, approvals and registrations which if not obtained
or made would not be material to Tencor or KLA or have a material adverse
effect on the ability of the parties to consummate the Merger.
2.5 SEC Filings; Tencor Financial Statements.
(a) Tencor has filed all forms, reports and documents required to be
filed with the SEC since January 1, 1994, and has made available to KLA
such forms, reports and documents in the form filed with the SEC. All such
required forms, reports and documents (including those that Tencor may file
subsequent to the date hereof) are referred to herein as the "TENCOR SEC
REPORTS." As of their respective dates, the Tencor SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act of 1933,
as amended (the "SECURITIES ACT"), or the Exchange Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such
Tencor SEC Reports, and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then
on the date of such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. None of Tencor's subsidiaries
is required to file any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in Tencor SEC Reports (the
"TENCOR FINANCIALS"), including any Tencor SEC Reports filed after the date
hereof until the Closing, (x) complied as to form in all material respects
with the published rules and regulations of the SEC with respect thereto,
(y) was prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case
of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q under the Exchange Act) and (z) fairly presented the
consolidated financial position of Tencor and its subsidiaries as at the
respective dates thereof and the consolidated results of Tencor's
operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments. The balance sheet of Tencor contained in
Tencor SEC Reports as of September 30, 1996 is hereinafter referred to as
the "TENCOR BALANCE SHEET." Except as disclosed in the Tencor Financials,
since the date of the Tencor Balance Sheet neither Tencor nor any of its
subsidiaries has any liabilities (absolute, accrued, contingent or
otherwise) of a nature required to be disclosed on a balance sheet or in
the related notes to the consolidated financial statements prepared in
accordance with GAAP which are, individually or in the aggregate, material
to the business, results of operations or financial condition of Tencor and
its subsidiaries taken as a whole, except liabilities (i) provided for in
the Tencor Balance Sheet, or (ii) incurred since the date of the Tencor
Balance Sheet in the ordinary course of business consistent with past
practices and immaterial in the aggregate.
(c) Tencor has heretofore furnished to KLA a complete and correct copy
of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to
8
agreements, documents or other instruments which previously had been filed
by Tencor with the SEC pursuant to the Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the Tencor
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Tencor, (ii) any material change by Tencor in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP, or (iii) any material revaluation by Tencor of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the ordinary
course of business.
2.7 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "TAX" or
"TAXES" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and
liabilities relating to taxes, including taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value
added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest,
penalties and additions imposed with respect to such amounts and any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits.
(i) Tencor and each of its subsidiaries have timely filed all
federal, state, local and foreign returns, estimates, information
statements and reports ("RETURNS") relating to Taxes required to be
filed by Tencor and each of its subsidiaries, except such Returns which
are not material to Tencor, and have paid all Taxes shown to be due on
such Returns.
(ii) Except as is not material to Tencor, Tencor and each of its
subsidiaries as of the Effective Time will have withheld with respect to
its employees all federal and state income taxes, FICA, FUTA and other
Taxes required to be withheld.
(iii) Except as is not material to Tencor, neither Tencor nor any
of its subsidiaries has been delinquent in the payment of any Tax nor is
there any Tax deficiency outstanding, proposed or assessed against
Tencor or any of its subsidiaries, nor has Tencor or any of its
subsidiaries executed any waiver of any statute of limitations on or
extending the period for the assessment or collection of any Tax.
(iv) Except as is not material to Tencor, no audit or other
examination of any Return of Tencor or any of its subsidiaries is
presently in progress, nor has Tencor or any of its subsidiaries been
notified of any request for such an audit or other examination.
(v) Except as is not material to Tencor, no adjustment relating to
any Returns filed by Tencor or any of its subsidiaries has been proposed
formally or informally by any Tax authority to Tencor or any of its
subsidiaries or any representative thereof and, to the knowledge of
Tencor, no basis exists for any such adjustment which would be material
to Tencor.
(vi) Neither Tencor nor any of its subsidiaries has any liability
for unpaid Taxes which has not been accrued for or reserved on the
Tencor Balance Sheet, whether asserted or unasserted, contingent or
otherwise, which is material to Tencor.
(vii) None of Tencor's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(viii) There is no contract, agreement, plan or arrangement,
including but not limited to the provisions of this Agreement, covering
any employee or former employee of Tencor or any of its subsidiaries
that, individually or collectively, could give rise to the payment of
any amount that would not be deductible pursuant to Sections 280G, 404
or 162 of the Code.
9
(ix) Neither Tencor nor any of its subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection
(f) asset (as defined in Section 341(f)(4) of the Code) owned by Tencor.
(x) Tencor is not, and has not been at any time, a "United States
real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
(xi) No power of attorney that is currently in force has been
granted with respect to any matter relating to Taxes payable by Tencor
or any of its subsidiaries.
(xii) Neither Tencor nor any of its subsidiaries is party to or
affected by any tax-sharing or allocation agreement or arrangement.
(xiii) The Tencor Schedules list (y) any Tax exemption, Tax holiday
or other Tax-sparing arrangement that Tencor or any of its subsidiaries
has in any jurisdiction, including the nature, amount and lengths of
such Tax exemption, Tax holiday or other Tax-sparing arrangement and (z)
any expatriate tax programs or policies affecting Tencor or any of its
subsidiaries. Each of Tencor and its subsidiaries is in full compliance
with all terms and conditions of any Tax exemption, Tax holiday or other
Tax-sparing arrangement or order of any Governmental Entity and the
consummation of the transactions contemplated hereby will not have any
adverse effect on the continued validity and effectiveness of any such
Tax exemption, Tax holiday or other Tax-sparing arrangement or order.
2.8 Intellectual Property.
(a) Tencor and its subsidiaries own, or have the right to use, sell or
license all intellectual property necessary or required for the conduct of
their respective businesses as presently conducted (such intellectual
property and the rights thereto are collectively referred to herein as the
"TENCOR IP RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any Tencor IP
Rights, will not cause the forfeiture or termination or give rise to a
right of forfeiture or termination of any Tencor IP Rights or materially
impair the right of Tencor, the Surviving Corporation or KLA to use, sell
or license any Tencor IP Rights or portion thereof.
(c) Neither the manufacture, marketing, license, sale or intended use
of any product or technology currently licensed or sold or under
development by Tencor or any of its subsidiaries violates in any material
respect any license or agreement between Tencor or any of its subsidiaries
and any third party or infringes in any material respect any intellectual
property right of any other party; and there is no pending or, to the
knowledge of Tencor, threatened claim or litigation contesting the
validity, ownership or right to use, sell, license or dispose of any Tencor
IP Rights, nor has Tencor received any written notice asserting that any
Tencor IP Rights or the proposed use, sale, license or disposition thereof
conflicts or will conflict with the rights of any other party.
(d) Tencor has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its
proprietary rights in, all Tencor IP Rights.
2.9 Compliance; Permits; Restrictions.
(a) Neither Tencor nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or violation of (i) any law, rule,
regulation, order, judgment or decree applicable to Tencor or any of its
subsidiaries or by which Tencor or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Tencor or any of its
subsidiaries is a party or by which Tencor or any of its subsidiaries or
its or any of their respective properties is bound or affected. To the
knowledge of Tencor, no investigation or review by any Governmental Entity
is pending or threatened against Tencor or any of its subsidiaries, nor has
any Governmental Entity indicated an
10
intention to conduct the same. There is no material agreement, judgment,
injunction, order or decree binding upon Tencor or any of its subsidiaries
which has or could reasonably be expected to have the effect of prohibiting
or materially impairing any business practice of Tencor or any of its
subsidiaries, any acquisition of material property by Tencor or any of its
subsidiaries or the conduct of business by Tencor as currently conducted.
(b) Tencor and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of Tencor (collectively, the
"TENCOR PERMITS"). Tencor and its subsidiaries are in compliance in all
material respects with the terms of the Tencor Permits.
2.10 Litigation. There is no action, suit, proceeding, claim, arbitration
or investigation pending, or as to which Tencor or any of its subsidiaries has
received any notice of assertion nor, to Tencor's knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation against
Tencor or any of its subsidiaries which reasonably would be likely to be
material to Tencor, or which in any manner challenges or seeks to prevent,
enjoin, alter or delay any of the transactions contemplated by this Agreement.
2.11 Brokers' and Finders' Fees. Except for fees payable to Lehman
Brothers Inc. pursuant to an engagement letter dated January 9, 1996, a copy of
which has been provided to KLA, Tencor has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
2.12 Employee Benefit Plans.
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee
benefit plan" as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) maintained or contributed to by
Tencor or any trade or business (an "ERISA AFFILIATE") which is under
common control with Tencor within the meaning of Section 414 of the Code
(the "TENCOR EMPLOYEE PLANS"), Tencor has made available to KLA a true and
complete copy of, to the extent applicable, (i) such Tencor Employee Plan,
(ii) the most recent annual report (Form 5500), (iii) each trust agreement
related to such Tencor Employee Plan, (iv) the most recent summary plan
description for each Tencor Employee Plan for which such a description is
required, (v) the most recent actuarial report relating to any Tencor
Employee Plan subject to Title IV of ERISA and (vi) the most recent United
States Internal Revenue Service ("IRS") determination letter issued with
respect to any Tencor Employee Plan.
(b) Each Tencor Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the
IRS covering the provisions of the Tax Reform Act of 1986 stating that such
Tencor Employee Plan is so qualified and nothing has occurred since the
date of such letter that could reasonably be expected to affect the
qualified status of such plan. Each Tencor Employee Plan has been operated
in all material respects in accordance with its terms and the requirements
of applicable law. Neither Tencor nor any ERISA Affiliate of Tencor has
incurred or is reasonably expected to incur any material liability under
Title IV of ERISA in connection with any Tencor Employee Plan.
2.13 Absence of Liens and Encumbrances. Tencor and each of its
subsidiaries has good and valid title to, or, in the case of leased properties
and assets, valid leasehold interests in, all of its material tangible
properties and assets, real, personal and mixed, used in its business, free and
clear of any liens or encumbrances except as reflected in the Tencor Financials
and except for liens for taxes not yet due and payable and such imperfections of
title and encumbrances, if any, which would not be material to Tencor.
2.14 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to
result in a material liability to Tencor, no underground storage tanks and
no amount of any substance that has been designated by any Governmental
Entity or by applicable federal, state or local law to be radioactive,
toxic, hazardous or otherwise a danger to health or the environment,
including, without limitation, PCBs, asbestos,
11
petroleum, urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and
Recovery Act of 1976, as amended, and the regulations promulgated pursuant
to said laws, (a "HAZARDOUS MATERIAL"), but excluding office and janitorial
supplies, are present, as a result of the actions of Tencor or any of its
subsidiaries or any affiliate of Tencor, or, to Tencor's knowledge, as a
result of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that Tencor or any of its subsidiaries has at any time
owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be
likely to result in a material liability to Tencor, neither Tencor nor any
of its subsidiaries has transported, stored, used, manufactured, disposed
of, released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has
Tencor or any of its subsidiaries disposed of, transported, sold, used,
released, exposed its employees or others to or manufactured any product
containing a Hazardous Material (collectively "HAZARDOUS MATERIALS
ACTIVITIES") in violation of any rule, regulation, treaty or statute
promulgated by any Governmental Entity in effect prior to or as of the date
hereof to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
(c) Permits. Tencor and its subsidiaries currently hold all
environmental approvals, permits, licenses, clearances and consents (the
"TENCOR ENVIRONMENTAL PERMITS") necessary for the conduct of Tencor's and
its subsidiaries' Hazardous Material Activities and other businesses of
Tencor and its subsidiaries as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No material action, proceeding,
revocation proceeding, amendment procedure, writ, injunction or claim is
pending, or to Tencor's knowledge, threatened concerning any Tencor
Environmental Permit, Hazardous Material or any Hazardous Materials
Activity of Tencor or any of its subsidiaries. Tencor is not aware of any
fact or circumstance which could involve Tencor or any of its subsidiaries
in any material environmental litigation or impose upon Tencor any material
environmental liability.
2.15 Labor Matters. To Tencor's knowledge, there are no activities or
proceedings of any labor union to organize any employees of Tencor or any of its
subsidiaries and there are no strikes, or material slowdowns, work stoppages or
lockouts, or threats thereof by or with respect to any employees of Tencor or
any of its subsidiaries. Tencor and its subsidiaries are and have been in
compliance in all material respects with all applicable laws regarding
employment practices, terms and conditions of employment, and wages and hours
(including, without limitation, ERISA, WARN or any similar state or local law).
2.16 Agreements, Contracts and Commitments. Except as set forth in the
Tencor Schedules, neither Tencor nor any of its subsidiaries is a party to or is
bound by:
(a) any employment or consulting agreement, contract or commitment
with any officer or director level employee or member of Tencor's Board of
Directors, other than those that are terminable by Tencor or any of its
subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit Tencor's or any of its subsidiaries' ability to
terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or guaranty not entered into in
the ordinary course of business other than indemnification agreements
between Tencor or any of its subsidiaries and any of its officers or
directors;
12
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of Tencor or any of its subsidiaries to engage in any
line of business or compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating
to the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise; or
(f) any material joint marketing or development agreement.
Neither Tencor nor any of its subsidiaries, nor to Tencor's knowledge any
other party to a Tencor Contract (as defined below), has breached, violated or
defaulted under, or received notice that it has breached violated or defaulted
under, any of the material terms or conditions of any of the agreements,
contracts or commitments to which Tencor or any of its subsidiaries is a party
or by which it is bound of the type described in clauses (a) through (l) above
(any such agreement, contract or commitment, a "Tencor Contract") in such a
manner as would permit any other party to cancel or terminate any such Tencor
Contract, or would permit any other party to seek damages, which would be
reasonably likely to be material to Tencor.
2.17 Pooling of Interests. To the knowledge of Tencor, based on
consultation with its independent accountants, neither Tencor nor any of its
directors, officers, affiliates or shareholders has taken any action which would
preclude KLA's ability to account for the Merger as a pooling of interests.
2.18 Change of Control Payments. The Tencor Schedules set forth each plan
or agreement pursuant to which any material amounts may become payable (whether
currently or in the future) to current or former officers and directors of
Tencor as a result of or in connection with the Merger.
2.19 Statements; Proxy Statement/Prospectus. The information supplied by
Tencor for inclusion in the Registration Statement (as defined in Section
3.4(b)) shall not at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading. The information supplied by Tencor for inclusion in the proxy
statement/prospectus to be sent to the shareholders of Tencor and stockholders
of KLA in connection with the meeting of Tencor's shareholders to consider the
approval and adoption of this Agreement and the approval of the Merger (the
"TENCOR SHAREHOLDERS' MEETING") and in connection with the meeting of KLA's
stockholders to consider the approval of (i) the amendment of KLA's Certificate
of Incorporation to increase its authorized share capital to allow for the
issuance of shares of KLA Common Stock by virtue of the Merger, (ii) the
issuance of shares of KLA Common Stock by virtue of the Merger, and (iii) the
amendment of KLA's Certificate of Incorporation to change KLA's corporate name
(subject to and conditional upon the effectiveness of the Merger) (the "KLA
STOCKHOLDERS' MEETING") (such proxy statement/prospectus as amended or
supplemented is referred to herein as the "PROXY STATEMENT") shall not, on the
date the Proxy Statement is first mailed to Tencor's shareholders and KLA's
stockholders, at the time of the Tencor Shareholders' Meeting or the KLA
Stockholders' Meeting and at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Tencor
Shareholders' Meeting or the KLA Stockholders' Meeting which has become false or
misleading. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time, any event relating to
Tencor or any of its affiliates, officers or directors should be discovered by
Tencor which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, Tencor shall promptly inform KLA.
Notwithstanding the foregoing, Tencor makes no representation or warranty with
respect to any information supplied by KLA or Merger Sub which is contained in
any of the foregoing documents.
13
2.20 Board Approval. The Board of Directors of Tencor has, as of the date
of this Agreement, determined (i) that the Merger is fair to, and in the best
interests of Tencor and its shareholders, and (ii) to recommend that the
shareholders of Tencor approve and adopt this Agreement and approve the Merger.
2.21 Fairness Opinion. Tencor has received a written opinion from Lehman
Brothers Inc., dated as of the date hereof, to the effect that as of the date
hereof, the Exchange Ratio is fair to Tencor's shareholders from a financial
point of view and has delivered to KLA a copy of such opinion.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF KLA AND MERGER SUB
KLA and Merger Sub represent and warrant to Tencor, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by KLA to Tencor dated as of the date hereof and certified by a duly authorized
officer of KLA (the "KLA SCHEDULES"), as follows:
3.1 Organization of KLA.
(a) KLA and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or
licensed to do business and is in good standing in each jurisdiction where
the character of the properties owned, leased or operated by it or the
nature of its activities makes such qualification or licensing necessary,
except where the failure to be so qualified would not have a Material
Adverse Effect (as defined below) on KLA.
(b) KLA has delivered to Tencor a true and complete list of all of
KLA's subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and KLA's equity interest therein.
(c) KLA has delivered or made available to Tencor a true and correct
copy of the Certificate of Incorporation and Bylaws of KLA and similar
governing instruments of each of its subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither KLA nor any
of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with KLA, the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect
that is materially adverse to the business, assets (including intangible
assets), financial condition or results of operations of KLA and its
subsidiaries taken as a whole (except for those changes, events and effects
that are directly caused by (i) conditions affecting the United States
economy as a whole, or (ii) conditions affecting the semiconductor capital
equipment manufacturing industry as a whole, which conditions (in the case
of clause (i) or (ii) do not affect KLA in a disproportionate manner).
3.2 KLA and Merger Sub Capital Structure. The authorized capital stock of
KLA consists of 75,000,000 shares of Common Stock, par value $0.001 per share,
74,000,000 of which have been designated "Common Stock" of which there were
51,544,239 shares issued and outstanding as of January 10, 1997, including
110,000 shares held in the treasury of KLA, and 1,000,000 of which have been
designated "Junior Common Stock," of which no shares are issued and outstanding;
and 1,000,000 shares of Preferred Stock, par value $0.001 per share, of which no
shares are issued or outstanding. The authorized capital stock of Merger Sub
consists of 1,000 shares of Common Stock, no par value, all of which, as of the
date hereof, are issued and outstanding and are held by KLA. Merger Sub was
formed on January 9, 1997, for the purpose of consummating the Merger and has no
material assets or liabilities except as necessary for such purpose. All
outstanding shares of KLA Common Stock are duly authorized, validly issued,
fully paid and nonassessable and are not subject to preemptive rights created by
statute, the Certificate of Incorporation or Bylaws of KLA or any agreement or
document to which KLA is a party or by which it is bound. As of January 10,
1997, KLA had reserved an aggregate of 16,500,000 shares and 200,000 shares,
respectively, of KLA Common Stock, net of exercises, for issuance to employees,
consultants and non-employee directors pursuant to the KLA 1982
14
Stock Option Plan and the KLA 1990 Outside Directors Stock Option Plan, under
which options are outstanding for an aggregate of 6,019,881 shares and 108,590
shares, respectively, and under which 2,161,788 shares and 31,669 shares,
respectively, are available for grant as of January 10, 1997. In addition, as of
January 10, 1997, options to purchase 4,772 shares of KLA Common Stock were
outstanding and 904 shares of KLA Common Stock were available for grant pursuant
to a stock plan assumed by KLA in connection with its acquisition of Metrologix
Inc. All shares of KLA Common Stock subject to issuance as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, would be duly authorized, validly issued, fully paid
and nonassessable. The KLA Schedules list for each person who held in the
aggregate options to acquire 10,000 or more shares of KLA Common Stock at
January 13, 1997, the name of the holder of such option, the number of shares
subject to such option, the exercise price of such option, the number of shares
as to which such option will have vested at such date, the vesting schedule for
such option and whether the exercisability of such option will be accelerated in
any way by the transactions contemplated by this Agreement, and indicate the
extent of acceleration, if any. As of January 13, 1997, there were an aggregate
of 4,800,000 shares of KLA Common Stock have been reserved for issuance pursuant
to KLA's Employee Stock Purchase Plan (the "KLA EMPLOYEE STOCK PURCHASE PLAN").
3.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 3.2, and except pursuant to the KLA Rights Plan, there are no equity
securities, partnership interests or similar ownership interests of any class of
KLA, or any securities exchangeable or convertible into or exercisable for such
equity securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding. Except for securities KLA owns, directly
or indirectly through one or more subsidiaries, there are no equity securities,
partnership interests or similar ownership interests of any class of any
subsidiary of KLA, or any security exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as set
forth in Section 3.2 and except pursuant to the KLA Rights Plan, there are no
options, warrants, equity securities, partnership interests or similar ownership
interests, calls, rights (including preemptive rights), commitments or
agreements of any character to which KLA or any of its subsidiaries is a party
or by which it is bound obligating KLA or any of its subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem
or otherwise acquire, or cause the repurchase, redemption or acquisition, of any
shares of capital stock, partnership interests or similar ownership interests of
KLA or any of its subsidiaries or obligating KLA or any of its subsidiaries to
grant, extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. There are no registration
rights and, to the knowledge of KLA, as of the date of this Agreement, there are
no voting trusts, proxies or other agreements or understandings with respect to
any equity security of any class of KLA or with respect to any equity security,
partnership interest or similar ownership interest of any class of any of its
subsidiaries.
3.4 Authority.
(a) Each of KLA and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby and KLA has all requisite corporate power and authority
to enter into the KLA Stock Option Agreement and to consummate the
transactions contemplated thereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, and
the execution and delivery of the KLA Stock Option Agreement and the
consummation of the transactions contemplated thereby, have been duly
authorized by all necessary corporate action on the part of KLA and, in the
case of this Agreement, Merger Sub, subject only to the filing and
recordation of the Agreement of Merger pursuant to California Law and the
approval by KLA's stockholders of (i) the amendment of KLA's Certificate of
Incorporation to increase its authorized share capital to allow for the
issuance of shares of KLA Common Stock by virtue of the Merger, (ii) the
issuance of shares of KLA Common Stock by virtue of the Merger, and (iii)
the amendment of KLA's Certificate of Incorporation to change KLA's
corporate name (subject to and conditional upon the effectiveness of the
Merger). A vote of the holders of at least a majority of the outstanding
shares of the KLA Common Stock is required for KLA's stockholders to
approve each of (i) the amendment of KLA's Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares
of KLA Common Stock by virtue of the Merger, (ii) the issuance of shares of
15
KLA Common Stock by virtue of the Merger, and (iii) the amendment of KLA's
Certificate of Incorporation to change KLA's corporate name (subject to and
conditional upon the effectiveness of the Merger). This Agreement has been
duly executed and delivered by each of KLA and Merger Sub and, assuming the
due authorization, execution and delivery by Tencor, constitutes the valid
and binding obligation of KLA, enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy and other similar
laws and general principles of equity. The KLA Stock Option Agreement has
been duly executed and delivered by KLA and, assuming the due
authorization, execution and delivery of the KLA Stock Option Agreement by
Tencor, the KLA Stock Option Agreement constitutes the valid and binding
obligation of KLA, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy and other similar laws and
general principles of equity. The execution and delivery of this Agreement
by each of KLA and Merger Sub and the execution and delivery of the KLA
Stock Option Agreement by KLA do not, and the performance of this Agreement
by each of KLA and Merger Sub will not and the performance of the KLA Stock
Option Agreement by KLA will not, (i) conflict with or violate the
Certificate of Incorporation or Bylaws of KLA or the Articles of
Incorporation or Bylaws of Merger Sub or the equivalent organizational
documents of any of KLA's other subsidiaries, (ii) subject to obtaining the
approval of KLA's stockholders of (x) the amendment of KLA's Certificate of
Incorporation to increase its authorized share capital to allow for the
issuance of shares of KLA Common Stock by virtue of the Merger, (y) the
issuance of shares of KLA Common Stock by virtue of the Merger, and (z) the
amendment of KLA's Certificate of Incorporation to change KLA's corporate
name (subject to and conditional upon the effectiveness of the Merger) as
contemplated in Section 5.2 and compliance with the requirements set forth
in Section 3.4(b) below, conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to KLA or any of its
subsidiaries (including Merger Sub) or by which its or any of their
respective properties is bound or affected, or (iii) result in any breach
of or constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or impair KLA's rights or alter the
rights or obligations of any third party under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on any of the properties or
assets of KLA or any of its subsidiaries (including Merger Sub) pursuant
to, any material note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to
which KLA or any of its subsidiaries (including Merger Sub) is a party or
by which KLA or any of its subsidiaries or its or any of their respective
properties are bound or affected. The KLA Schedules list all material
consents, waivers and approvals under any of KLA's or any of its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions
contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to KLA or Merger Sub in connection with the execution and delivery
of this Agreement and the KLA Stock Option Agreement or the consummation of
the Merger, except for (i) the filing of a Form S-4 Registration Statement
(the "REGISTRATION STATEMENT") with the SEC in accordance with the
Securities Act, (ii) the filing of the Agreement of Merger with the
Secretary of State of the State of California, (iii) the filing of the
Proxy Statement with the SEC in accordance with the Exchange Act, (iv) such
consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable federal and state
securities laws and the HSR Act and the securities or antitrust laws of any
foreign country, and (v) such other consents, authorizations, filings,
approvals and registrations which if not obtained or made would not be
material to KLA or Tencor or have a material adverse effect on the ability
of the parties to consummate the Merger.
3.5 Section 203 of the Delaware General Corporation Law Not
Applicable. The Board of Directors of KLA has taken all actions so that the
restrictions contained in Section 203 of the Delaware General Corporation Law
applicable to a "business combination" (as defined in such Section 203) will not
apply to the execution, delivery or performance of this Agreement or the Stock
Option Agreements or to the consummation of the Merger or the other transactions
contemplated by this Agreement or the Stock Option Agreements.
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3.6 SEC Filings; KLA Financial Statements.
(a) KLA has filed all forms, reports and documents required to be
filed with the SEC since January 1, 1994, and has made available to Tencor
such forms, reports and documents in the form filed with the SEC. All such
required forms, reports and documents (including those that KLA may file
subsequent to the date hereof) are referred to herein as the "KLA SEC
REPORTS." As of their respective dates, the KLA SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such KLA SEC Reports, and (ii) did not at the time
they were filed (or if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
None of KLA's subsidiaries is required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in KLA SEC Reports (the "KLA
FINANCIALS"), including any KLA SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with
the published rules and regulations of the SEC with respect thereto, (y)
was prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto or, in the case of unaudited interim financial statements, as may
be permitted by the SEC on Form 10-Q under the Exchange Act) and (z) fairly
presented the consolidated financial position of KLA and its subsidiaries
as at the respective dates thereof and the consolidated results of KLA's
operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments. The balance sheet of KLA contained in KLA
SEC Reports as of September 30, 1996 is hereinafter referred to as the "KLA
BALANCE SHEET." Except as disclosed in the KLA Financials, since the date
of the KLA Balance Sheet neither KLA nor any of its subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature
required to be disclosed on a balance sheet or in the related notes to the
consolidated financial statements prepared in accordance with GAAP which
are, individually or in the aggregate, material to the business, results of
operations or financial condition of KLA and its subsidiaries taken as a
whole, except liabilities (i) provided for in the KLA Balance Sheet, or
(ii) incurred since the date of the KLA Balance Sheet in the ordinary
course of business consistent with past practices and immaterial in the
aggregate.
(c) KLA has heretofore furnished to Tencor a complete and correct copy
of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by KLA with the SEC pursuant to
the Securities Act or the Exchange Act.
3.7 Absence of Certain Changes or Events. Since the date of the KLA
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on KLA, (ii) any material change by KLA in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP, or (iii) any material revaluation by KLA of any of its assets,
including, without limitation, writing down the value of capitalized inventory
or writing off notes or accounts receivable other than in the ordinary course of
business.
3.8 Taxes.
(a) Tax Returns and Audits.
(i) KLA and each of its subsidiaries have timely filed all Returns
relating to Taxes required to be filed by KLA and each of its
subsidiaries, except such Returns which are not material to KLA, and
have paid all Taxes shown to be due on such Returns.
(ii) Except as is not material to KLA, KLA and each of its
subsidiaries as of the Effective Time will have withheld with respect to
its employees all federal and state income taxes, FICA, FUTA and other
Taxes required to be withheld.
17
(iii) Except as is not material to KLA, neither KLA nor any of its
subsidiaries has been delinquent in the payment of any Tax nor is there
any Tax deficiency outstanding, proposed or assessed against KLA or any
of its subsidiaries, nor has KLA or any of its subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(iv) Except as is not material to KLA, no audit or other
examination of any Return of KLA or any of its subsidiaries is presently
in progress, nor has KLA or any of its subsidiaries been notified of any
request for such an audit or other examination.
(v) Except as is not material to KLA, no adjustment relating to any
Returns filed by KLA or any of its subsidiaries has been proposed
formally or informally by any Tax authority to KLA or any of its
subsidiaries or any representative thereof and, to the knowledge of KLA,
no basis exists for any such adjustment which would be material to KLA.
(vi) Neither KLA nor any of its subsidiaries has any liability for
unpaid Taxes which has not been accrued for or reserved on the KLA
Balance Sheet, whether asserted or unasserted, contingent or otherwise,
which is material to KLA.
(vii) None of KLA's assets are treated as "tax-exempt use property"
within the meaning of Section 168(h) of the Code.
(viii) There is no contract, agreement, plan or arrangement,
including but not limited to the provisions of this Agreement, covering
any employee or former employee of KLA or any of its subsidiaries that,
individually or collectively, could give rise to the payment of any
amount that would not be deductible pursuant to Sections 280G, 404 or
162 of the Code.
(ix) Neither KLA nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as defined in Section 341(f)(4) of the Code) owned by KLA.
(x) KLA is not, and has not been at any time, a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of
the Code.
(xi) No power of attorney that is currently in force has been
granted with respect to any matter relating to Taxes payable by KLA or
any of its subsidiaries.
(xii) Neither KLA nor any of its subsidiaries is party to or
affected by any tax-sharing or allocation agreement or arrangement.
(xiii) The KLA Schedules list (y) any Tax exemption, Tax holiday or
other Tax-sparing arrangement that KLA or any of its subsidiaries has in
any jurisdiction, including the nature, amount and lengths of such Tax
exemption, Tax holiday or other Tax-sparing arrangement and (z) any
expatriate tax programs or policies affecting KLA or any of its
subsidiaries. Each of KLA and its subsidiaries is in full compliance
with all terms and conditions of any Tax exemption, Tax holiday or other
Tax-sparing arrangement or order of any Governmental Entity and the
consummation of the transactions contemplated hereby will not have any
adverse effect on the continued validity and effectiveness of any such
Tax exemption, Tax holiday or other Tax-sparing arrangement or order.
3.9 Intellectual Property.
(a) KLA and its subsidiaries own, or have the right to use, sell or
license all intellectual property necessary or required for the conduct of
their respective businesses as presently conducted (such intellectual
property and the rights thereto are collectively referred to herein as the
"KLA IP RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any KLA IP Rights,
will not cause the forfeiture or termination or give rise to a right of
18
forfeiture or termination of any KLA IP Rights or materially impair the
right of KLA, the Surviving Corporation or Tencor to use, sell or license
any KLA IP Rights or portion thereof.
(c) Neither the manufacture, marketing, license, sale or intended use
of any product or technology currently licensed or sold or under
development by KLA or any of its subsidiaries violates in any material
respect any license or agreement between KLA or any of its subsidiaries and
any third party or infringes in any material respect any intellectual
property right of any other party; and there is no pending or, to the
knowledge of KLA, threatened claim or litigation contesting the validity,
ownership or right to use, sell, license or dispose of any KLA IP Rights,
nor has KLA received any written notice asserting that any KLA IP Rights or
the proposed use, sale, license or disposition thereof conflicts or will
conflict with the rights of any other party.
(d) KLA has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its
proprietary rights in, all KLA IP Rights.
3.10 Compliance; Permits; Restrictions.
(a) Neither KLA nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or violation of (i) any law, rule,
regulation, order, judgment or decree applicable to KLA or any of its
subsidiaries or by which KLA or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which KLA or any of its
subsidiaries is a party or by which KLA or any of its subsidiaries or its
or any of their respective properties is bound or affected. To the
knowledge of KLA, no investigation or review by any Governmental Entity is
pending or threatened against KLA or any of its subsidiaries, nor has any
Governmental Entity indicated an intention to conduct the same. There is no
material agreement, judgment, injunction, order or decree binding upon KLA
or any of its subsidiaries which has or could reasonably be expected to
have the effect of prohibiting or materially impairing any business
practice of KLA or any of its subsidiaries, any acquisition of material
property by KLA or any of its subsidiaries or the conduct of business by
KLA as currently conducted.
(b) KLA and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of KLA (collectively, the "KLA
PERMITS"). KLA and its subsidiaries are in compliance in all material
respects with the terms of the KLA Permits.
3.11 Litigation. There is no action, suit, proceeding, claim, arbitration
or investigation pending, or as to which KLA or any of its subsidiaries has
received any notice of assertion nor, to KLA's knowledge, is there a threatened
action, suit, proceeding, claim, arbitration or investigation against KLA or any
of its subsidiaries which reasonably would be likely to be material to KLA, or
which in any manner challenges or seeks to prevent, enjoin, alter or delay any
of the transactions contemplated by this Agreement.
3.12 Brokers' and Finders' Fees. Except for fees payable to Merrill Lynch
pursuant to an engagement letter dated December 20, 1996, and Deutsche Morgan
Grenfell Technology Group pursuant to an engagement letter dated December 16,
1996, a copy of each of which has been provided to Tencor, KLA has not incurred,
nor will it incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or any similar charges in connection with
this Agreement or any transaction contemplated hereby.
3.13 Employee Benefit Plans.
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee
benefit plan" as defined in Section 3(3) of ERISA) maintained or
contributed to by KLA or any trade or business which is under common
control with KLA within the meaning of Section 414 of the Code (the "KLA
EMPLOYEE PLANS"), KLA has made available to Tencor a true and complete copy
of, to the extent applicable, (i) such KLA Employee Plan, (ii) the most
recent annual report (Form 5500), (iii) each trust agreement related to
such KLA Employee Plan, (iv) the most recent summary plan description for
each KLA Employee Plan for which
19
such a description is required, (v) the most recent actuarial report
relating to any KLA Employee Plan subject to Title IV of ERISA and (vi) the
most recent IRS determination letter issued with respect to any KLA
Employee Plan.
(b) Each KLA Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the
IRS covering the provisions of the Tax Reform Act of 1986 stating that such
KLA Employee Plan is so qualified and nothing has occurred since the date
of such letter that could reasonably be expected to affect the qualified
status of such plan. Each KLA Employee Plan has been operated in all
material respects in accordance with its terms and the requirements of
applicable law. Neither KLA nor any ERISA Affiliate of KLA has incurred or
is reasonably expected to incur any material liability under Title IV of
ERISA in connection with any KLA Employee Plan.
3.14 Absence of Liens and Encumbrances. KLA and each of its subsidiaries
has good and valid title to, or, in the case of leased properties and assets,
valid leasehold interests in, all of its material tangible properties and
assets, real, personal and mixed, used in its business, free and clear of any
liens or encumbrances except as reflected in the KLA Financials and except for
liens for taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which would not be material to KLA.
3.15 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to
result in a material liability to KLA, no underground storage tanks and no
amount of any Hazardous Material, but excluding office and janitorial
supplies, are present, as a result of the actions of KLA or any of its
subsidiaries or any affiliate of KLA, or, to KLA's knowledge, as a result
of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that KLA or any of its subsidiaries has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be
likely to result in a material liability to KLA, neither KLA nor any of its
subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has KLA
or any of its subsidiaries engaged in any Hazardous Materials Activities in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. KLA and its subsidiaries currently hold all
environmental approvals, permits, licenses, clearances and consents (the
"KLA ENVIRONMENTAL PERMITS") necessary for the conduct of KLA's and its
subsidiaries' Hazardous Material Activities and other businesses of KLA and
its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding,
revocation proceeding, amendment procedure, writ, injunction or claim is
pending, or to KLA's knowledge, threatened concerning any KLA Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of KLA or
any of its subsidiaries. KLA is not aware of any fact or circumstance which
could involve KLA or any of its subsidiaries in any material environmental
litigation or impose upon KLA any material environmental liability.
3.16 Labor Matters. To KLA's knowledge, there are no activities or
proceedings of any labor union to organize any employees of KLA or any of its
subsidiaries and there are no strikes, or material slowdowns, work stoppages or
lockouts, or threats thereof by or with respect to any employees of KLA or any
of its subsidiaries. KLA and its subsidiaries are and have been in compliance in
all material respects with all applicable laws regarding employment practices,
terms and conditions of employment, and wages and hours (including, without
limitation, ERISA, WARN or any similar state or local law).
20
3.17 Agreements, Contracts and Commitments. Except as set forth in the KLA
Schedules, neither KLA nor any of its subsidiaries is a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment
with any officer or director level employee or member of KLA's Board of
Directors, other than those that are terminable by KLA or any of its
subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit KLA's or any of its subsidiaries' ability to
terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or guaranty not entered into in
the ordinary course of business other than indemnification agreements
between KLA or any of its subsidiaries and any of its officers or
directors;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of KLA or any of its subsidiaries to engage in any
line of business or compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating
to the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise; or
(f) any material joint marketing or development agreement.
Neither KLA nor any of its subsidiaries, nor to KLA's knowledge any other
party to a KLA Contract (as defined below), has breached, violated or defaulted
under, or received notice that it has breached violated or defaulted under, any
of the material terms or conditions of any of the agreements, contracts or
commitments to which KLA or any of its subsidiaries is a party or by which it is
bound of the type described in clauses (a) through (l) above (any such
agreement, contract or commitment, a "KLA CONTRACT") in such a manner as would
permit any other party to cancel or terminate any such KLA Contract, or would
permit any other party to seek damages, which would be reasonably likely to be
material to KLA.
3.18 Pooling of Interests. To the knowledge of KLA, based on consultation
with its independent accountants, neither KLA nor any of its directors,
officers, affiliates or stockholders has taken any action which would preclude
KLA's ability to account for the Merger as a pooling of interests.
3.19 Change of Control Payments. The KLA Schedules set forth each plan or
agreement pursuant to which any material amounts may become payable (whether
currently or in the future) to current or former officers and directors of KLA
as a result of or in connection with the Merger.
3.20 Statements; Proxy Statement/Prospectus. The information supplied by
KLA for inclusion in the Registration Statement shall not at the time the
Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by KLA for inclusion in the Proxy Statement shall not, on
the date the Proxy Statement is first mailed to KLA's stockholders and Tencor's
shareholders, at the time of the KLA Stockholders' Meeting or the Tencor
Shareholders' Meeting and at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the KLA
Stockholders' Meeting or the Tencor Shareholders' Meeting which has become false
or misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior
21
to the Effective Time, any event relating to KLA or any of its affiliates,
officers or directors should be discovered by KLA which should be set forth in
an amendment to the Registration Statement or a supplement to the Proxy
Statement, KLA shall promptly inform Tencor. Notwithstanding the foregoing, KLA
makes no representation or warranty with respect to any information supplied by
Tencor which is contained in any of the foregoing documents.
3.21 Board Approval. The Board of Directors of KLA has, as of the date of
this Agreement, determined (i) that the Merger is fair to, and in the best
interests of KLA and its stockholders, and (ii) to recommend that the
stockholders of KLA approve (x) the amendment of KLA's Certificate of
Incorporation to increase its authorized share capital to allow for the issuance
of shares of KLA Common Stock by virtue of the Merger, (y) the issuance of
shares of KLA Common Stock by virtue of the Merger, and (z) the amendment of
KLA's Certificate of Incorporation to change KLA's corporate name (subject to
and conditional upon the effectiveness of the Merger).
3.22 Fairness Opinion. KLA has received written opinions from each of
Merrill Lynch and Deutsche Morgan Grenfell Technology Group, dated as of the
date hereof, to the effect that as of the date hereof, the Exchange Ratio is
fair to KLA from a financial point of view and has delivered to Tencor a copy of
such opinions.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, Tencor (which for the purposes of this
Article 4 shall include Tencor and each of its subsidiaries) and KLA (which for
the purposes of this Article 4 shall include KLA and each of its subsidiaries)
agree, except (i) in the case of Tencor as provided in Article 4 of the Tencor
Schedules and in the case of KLA as provided in Article 4 of the KLA Schedules,
or (ii) to the extent that the other of them shall otherwise consent in writing,
to carry on its business diligently and in accordance with good commercial
practice and to carry on its business in the usual, regular and ordinary course,
in substantially the same manner as heretofore conducted and in compliance with
all applicable laws and regulations, to pay its debts and taxes when due subject
to good faith disputes over such debts or taxes, to pay or perform other
material obligations when due, and use its commercially reasonable efforts
consistent with past practices and policies to preserve intact its present
business organization, keep available the services of its present officers and
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. In addition, each of Tencor and KLA will promptly notify the other of
any material event involving its business or operations. Furthermore, Tencor and
KLA agree that during the period prior to the Effective Time they will exchange
monthly summary financial data and that their respective senior management
groups will participate in informational meetings on a monthly basis, at such
time and place as shall be mutually agreeable. No information or knowledge
obtained in any investigation will affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.
In addition, except as permitted by the terms of this Agreement or the
Stock Option Agreements, and except in the case of Tencor as provided in Article
4 of the Tencor Schedules, and except in the case of KLA in connection with the
KLA Rights Plan or as provided in Article 4 of the KLA Schedules, without the
prior written consent of the other, neither Tencor nor KLA shall do any of the
following, and neither Tencor nor KLA shall permit its subsidiaries to do any of
the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies
22
existing, on the date hereof and as previously disclosed in writing to the
other, or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Tencor IP Rights
or the KLA IP Rights, as the case may be, or enter into grants to future
patent rights, other than in the ordinary course of business;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any capital stock or
split, combine or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for any capital stock, other than pursuant to the KLA Rights
Plan;
(e) Repurchase or otherwise acquire, directly or indirectly, any
shares of capital stock except pursuant to rights of repurchase of any such
shares under any employee, consultant or director stock plan existing on
the date hereof, and other than pursuant to the KLA Rights Plan;
(f) Issue, deliver, sell, authorize or propose the issuance, delivery
or sale of, any shares of capital stock or any securities convertible into
shares of capital stock, or subscriptions, rights, warrants or options to
acquire any shares of capital stock or any securities convertible into
shares of capital stock, or enter into other agreements or commitments of
any character obligating it to issue any such shares or convertible
securities, other than (i) the issuance of shares of Tencor Common Stock or
KLA Common Stock, as the case may be, pursuant to the exercise of stock
options therefor outstanding as of the date of this Agreement, (ii) options
to purchase shares of Tencor Common Stock or KLA Common Stock, as the case
may be, to be granted at fair market value in the ordinary course of
business, consistent with past practice and in accordance with stock option
plans existing on the date hereof, (iii) shares of Tencor Common Stock or
KLA Common Stock, as the case may be, issuable upon the exercise of the
options referred to in clause (ii), (iv) shares of Tencor Common Stock or
KLA Common Stock, as the case may be, issuable to participants in the KLA
Employee Stock Purchase Plan or the Tencor Employee Stock Purchase Plans
consistent with past practice and the terms thereof, (v) shares of Tencor
Common Stock or KLA Common Stock, as the case may be, issuable pursuant to
the Stock Option Agreements, and (vi) pursuant to the KLA Rights Plan;
(g) Cause, permit or propose any amendments to any charter document or
Bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity interest in or a material portion of the assets
of, or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of Tencor or KLA, as the
case may be, or enter into any material joint ventures, strategic
partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any
properties or assets which are material, individually or in the aggregate,
to the business of Tencor or KLA, as the case may be, except in the
ordinary course of business consistent with past practice;
(j) Incur any indebtedness for borrowed money (other than ordinary
course trade payables or pursuant to existing credit facilities in the
ordinary course of business) or guarantee any such indebtedness or issue or
sell any debt securities or warrants or rights to acquire debt securities
of Tencor or KLA, as the case may be, or guarantee any debt securities of
others;
(k) Adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any
special bonus or special remuneration to any director or employee, or
increase the salaries or wage rates of its officers or employees other than
in the ordinary course of business, consistent with past practice, or
change in any material respect any management policies or procedures;
23
(l) Pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business;
(m) Make any grant of exclusive rights to any third party;
(n) Take any action that would be reasonably likely to interfere with
KLA's ability to account for the Merger as a pooling of interests; or
(o) Agree in writing or otherwise to take any of the actions described
in Article 4 (a) through (n) above.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings;
Board Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
Tencor and KLA will prepare, and file with the SEC, the Proxy Statement and
KLA will prepare and file with the SEC the Registration Statement in which
the Proxy Statement will be included as a prospectus. Each of Tencor and
KLA will respond to any comments of the SEC, will use its respective best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing and will cause
the Proxy Statement to be mailed to its respective stockholders or
shareholders, as the case may be, at the earliest practicable time. As
promptly as practicable after the date of this Agreement, Tencor and KLA
will prepare and file any other filings required under the Exchange Act,
the Securities Act or any other Federal, foreign or Blue Sky laws relating
to the Merger and the transactions contemplated by this Agreement (the
"OTHER FILINGS"). Each of Tencor and KLA will notify the other promptly
upon the receipt of any comments from the SEC or its staff and of any
request by the SEC or its staff or any other government officials for
amendments or supplements to the Registration Statement, the Proxy
Statement or any Other Filing or for additional information and will supply
the other with copies of all correspondence between such party or any of
its representatives, on the one hand, and the SEC, or its staff or any
other government officials, on the other hand, with respect to the
Registration Statement, the Proxy Statement, the Merger or any Other
Filing. The Proxy Statement, the Registration Statement and the Other
Filings will comply in all material respects with all applicable
requirements of law and the rules and regulations promulgated thereunder.
Whenever any event occurs which is required to be set forth in an amendment
or supplement to the Proxy Statement, the Registration Statement or any
Other Filing, Tencor or KLA, as the case may be, will promptly inform the
other of such occurrence and cooperate in filing with the SEC or its staff
or any other government officials, and/or mailing to shareholders of Tencor
or stockholders of KLA, such amendment or supplement.
(b) The Proxy Statement will include the recommendation of the Board
of Directors of Tencor in favor of adoption and approval of this Agreement
and approval of the Merger (except that the Board of Directors of Tencor
may withdraw, modify or refrain from making such recommendation to the
extent that the Board determines, in good faith, after consultation with
outside legal counsel, that compliance with the Board's fiduciary duties
under applicable law would require it to do so). In addition, the Proxy
Statement will include the recommendations of the Board of Directors of KLA
in favor of (x) the amendment of KLA's Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares
of KLA Common Stock by virtue of the Merger, (y) the issuance of shares of
KLA Common Stock by virtue of the Merger, and (z) the amendment of KLA's
Certificate of Incorporation to change KLA's corporate name, subject to and
conditional upon the effectiveness of the Merger (except that the Board of
Directors of KLA may withdraw, modify or refrain from making such
recommendations to the extent that the Board determines, in good faith,
after consultation with outside legal counsel, that compliance with the
Board's fiduciary duties under applicable law would require it to do so).
24
5.2 Meetings of Shareholders and Stockholders. Promptly after the date
hereof, Tencor will take all action necessary in accordance with California Law
and its Articles of Incorporation and Bylaws to convene the Tencor Shareholders'
Meeting to be held as promptly as practicable, and in any event (to the extent
permissible under applicable law) within 45 days after the declaration of
effectiveness of the Registration Statement, for the purpose of voting upon this
Agreement. Tencor will consult with KLA and use its best efforts to hold the
Tencor Shareholders' Meeting on the same day as the KLA Stockholders' Meeting.
Promptly after the date hereof, KLA will take all action necessary in accordance
with the Delaware General Corporation Law and its Certificate of Incorporation
and Bylaws to convene the KLA Stockholders' Meeting to be held as promptly as
practicable, and in any event (to the extent permissible under applicable law)
within 45 days after the declaration of effectiveness of the Registration
Statement, for the purpose of (i) amending its Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of KLA
Common Stock by virtue of the Merger, (ii) voting upon the issuance of shares of
KLA Common Stock by virtue of the Merger, and (iii) amending its Certificate of
Incorporation to change its corporate name (subject to and conditional upon the
effectiveness of the Merger). KLA will consult with Tencor and will use its best
efforts to hold the KLA Stockholders' Meeting on the same day as the Tencor
Shareholders' Meeting. For so long as the Board of Directors of Tencor continues
to make the recommendation set forth in Section 5.1, Tencor will use its best
efforts to solicit from its shareholders proxies in favor of the adoption and
approval of this Agreement and the approval of the Merger and will take all
other action necessary or advisable to secure the vote or consent of its
shareholders required by the rules of the National Association of Securities
Dealers, Inc. or California Law to obtain such approvals. For so long as the
Board of Directors of KLA continues to make the recommendations set forth in
Section 5.1, KLA will use its best efforts to solicit from its stockholders
proxies in favor of (i) the amendment of KLA's Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of KLA
Common Stock by virtue of the Merger, (ii) the issuance of shares of KLA Common
Stock by virtue of the Merger, and (iii) the amendment of KLA's Certificate of
Incorporation to change KLA's corporate name (subject to and conditional upon
the effectiveness of the Merger) and will take all other action necessary or
advisable to secure the vote or consent of its stockholders required by the
rules of the National Association of Securities Dealers, Inc. or the Delaware
General Corporation Law to obtain such approvals.
5.3 Confidentiality. The parties acknowledge that Tencor and KLA have
previously executed a Confidentiality Agreement, dated January 6, 1996 (the
"Confidentiality Agreement"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
5.4 No Solicitation.
(a) Restrictions on KLA.
(i) From and after the date of this Agreement until the earlier of
the Effective Time or termination of this Agreement pursuant to its
terms, KLA and its subsidiaries shall not, and will instruct their
respective directors, officers, employees, representatives, investment
bankers, agents and affiliates not to, directly or indirectly, (i)
solicit or knowingly encourage submission of, any proposals or offers by
any person, entity or group (other than Tencor and its affiliates,
agents and representatives), or (ii) participate in any discussions or
negotiations with, or disclose any non-public information concerning KLA
or any of its subsidiaries to, or afford any access to the properties,
books or records of KLA or any of its subsidiaries to, or otherwise
assist or facilitate, or enter into any agreement or understanding with,
any person, entity or group (other than Tencor and its affiliates,
agents and representatives), in connection with any Acquisition Proposal
with respect to KLA. For the purposes of this Agreement, an "ACQUISITION
PROPOSAL" with respect to an entity means any proposal or offer relating
to (i) any merger, consolidation, sale of substantial assets or similar
transactions involving the entity or any subsidiaries of the entity
(other than sales of assets or inventory in the ordinary course of
business or as permitted under the terms of this Agreement), (ii) sale
of 15% or more of the outstanding shares of capital stock of the entity
(including without limitation by way of a tender offer or an exchange
offer), (iii) the acquisition by any person of beneficial ownership or a
right to acquire beneficial ownership of, or the formation of any
"group" (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder)
25
which beneficially owns, or has the right to acquire beneficial
ownership of, 15% or more of the then outstanding shares of capital
stock of the entity (except for acquisitions for passive investment
purposes only in circumstances where the person or group qualifies for
and files a Schedule 13G with respect thereto); or (iv) any public
announcement of a proposal, plan or intention to do any of the foregoing
or any agreement to engage in any of the foregoing. KLA will immediately
cease any and all existing activities, discussions or negotiations with
any parties conducted heretofore with respect to any of the foregoing.
KLA will (i) notify Tencor as promptly as practicable if any inquiry or
proposal is made or any information or access is requested in writing in
connection with an Acquisition Proposal or potential Acquisition
Proposal and (ii) as promptly as practicable notify Tencor of the
significant terms and conditions of any such Acquisition Proposal. In
addition, subject to the other provisions of this Section 5.4(a), from
and after the date of this Agreement until the earlier of the Effective
Time and termination of this Agreement pursuant to its terms, KLA and
its subsidiaries will not, and will instruct their respective directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Proposal made by any person, entity or group (other than Tencor);
provided, however, that nothing herein shall prohibit KLA's Board of
Directors from taking and disclosing to KLA's stockholders a position
with respect to a tender offer pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act.
(ii) Notwithstanding the provisions of paragraph (a)(i) above,
prior to the Effective Time, KLA may, to the extent the Board of
Directors of KLA determines, in good faith, after consultation with
outside legal counsel, that the Board's fiduciary duties under
applicable law require it to do so, participate in discussions or
negotiations with, and, subject to the requirements of paragraph
(a)(iii), below, furnish information to any person, entity or group
after such person, entity or group has delivered to KLA in writing, an
unsolicited bona fide Acquisition Proposal which the Board of Directors
of KLA in its good faith reasonable judgment determines, after
consultation with its independent financial advisors, would result in a
transaction more favorable than the Merger to the stockholders of KLA (a
"KLA SUPERIOR PROPOSAL"). In addition, notwithstanding the provisions of
paragraph (a)(i) above, in connection with a possible Acquisition
Proposal, KLA may refer any third party to this Section 5.4(a) or make a
copy of this Section 5.4(a) available to a third party. In the event KLA
receives a KLA Superior Proposal, nothing contained in this Agreement
(but subject to the terms hereof) will prevent the Board of Directors of
KLA from recommending such KLA Superior Proposal to KLA's stockholders,
if the Board determines, in good faith, after consultation with outside
legal counsel, that such action is required by its fiduciary duties
under applicable law; in such case, the Board of Directors of KLA may
withdraw, modify or refrain from making its recommendations set forth in
Section 5.1(b), and, to the extent it does so, KLA may refrain from
soliciting proxies and taking such other action necessary to secure the
vote of its stockholders as may be required by Section 5.2; provided,
however, that KLA shall not recommend to its stockholders a KLA Superior
Proposal for a period of not less than 48 hours after Tencor's receipt
of a copy of such KLA Superior Proposal (or a description of the
significant terms and conditions thereof, if not in writing); and
provided further, that nothing contained in this Section shall limit
KLA's obligation to hold and convene the KLA Stockholders Meeting
(regardless of whether the recommendations of the Board of Directors of
KLA shall have been withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary herein, KLA will not
provide any non-public information to a third party unless: (x) KLA
provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential
information at least as restrictive as such terms in the Confidentiality
Agreement; and (y) such non-public information is the same information
previously delivered to Tencor.
(b) Restrictions on Tencor.
(i) From and after the date of this Agreement the earlier of the
Effective Time or termination of this Agreement pursuant to its terms,
Tencor and its subsidiaries will not, and will instruct their
26
respective directors, officers, employees, representatives, investment
bankers, agents and affiliates not to, directly or indirectly, (i)
solicit or knowingly encourage submission of, any proposals or offers by
any person, entity or group (other than KLA and its affiliates, agents
and representatives), or (ii) participate in any discussions or
negotiations with, or disclose any non-public information concerning
Tencor or any of its subsidiaries to, or afford any access to the
properties, books or records of Tencor or any of its subsidiaries to, or
otherwise assist or facilitate, or enter into any agreement or
understanding with, any person, entity or group (other than KLA and its
affiliates, agents and representatives), in connection with any
Acquisition Proposal with respect to Tencor. Tencor will immediately
cease any and all existing activities, discussions or negotiations with
any parties conducted heretofore with respect to any of the foregoing.
Tencor will (i) notify KLA as promptly as practicable if any inquiry or
proposal is made or any information or access is requested in writing in
connection with an Acquisition Proposal or potential Acquisition
Proposal and (ii) as promptly as practicable notify KLA of the
significant terms and conditions of any such Acquisition Proposal. In
addition, subject to the other provisions of this Section 5.4(b), from
and after the date of this Agreement until the earlier of the Effective
Time and termination of this Agreement pursuant to its terms, Tencor and
its subsidiaries will not, and will instruct their respective directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Proposal made by any person, entity or group (other than KLA); provided,
however, that nothing herein shall prohibit Tencor's Board of Directors
from taking and disclosing to Tencor's shareholders a position with
respect to a tender offer pursuant to Rules 14d-9 and 14e-2 promulgated
under the Exchange Act.
(ii) Notwithstanding the provisions of paragraph (b)(i) above,
prior to the Effective Time, Tencor may, to the extent the Board of
Directors of Tencor determines, in good faith, after consultation with
outside legal counsel, that the Board's fiduciary duties under
applicable law require it to do so, participate in discussions or
negotiations with, and, subject to the requirements of paragraph
(b)(iii), below, furnish information to any person, entity or group
after such person, entity or group has delivered to Tencor in writing,
an unsolicited bona fide Acquisition Proposal which the Board of
Directors of Tencor in its good faith reasonable judgment determines,
after consultation with its independent financial advisors, would result
in a transaction more favorable than the Merger to the shareholders of
Tencor (a "TENCOR SUPERIOR PROPOSAL"). In addition, notwithstanding the
provisions of paragraph (b)(i) above, in connection with a possible
Acquisition Proposal, Tencor may refer any third party to this Section
5.4(b) or make a copy of this Section 5.4(b) available to a third party.
In the event Tencor receives a Tencor Superior Proposal, nothing
contained in this Agreement (but subject to the terms hereof) will
prevent the Board of Directors of Tencor from recommending such Tencor
Superior Proposal to its stockholders, if the Board determines, in good
faith, after consultation with outside legal counsel, that such action
is required by its fiduciary duties under applicable law; in such case,
the Board of Directors of Tencor may withdraw, modify or refrain from
making its recommendation set forth in Section 5.1(b), and, to the
extent it does so, Tencor may refrain from soliciting proxies and taking
such other action necessary to secure the vote of its shareholders as
may be required by Section 5.2; provided, however, that Tencor shall not
recommend to its shareholders a Tencor Superior Proposal for a period of
not less than 48 hours after KLA's receipt of a copy of such Tencor
Superior Proposal (or a description of the significant terms and
conditions thereof, if not in writing); and provided further, that
nothing contained in this Section shall limit Tencor's obligation to
hold and convene the Tencor Shareholders Meeting (regardless of whether
the recommendation of the Board of Directors of Tencor shall have been
withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary in paragraph (b),
Tencor will not provide any non-public information to a third party
unless: (x) Tencor provides such non-public information pursuant to a
nondisclosure agreement with terms regarding the protection of
confidential information at least as restrictive as such terms in the
Confidentiality Agreement; and (y) such non-public information is the
same information previously delivered to KLA.
27
5.5 Public Disclosure. KLA and Tencor will consult with each other before
issuing any press release or otherwise making any public statement with respect
to the Merger, this Agreement or an Acquisition Proposal and will not issue any
such press release or make any such public statement prior to such consultation,
except as may be required by law or any listing agreement with a national
securities exchange or the Nasdaq Stock Market.
5.6 Legal Requirements. Each of KLA, Merger Sub and Tencor will take all
reasonable actions necessary or desirable to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the transactions contemplated by this Agreement (including furnishing all
information required in connection with approvals by or filings with any
Governmental Entity, and prompt resolution of any litigation prompted hereby)
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such filings with or investigations by any
Governmental Entity, and any other such requirements imposed upon any of them or
their respective subsidiaries in connection with the consummation of the
transactions contemplated by this Agreement. KLA will use its commercially
reasonable efforts to take such steps as may be necessary to comply with the
securities and blue sky laws of all jurisdictions which are applicable to the
issuance of KLA Common Stock pursuant hereto. Tencor will use its commercially
reasonable efforts to assist KLA as may be necessary to comply with the
securities and blue sky laws of all jurisdictions which are applicable in
connection with the issuance of KLA Common Stock pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date
hereof, KLA and Tencor will each use its commercially reasonable efforts to
obtain all material consents, waivers and approvals under any of its or its
subsidiaries' agreements, contracts, licenses or leases required to be obtained
in connection with the consummation of the transactions contemplated hereby.
5.8 FIRPTA. At or prior to the Closing, Tencor, if requested by KLA, shall
deliver to the IRS a notice that the Tencor Common Stock is not a "U.S. Real
Property Interest" as defined and in accordance with the requirements of
Treasury Regulation Section 1.897-2(h)(2).
5.9 Notification of Certain Matters. KLA and Merger Sub will give prompt
notice to Tencor, and Tencor will give prompt notice to KLA, of the occurrence,
or failure to occur, of any event, which occurrence or failure to occur would be
reasonably likely to cause (a) any representation or warranty contained in this
Agreement and made by it to be untrue or inaccurate in any material respect at
any time from the date of this Agreement to the Effective Time such that the
conditions set forth in Section 6.2(a) or 6.3(a), as the case may be, would not
be satisfied as a result thereof or (b) any material failure of KLA and Merger
Sub or Tencor, as the case may be, or of any officer, director, employee or
agent thereof, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Notwithstanding the
above, the delivery of any notice pursuant to this section will not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
5.10 Best Efforts and Further Assurances. Subject to the respective rights
and obligations of KLA and Tencor under this Agreement, each of the parties to
this Agreement will use its best efforts to effectuate the Merger and the other
transactions contemplated hereby and to fulfill and cause to be fulfilled the
conditions to closing under this Agreement; provided that neither KLA nor Tencor
nor any subsidiary or affiliate thereof will be required to agree to any
divestiture by itself or any of its affiliates of shares of capital stock or of
any business, assets or property, or the imposition of any material limitation
on the ability of any of them to conduct their businesses or to own or exercise
control of such assets, properties and stock. Subject to the foregoing, each
party hereto, at the reasonable request of another party hereto, will execute
and deliver such other instruments and do and perform such other acts and things
as may be necessary or desirable for effecting completely the consummation of
the transactions contemplated hereby.
5.11 Stock Options and Employee Benefits.
(a) At the Effective Time, each outstanding option to purchase shares
of Tencor Common Stock (each a "Tencor Stock Option") under the Tencor
Stock Option Plans, whether or not exercisable, will be assumed by KLA.
Each Tencor Stock Option so assumed by KLA under this Agreement will
continue
28
to have, and be subject to, the same terms and conditions set forth in the
applicable Tencor Stock Option Plan immediately prior to the Effective Time
(including, without limitation, any repurchase rights), except that (i)
each Tencor Stock Option will be exercisable (or will become exercisable in
accordance with its terms) for that number of whole shares of KLA Common
Stock equal to the product of the number of shares of Tencor Common Stock
that were issuable upon exercise of such Tencor Stock Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, rounded down
to the nearest whole number of shares of KLA Common Stock, and (ii) the per
share exercise price for the shares of KLA Common Stock issuable upon
exercise of such assumed Tencor Stock Option will be equal to the quotient
determined by dividing the exercise price per share of Tencor Common Stock
at which such Tencor Stock Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
After the Effective Time, KLA will issue to each holder of an outstanding
Tencor Stock Option a notice describing the foregoing assumption of such
Tencor Stock Option by KLA.
(b) Tencor Stock Options assumed by KLA shall qualify following the
Effective Time as incentive stock options as defined in Section 422 of the
Code to the extent Tencor Stock Options qualified as incentive stock
options immediately prior to the Effective Time.
(c) KLA will reserve sufficient shares of KLA Common Stock for
issuance under Section 5.11(a) and under Section 1.6(c) hereof.
(d) For a period of one year following the Effective Time, the
combined company following the Merger will provide the persons employed by
Tencor immediately prior to the Effective Time, for so long as such persons
remain employed by KLA or the Surviving Corporation, with salary and
benefits in the aggregate which are substantially comparable to those
provided to such persons by Tencor immediately prior to the Effective Time.
5.12 Form S-8. KLA agrees to file a registration statement on Form S-8 for
the shares of KLA Common Stock issuable with respect to assumed Tencor Stock
Options no later than two (2) business days after the Closing Date.
5.13 Indemnification and Insurance.
(a) From and after the Effective Time, KLA will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of Tencor
pursuant to any indemnification agreements between Tencor and its directors
and officers existing prior to the date hereof. The Articles of
Incorporation and By-laws of the Surviving Corporation will contain the
provisions with respect to indemnification set forth in the Articles of
Incorporation and By-laws of Tencor, which provisions will not be amended,
repealed or otherwise modified for a period of six years from the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who, immediately prior to the Effective Time, were directors,
officers, employees or agents of Tencor, unless such modification is
required by law.
(b) After the Effective Time KLA will cause the Surviving Corporation,
to the fullest extent permitted under applicable law or under the Surviving
Corporation's Articles of Incorporation or By-laws, to indemnify and hold
harmless, each present director or officer of Tencor (collectively, the
"INDEMNIFIED PARTIES") against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and amounts
paid in settlement in connection with any claim, action, suit, proceeding
or investigation, whether civil, criminal, administrative or investigative,
to the extent arising out of or pertaining to any action or omission in his
or her capacity as a director or officer of Tencor arising out of or
pertaining to the transactions contemplated by this Agreement for a period
of six years after the date hereof. In the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) any counsel retained by the Indemnified Parties for
any period after the Effective Time must be reasonably satisfactory to the
Surviving Corporation and KLA, (ii) after the Effective Time, KLA will
cause the Surviving Corporation to pay the reasonable fees and expenses of
such counsel, promptly after statements therefor are received and (iii) KLA
will cause the Surviving Corporation to cooperate in the defense of any
such matter; provided, however, that neither
29
KLA nor the Surviving Corporation will be liable for any settlement
effected without its written consent (which consent will not be
unreasonably withheld); and provided, further, that, in the event that any
claim or claims for indemnification are asserted or made within such
six-year period, all rights to indemnification in respect of any such claim
or claims will continue until the disposition of any and all such claims;
provided, further, that any determination required to be made with respect
to whether an Indemnified Party's conduct complies with the standards set
forth under California Law, Tencor's articles of incorporation or bylaws or
such agreements, as the case may be, shall be made by independent legal
counsel selected by the Indemnified Party and reasonably acceptable to KLA;
and provided, further, that nothing in this Section 5.13 shall impair any
rights or obligations of any present or former employees, agents, directors
or officers of Tencor. The Indemnified Parties as a group may retain only
one law firm (in addition to local counsel) to represent them with respect
to any single action unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the
positions of any two or more Indemnified Parties. In the event KLA or the
Surviving Corporation or any of their respective successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each such case, to the
extent necessary to effectuate the purposes of this Section 5.13, proper
provision shall be made so that the successors and assigns of KLA and
Tencor assume the obligations set forth in this Section 5.13 and none of
the actions described in clause (i) or (ii) shall be taken until such
provision is made.
(c) For a period of six years after the Effective Time, KLA will cause
the Surviving Corporation to use its commercially reasonable efforts to
maintain in effect, if available, directors' and officers' liability
insurance covering those persons who are currently covered by Tencor's
directors' and officers' liability insurance policy on terms comparable to
those applicable to the then current directors and officers of KLA;
provided, however, that in no event will KLA or the Surviving Corporation
be required to expend in excess of 200% of the annual premium currently
paid by Tencor for such coverage (or such coverage as is available for such
200% of the annual premium).
(d) This Section 5.13 will survive any termination of this Agreement
and the consummation of the Merger at the Effective Time, is intended to
benefit Tencor, the Surviving Corporation and the Indemnified Parties, and
will be binding on all successors and assigns of the Surviving Corporation.
5.14 NMS Listing. KLA agrees to authorize for listing on the Nasdaq
National Market the shares of KLA Common Stock issuable, and those required to
be reserved for issuance, in connection with the Merger, upon official notice of
issuance.
5.15 KLA Affiliate Agreement. Set forth on the KLA Schedules is a list of
those persons who may be deemed to be, in KLA's reasonable judgment, affiliates
of KLA within the meaning of Rule 145 promulgated under the Securities Act (each
a "KLA AFFILIATE"). KLA will provide Tencor with such information and documents
as Tencor reasonably requests for purposes of reviewing such list. KLA will use
its best efforts to deliver or cause to be delivered to Tencor, as promptly as
practicable on or following the date hereof, from each KLA Affiliate an executed
affiliate agreement in substantially the form attached hereto as Exhibit D, each
of which will be in full force and effect as of the Effective Time.
5.16 Tencor Affiliate Agreement. Set forth on the Tencor Schedules is a
list of those persons who may be deemed to be, in Tencor's reasonable judgment,
affiliates of Tencor within the meaning of Rule 145 promulgated under the
Securities Act (each a "TENCOR AFFILIATE"). Tencor will provide KLA with such
information and documents as KLA reasonably requests for purposes of reviewing
such list. Tencor will use its best efforts to deliver or cause to be delivered
to KLA, as promptly as practicable on or following the date hereof, from each
Tencor Affiliate an executed affiliate agreement in substantially the form
attached hereto as Exhibit E (the "TENCOR AFFILIATE AGREEMENT"), each of which
will be in full force and effect as of the Effective Time. KLA will be entitled
to place appropriate legends on the certificates evidencing any KLA Common Stock
to be received by a Tencor Affiliate pursuant to the terms of this Agreement,
and to issue appropriate stop transfer instructions to the transfer agent for
the KLA Common Stock, consistent with the terms of the Tencor Affiliate
Agreement.
30
5.17 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, Tencor and KLA each shall file with the United States Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any applicable jurisdiction, as agreed to by the
parties. Tencor and KLA each shall promptly (a) supply the other with any
information which may be required in order to effectuate such filings and (b)
supply any additional information which reasonably may be required by the FTC,
the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate.
5.18 Board of Directors of the Combined Company. The Board of Directors of
KLA will take all actions necessary to cause the Board of Directors of KLA,
immediately after the Effective Time, to consist of 12 persons, seven of whom
shall have served on the Board of Directors of KLA immediately prior to the
Effective Time, and five of whom shall have served on the Board of Directors of
Tencor immediately prior to the Effective Time (including Jon D. Tompkins and
Lida Urbanek). Of the five designees of Tencor, one person shall be considered a
Class II director, two persons shall be designated Class III directors and two
persons shall be designated Class I directors. If, prior to the Effective Time,
any of the Tencor or KLA designees shall decline or be unable to serve as a
Tencor or KLA director, Tencor (if such person was designated by Tencor) or KLA
(if such person was designated by KLA) shall designate another person to serve
in such person's stead, which person shall be reasonably acceptable to the other
party.
5.19 Committees of the Board of Directors of KLA. The Board of Directors
of KLA will take all actions necessary to cause the Compensation Committee of
the Board of Directors of KLA, immediately after the Effective Time, to consist
of three members, two of whom shall have served on the Board of Directors of
Tencor immediately prior to the Effective Time and one who shall have served on
the Board of Directors of KLA immediately prior to the Effective Time. In
addition, the Board of Directors of KLA will take all actions necessary to cause
the Audit Committee of the Board of Directors of KLA, immediately after the
Effective Time, to consist of three members, two of whom shall have served on
the Board of Directors of KLA immediately prior to the Effective Time and one
who shall have served on the Board of Directors of Tencor immediately prior to
the Effective Time. Furthermore, the Board of Directors of KLA will take all
actions necessary to cause one person who shall have served on the Board of
Directors of Tencor immediately prior to the Effective Time to serve on the
Nominating Committee of the Board of Directors of KLA, immediately after the
Effective Time.
5.20 Officers of Combined Company; Executive Committee. At the Effective
Time, Ken Levy will be offered a position as the Chairman of the Board of KLA,
Jon D. Tompkins will be offered a position as the Chief Executive Officer of KLA
and Ken Schroeder will be offered a position as the President and Chief
Operating Officer of KLA. It is contemplated that following the Effective Time
an executive committee comprised of senior management from both Tencor and KLA
would be formed to jointly determine the management of KLA following the
Effective Time; the executive committee would meet regularly to review the
overall strategy, product direction and operations of the new combined company.
5.21 Change of Name; Increase in Authorized Shares. Subject to the terms
hereof, at the KLA Stockholders' Meeting KLA shall propose and recommend that
its Certificate of Incorporation be amended at the Effective Time to change its
name to "KLA-Tencor Corporation." In addition, subject to the terms hereof, at
the KLA Stockholders' Meeting KLA shall propose and recommend that its
Certificate of Incorporation be amended to increase the authorized number of
shares of Common Stock thereunder to 250 million shares, provided that KLA may
propose and recommend an increase of such lesser number as in good faith it
determines (provided that, subject to the terms hereof, such lesser number is
not less than the number required to issue shares by virtue of the Merger and
the other transactions contemplated hereby).
31
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder and Shareholder Approval. This Agreement shall have
been approved and adopted, and the Merger shall have been duly approved, by
the requisite vote under applicable law, by the shareholders of Tencor; and
an increase in the authorized number of shares of KLA Common Stock so as to
permit the issuance of shares of KLA Common Stock by virtue of the Merger,
as well as such issuance, shall have been duly approved by the requisite
vote under applicable law and the rules of the National Association of
Securities Dealers, Inc. by the stockholders of KLA.
(b) Registration Statement Effective; Proxy Statement. The SEC shall
have declared the Registration Statement effective. No stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of the Proxy Statement, shall have been
initiated or threatened in writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
Merger. All waiting periods under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early.
(d) Tax Opinions. KLA and Tencor shall each have received written
opinions from their respective counsel, Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, and Heller, Ehrman, White & McAuliffe, to the
effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code; provided, however, that if the counsel to
either KLA or Tencor does not render such opinion, this condition shall
nonetheless be deemed to be satisfied with respect to such party if counsel
to the other party renders such opinion to such party. The parties to this
Agreement agree to make reasonable representations as requested by such
counsel for the purpose of rendering such opinions.
(e) Nasdaq Listing. The shares of KLA Common Stock issuable to
shareholders of Tencor pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(f) Opinion of Accountants. Each of KLA and Tencor shall have
received a letter from Price Waterhouse LLP, dated within two (2) business
days prior to the Effective Time, regarding that firm's concurrence with
KLA's managements' and Tencor's managements' conclusions as to the
appropriateness of pooling of interest accounting for the Merger under
Accounting Principles Board Opinion No. 16, if the Merger is consummated in
accordance with this Agreement.
6.2 Additional Conditions to Obligations of Tencor. The obligation of
Tencor to consummate and effect the Merger shall be subject to the satisfaction
at or prior to the Effective Time of each of the following conditions, any of
which may be waived, in writing, exclusively by Tencor:
(a) Representations and Warranties. The representations and
warranties of KLA and Merger Sub contained in this Agreement shall have
been true and correct in all material respects as of the date of this
Agreement. In addition, the representations and warranties of KLA and
Merger Sub contained in this Agreement shall be true and correct in all
material respects on and as of the Effective Time except for changes
contemplated by this Agreement and except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such particular date), with the same force
and effect as if made on and as of the Effective Time, except in such cases
(other than the representations in Sections 3.2, 3.3 and 3.22) where the
failure to be so true and correct would not have a Material Adverse Effect
on KLA. Tencor shall have received a certificate with respect
32
to the foregoing signed on behalf of KLA by the Chief Executive Officer and
the Chief Financial Officer of KLA;
(b) Agreements and Covenants. KLA and Merger Sub shall have performed
or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or
prior to the Effective Time, and Tencor shall have received a certificate
to such effect signed on behalf of KLA by the Chief Executive Officer and
the Chief Financial Officer of KLA; and
(c) Material Adverse Effect. No Material Adverse Effect with respect
to KLA shall have occurred since the date of this Agreement.
6.3 Additional Conditions to the Obligations of KLA and Merger Sub. The
obligations of KLA and Merger Sub to consummate and effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, exclusively by
KLA:
(a) Representations and Warranties. The representations and
warranties of Tencor contained in this Agreement shall have been true and
correct in all material respects as of the date of this Agreement. In
addition, the representations and warranties of Tencor contained in this
Agreement shall be true and correct in all material respects on and as of
the Effective Time except for changes contemplated by this Agreement and
except for those representations and warranties which address matters only
as of a particular date (which shall remain true and correct as of such
particular date), with the same force and effect as if made on and as of
the Effective Time, except in such cases (other than the representations in
Sections 2.2, 2.3 and 2.21) where the failure to be so true and correct
would not have a Material Adverse Effect on Tencor. KLA shall have received
a certificate with respect to the foregoing signed on behalf of Tencor by
the President and the Chief Financial Officer of Tencor;
(b) Agreements and Covenants. Tencor shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Effective Time, and the KLA shall have received a certificate to such
effect signed on behalf of Tencor by the President and the Chief Financial
Officer of Tencor; and
(c) Material Adverse Effect. No Material Adverse Effect with respect
to Tencor shall have occurred since the date of this Agreement.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger by
the shareholders of Tencor or the approval of the issuance of KLA Common Stock
in connection with the Merger by the stockholders of KLA:
(a) by mutual written consent duly authorized by the Boards of
Directors of KLA and Tencor;
(b) by either Tencor or KLA if the Merger shall not have been
consummated by July 31, 1997; provided, however, that the right to
terminate this Agreement under this Section 7.1(b) shall not be available
to any party whose action or failure to act has been a principal cause of
or resulted in the failure of the Merger to occur on or before such date
and such action or failure to act constitutes a breach of this Agreement;
(c) by either Tencor or KLA if a Governmental Entity shall have issued
an order, decree or ruling or taken any other action (an "ORDER"), in any
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree or ruling is final and
nonappealable;
(d) by either Tencor or KLA if the required approvals of the
shareholders of Tencor or the stockholders of KLA contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain
the required vote upon a vote taken at a meeting of shareholders or
stockholders, as the
33
case may be, duly convened therefor or at any adjournment thereof (provided
that the right to terminate this Agreement under this Section 7.1(d) shall
not be available to any party where the failure to obtain shareholder or
stockholder approval of such party shall have been caused by the action or
failure to act of such party in breach of this Agreement);
(e) by KLA, if the Board of Directors of Tencor recommends a Tencor
Superior Proposal to the shareholders of Tencor, or if the Board of
Directors of Tencor shall have withheld, withdrawn or modified in a manner
adverse to KLA its recommendation in favor of adoption and approval of this
Agreement and approval of the Merger;
(f) by Tencor, if the Board of Directors of KLA recommends a KLA
Superior Proposal to the stockholders of KLA, or if the Board of Directors
of KLA shall have withheld, withdrawn or modified in a manner adverse to
Tencor its recommendation in favor of approving the issuance of the shares
of KLA Common Stock by virtue of the Merger;
(g) by Tencor, upon a breach of any representation, warranty, covenant
or agreement on the part of KLA set forth in this Agreement, or if any
representation or warranty of KLA shall have become untrue, in either case
such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that if such
inaccuracy in KLA's representations and warranties or breach by KLA is
curable by KLA through the exercise of its commercially reasonable efforts,
then Tencor may not terminate this Agreement under this Section 7.1(i)
provided KLA continues to exercise such commercially reasonable efforts to
cure such breach; or
(h) by KLA, upon a breach of any representation, warranty, covenant or
agreement on the part of Tencor set forth in this Agreement, or if any
representation or warranty of Tencor shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in Tencor's representations and warranties or breach by Tencor
is curable by Tencor through the exercise of its commercially reasonable
efforts, then KLA may not terminate this Agreement under this Section
7.1(j) provided Tencor continues to exercise such commercially reasonable
efforts to cure such breach.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties hereto.
In the event of the termination of this Agreement as provided in Section 7.1,
this Agreement shall be of no further force or effect, except (i) as set forth
in this Section 7.2, Section 7.3 and Article 8 (miscellaneous), each of which
shall survive the termination of this Agreement, and (ii) nothing herein shall
relieve any party from liability for any breach of this Agreement. No
termination of this Agreement shall affect the obligations of the parties
contained in the Confidentiality Agreement or the Stock Option Agreements, all
of which obligations shall survive termination of this Agreement in accordance
with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses
whether or not the Merger is consummated; provided, however, that KLA and
Tencor shall share equally all fees and expenses, other than attorneys' and
accountants fees and expenses, incurred in relation to the printing and
filing of the Proxy Statement (including any preliminary materials related
thereto) and the Registration Statement (including financial statements and
exhibits) and any amendments or supplements thereto.
(b) Tencor Payments.
(i) If (x) the Board of Directors of Tencor shall have withheld,
withdrawn or modified in a manner adverse to KLA its recommendation in
favor of adoption and approval of this Agreement
34
and approval of the Merger and at that time there shall not have
occurred a Material Adverse Effect on KLA, or (y) the Board of Directors
of Tencor recommends a Tencor Superior Proposal to the shareholders of
Tencor, Tencor shall pay to KLA an amount equal to $40 million within
one business day following the earlier to occur of (A) termination of
this Agreement pursuant to Section 7.1(e) hereof and (B) a Tencor
Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(b)(i)
above, and if (x) the vote of the shareholders of Tencor approving and
adopting this Agreement and approving the Merger shall not have been
obtained by reason of the failure to obtain the required vote upon a
vote taken at a meeting of shareholders duly convened therefor or at any
adjournment thereof (a "TENCOR NEGATIVE VOTE") and (y) prior to such
Tencor Negative Vote there shall have occurred an Acquisition Proposal
with respect to Tencor which shall have been publicly disclosed and not
withdrawn (a "TENCOR COMPETING PROPOSAL") and (z) within 12 months
following such Tencor Negative Vote Tencor shall enter into a definitive
agreement with respect to an Acquisition Proposal with the party (or any
affiliate of the party) that made the Tencor Competing Proposal or an
Acquisition Proposal with such party (or any such affiliate) shall have
been consummated, then, provided that there shall have not occurred a
Material Adverse Effect on KLA prior to the Tencor Negative Vote, Tencor
shall pay to KLA an amount equal to $40 million within one business day
following demand therefor; and
(iii) If no payment shall be required pursuant to clauses 7.3(b)(i)
or (ii) above and if there shall be a Tencor Negative Vote then Tencor
shall pay to KLA an amount equal to $5 million within one business day
following demand therefor.
(c) KLA Payments.
(i) If (x) the Board of Directors of KLA shall have withheld,
withdrawn or modified in a manner adverse to Tencor its recommendation
in favor of approving the issuance of the shares of KLA Common Stock by
virtue of the Merger and at that time there shall not have occurred a
Material Adverse Effect on Tencor, or (y) the Board of Directors of KLA
recommends a KLA Superior Proposal to the shareholders of KLA, KLA shall
pay to Tencor an amount equal to $60 million within one business day
following the earlier to occur of (A) termination of this Agreement
pursuant to Section 7.1(f) hereof and (B) a KLA Negative Vote (as
defined below);
(ii) If no payment shall be required pursuant to clause 7.3(c)(i)
above, and if (x) the vote of the stockholders of KLA in favor of an
increase in the authorized number of shares of KLA Common Stock so as to
permit the issuance of shares of KLA Common Stock by virtue of the
Merger, as well as such issuance, shall not have been obtained by reason
of the failure to obtain the required vote upon a vote taken at a
meeting of stockholders duly convened therefor or at any adjournment
thereof (a "KLA NEGATIVE VOTE") and (y) prior to such KLA Negative Vote
there shall have occurred an Acquisition Proposal with respect to KLA
which shall have been publicly disclosed and not withdrawn (a "KLA
COMPETING PROPOSAL") and (z) within 12 months following such KLA
Negative Vote Tencor shall enter into a definitive agreement with
respect to an Acquisition Proposal with the party (or any affiliate of
the party) that made the KLA Competing Proposal or an Acquisition
Proposal with such party (or any such affiliate) shall have been
consummated, then, provided that there shall not have occurred a
Material Adverse Effect on Tencor prior to the KLA Negative Vote, KLA
shall pay to Tencor an amount equal to $60 million within one business
day following demand therefor; and
(iii) If no payment shall be required pursuant to clauses 7.3(c)(i)
or (ii) above and if there shall be a KLA Negative Vote then KLA shall
pay to Tencor an amount equal to $5 million within one business day
following demand therefor.
(d) Payment of the fees described in Section 7.3(b) and (c) above
shall not be in lieu of damages incurred in the event of breach of this
Agreement.
35
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
and warranties of Tencor, KLA and Merger Sub contained in this Agreement shall
terminate at the Effective Time, and only the covenants that by their terms
survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to KLA or Merger Sub, to:
KLA Instruments Corporation
160 Rio Robles
P.O. Box 49055
San Jose, California 95161-9055
Attention: Chief Executive Officer
Telephone No.: (408) 434-4200
Telecopy No.: (408) 468-4266
with a copy to:
KLA Instruments Corporation
160 Rio Robles
P.O. Box 49055
San Jose, California 95161-9055
Attention: General Counsel
Telephone No.: (408) 434-4200
Telecopy No.: (408) 468-4266
with another copy to:
Wilson, Sonsini, Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Telephone No.: (415) 493-9300
Telecopy No.: (415) 493-6811
36
(b) if to Tencor, to:
Tencor Instruments
One Technology Drive
Milpitas, California 95035
Attention: President
Telephone No.: (408) 970-9500
Telecopy No.: (408) 988-6420
with a copy to:
Heller, Ehrman, White & McAuliffe
525 University Avenue
Palo Alto, CA 94301
Attention: Sarah A. O'Dowd, Esq.
Telephone No.: (415) 324-7045
Telecopy No.: (415) 324-0638
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise
indicated. The words "INCLUDE," "INCLUDES" and "INCLUDING" when used herein
shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement. When reference is made herein to "THE
BUSINESS OF" an entity, such reference shall be deemed to include the
business of all direct and indirect subsidiaries of such entity. Reference
to the subsidiaries of an entity shall be deemed to include all direct and
indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "KNOWLEDGE" means, with
respect to any matter in question, that any of the Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer or Controller of Tencor or
KLA, as the case may be, have actual knowledge of such matter.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including Tencor Schedules and the KLA
Schedules (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, it being understood that the Confidentiality Agreement shall continue in
full force and effect until the Closing and shall survive any termination of
this Agreement; and (b) are not intended to confer upon any other person any
rights or remedies hereunder, except with respect to the matters set forth in
Section 5.13.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not
37
preclude the exercise of any other remedy. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof;
provided that issues involving the corporate governance of any of the parties
hereto shall be governed by their respective jurisdictions of incorporation.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction of
any state or federal court within the Northern District of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, other than issues involving the corporate
governance of any of the parties hereto, agrees that process may be served upon
them in any manner authorized by the laws of the State of California for such
persons and waives and covenants not to assert or plead any objection which they
might otherwise have to such jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the of the parties. Subject to the preceding
38
sentence, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
------------------------
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
TENCOR INSTRUMENTS
By: /s/ JON D. TOMPKINS
------------------------------------
Name: Jon D. Tompkins
Title: President and Chief Executive
Officer
KLA INSTRUMENTS CORPORATION
By: /s/ KENNETH LEVY
------------------------------------
Name: Kenneth Levy
Title: Chief Executive Officer
TIGER ACQUISITION CORP.
By: /s/ KENNETH LEVY
------------------------------------
Name: Kenneth Levy
Title: President
**** REORGANIZATION AGREEMENT ****
39
ANNEX 1 -- CERTAIN DEFINITIONS
TERM SECTION IN WHICH TERM IS DEFINED
- --------------------------------------------------------- ------------------------------------
"Acquisition Proposal"................................... Section 5.4 (a)(i)
"Agreement".............................................. Section 1.2
"Agreement of Merger".................................... Section 1.2
"California Law"......................................... Recitals
"Certificates"........................................... Section 1.8(c)
"Closing"................................................ Section 1.2
"Closing Date"........................................... Section 1.2
"Code"................................................... Recitals
"Confidentiality Agreement".............................. Section 5.3 (b)
"Dissenting Shares"...................................... Section 1.7 (a)
"DOJ".................................................... Section 5.17
"Effective Time"......................................... Section 1.2
"ERISA".................................................. Section 2.12 (a)
"ERISA Affiliate"........................................ Section 2.12 (a)
"Exchange Act"........................................... Section 2.4 (b)
"Exchange Agent"......................................... Section 1.8 (a)
"Exchange Ratio"......................................... Section 1.6
"FTC".................................................... Section 5.17
"GAAP"................................................... Section 2.5 (b)
"Governmental Entity".................................... Section 2.4 (b)
"Hazardous Material"..................................... Section 2.14 (a)
"Hazardous Materials Activities"......................... Section 2.14 (b)
"HSR Act"................................................ Section 2.4 (b)
"include"................................................ Section 8.3 (a)
"includes"............................................... Section 8.3(a)
"including".............................................. Section 8.3 (a)
"Indemnified Parties".................................... Section 5.13 (b)
"IRS".................................................... Section 2.12 (a)
"KLA".................................................... Preamble
"KLA Affiliate".......................................... Section 5.15
"KLA Balance Sheet"...................................... Section 3.6 (b)
"KLA Common Stock"....................................... Section 1.6 (a)
"KLA Competing Proposal"................................. Section 7.3(c)(ii)
"KLA Contract"........................................... Section 3.17 (l)
"KLA Employee Plans"..................................... Section 3.13 (a)
"KLA Employee Stock Purchase Plan"....................... Section 3.2
"KLA Environmental Permits".............................. Section 3.15 (c)
"KLA Financials"......................................... Section 3.6 (b)
"KLA IP Rights".......................................... Section 3.9 (a)
"KLA Negative Vote"...................................... Section 7.3 (c)(ii)
"KLA Permits"............................................ Section 3.10 (b)
"KLA Rights Plan"........................................ Section 1.6 (a)
"KLA Schedules".......................................... Article III
"KLA SEC Reports"........................................ Section 3.6 (a)
"KLA Stock Option Agreement"............................. Recitals
"KLA Stockholders' Meeting".............................. Section 2.19
i
TERM SECTION IN WHICH TERM IS DEFINED
- --------------------------------------------------------- ------------------------------------
"KLA Superior Proposal".................................. Section 5.4 (a)(ii)
"knowledge".............................................. Section 8.3 (b)
"Material Adverse Effect"................................ Section 2.1 (d) and Section 3.1 (d)
"Merger"................................................. Section 1.1
"Merger Sub"............................................. Preamble
"Merger Sub Common Stock"................................ Section 1.6 (d)
"New Purchase Date"...................................... Section 1.6 (c)
"Order".................................................. Section 7.1 (c)
"Other Filings".......................................... Section 5.1 (a)
"Proxy Statement"........................................ Section 2.19
"Registration Statement"................................. Section 3.4 (b)
"Returns"................................................ Section 2.7 (b)(i)
"SEC".................................................... Section 2.4 (b)
"Securities Act"......................................... Section 2.5 (a)
"Stock Option Agreements"................................ Recitals
"Surviving Corporation".................................. Section 1.1
"Tax" or "Taxes"......................................... Section 2.7 (a)
"the business of"........................................ Section 8.3 (a)
"Tencor"................................................. Preamble
"Tencor Affiliate"....................................... Section 5.16
"Tencor Balance Sheet"................................... Section 2.5 (b)
"Tencor Common Stock".................................... Section 1.6 (a)
"Tencor Contract"........................................ Section 2.16 (l)
"Tencor Competing Proposal".............................. Section 7.3(b)(ii)
"Tencor Employee Plans".................................. Section 2.12 (a)
"Tencor Employee Stock Purchase Plans"................... Section 1.6 (c)
"Tencor Environmental Permits"........................... Section 2.14 (c)
"Tencor Financials"...................................... Section 2.5 (b)
"Tencor IP Rights"....................................... Section 2.8 (a)
"Tencor Negative Vote"................................... Section 7.3 (b)(ii)
"Tencor Permits"......................................... Section 2.9 (b)
"Tencor Schedules"....................................... Article II
"Tencor SEC Reports"..................................... Section 2.5 (a)
"Tencor Shareholders' Meeting"........................... Section 2.19
"Tencor Stock Option Agreement".......................... Recitals
"Tencor Stock Option Plans".............................. Section 1.6 (c)
"Tencor Superior Proposal"............................... Section 5.4 (b)(ii)
ii
ANNEX B
[OPTION FROM KLA TO TENCOR]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of January 14, 1997 (the "AGREEMENT")
is entered into by and between Tencor Instruments, a California corporation
("TENCOR"), and KLA Instruments Corporation, a Delaware corporation ("KLA").
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
Tencor, KLA and Tiger Acquisition Corp., a California corporation and a wholly
owned subsidiary of KLA ("SUB"), are entering into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT"), which provides that, among other
things, upon the terms and subject to the conditions thereof, Tencor and KLA
will to enter into a business combination transaction to pursue their long-term
business strategies (the "MERGER"); and
WHEREAS, as a condition to Tencor's willingness to enter into the Merger
Agreement, Tencor has requested that KLA agree, and KLA has so agreed, to grant
to Tencor an option to acquire shares of KLA's Common Stock, no par value, upon
the terms and subject to the conditions set forth herein;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
KLA hereby grants to Tencor an irrevocable option (the "OPTION") to acquire
up to a number of shares of the Common Stock, par value $0.001 per share, of KLA
("KLA SHARES") equal to 19.9% of the issued and outstanding shares as of the
first date, if any, upon which an Exercise Event (as defined in Section 2(a)
below) shall occur (the "OPTION SHARES") (provided that the Option Shares shall
not upon timely issuance constitute more than 19.9% of the then issued and
outstanding KLA Shares), in the manner set forth below (i) by paying cash at a
price of $40.00 per share (the "EXERCISE PRICE") and/or, at Tencor's election,
(ii) by exchanging therefor shares of the Common Stock, no par value, of Tencor
("TENCOR SHARES") at a rate (the "EXERCISE RATIO"), for each Option Share, of a
number of Tencor Shares equal to the Exercise Price divided by the closing sale
price of Tencor Shares on the Nasdaq National Market for the trading day
immediately preceding the date of the Closing (as defined below) of the
particular Option exercise. All references in this Agreement to KLA Shares or
Option Shares issued to Tencor hereunder shall be deemed to include the
associated KLA Rights. Capitalized terms used in this Agreement but not defined
herein shall have the meanings ascribed thereto in the Merger Agreement.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
(a) The Option may be exercised by Tencor, in whole or in part, at any time
or from time to time, (i) immediately prior to the consummation of a tender or
exchange offer for 25% or more of any class of KLA's capital stock, (ii) upon
the occurrence of all of the events specified in Section 7.3(c)(ii) of the
Merger Agreement, (iii) if and when the Board of Directors of KLA shall have
withheld, withdrawn or modified in a manner adverse to Tencor its recommendation
in favor of approving the issuance of the shares of KLA Common Stock by virtue
of the Merger after receipt of and in connection with an Acquisition Proposal
with respect to KLA or (iv) if and when the Board of Directors of KLA recommends
a KLA Superior Proposal to the shareholders of KLA (any of the events specified
in clauses (i), (ii), (iii)or (iv) of this sentence being referred to herein as
an "EXERCISE EVENT"). In the event Tencor wishes to exercise the Option, Tencor
shall deliver to KLA a written notice (each an "EXERCISE NOTICE") specifying the
total number of
Option Shares it wishes to acquire and the form of consideration to be paid.
Each closing of a purchase of Option Shares (a "CLOSING") shall occur on a date
and at a time prior to the termination of the Option designated by Tencor in an
Exercise Notice delivered at least two business days prior to the date of such
Closing, which Closing shall be held at the principal offices of KLA.
(b) Notwithstanding the foregoing, upon the commencement of a tender or
exchange offer for 25% or more of any class of KLA's capital stock (and/or
during any time which such a tender or exchange offer remains open), Tencor may
deliver to KLA an Exercise Notice (a "CONDITIONAL EXERCISE NOTICE") specifying
that it wishes to exercise and close a purchase of Option Shares immediately
prior to the consummation of such tender or exchange offer. Unless the
Conditional Exercise Notice is withdrawn by Tencor, the Closing of a purchase of
Option Shares specified in a Conditional Exercise Notice shall take place
immediately prior to the consummation of such tender or exchange offer. In the
event that such tender or exchange offer is not consummated prior to termination
of the Option, such Conditional Exercise Notice shall be void and of no further
force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 180 days following the termination of the Merger Agreement pursuant to
Article VII thereof if an Exercise Event shall have occurred on or prior to the
date of such termination, (iii) 12 months following the date on which the Merger
Agreement is terminated pursuant to Article VII thereof if (x) there shall have
been a KLA Negative Vote and (y) prior to such KLA Negative Vote there shall
have occurred an Acquisition Proposal with respect to KLA which shall have been
publicly disclosed and not withdrawn, (iv) 12 months following the date on which
the Merger Agreement is terminated pursuant to Article VII thereof if prior
thereto there shall have commenced a tender or exchange offer for 25% or more of
any class of KLA's capital stock and (v) the date on which the Merger Agreement
is terminated if neither an Exercise Event , nor both of the events specified in
subclauses (x) and (y) of clause (iii), nor the commencement of a tender or
exchange offer for 25% or more of any class of KLA's capital stock shall have
occurred on or prior to such date of termination; provided, however, that if the
Option cannot be exercised by reason of any applicable government order or
because the waiting period related to the issuance of the Option Shares under
the HSR Act shall not have expired or been terminated, then the Option shall not
terminate until the tenth business day after such impediment to exercise shall
have been removed or shall have become final and not subject to appeal.
Notwithstanding the foregoing, the Option may not be exercised if (i) Tencor
shall have breached in any material respect any of its covenants or agreements
contained in the Merger Agreement or (ii) the representations and warranties of
Tencor contained in the Merger Agreement shall not have been true and correct in
all material respects on and as of the date when made.
(d) If Tencor receives in the aggregate pursuant to Section 7.3(c) of the
Merger Agreement together with proceeds in connection with any sales or other
dispositions of Option Shares and any dividends received by Tencor declared on
Option Shares, more than the sum of (x) $60,000,000 plus (y) the Exercise Price
multiplied by the number of KLA Shares purchased by Tencor pursuant to the
Option, then all proceeds to Tencor in excess of such sum shall be remitted by
Tencor to KLA.
3. CONDITIONS TO CLOSING
The obligation of KLA to issue Option Shares to Tencor hereunder is subject
to the conditions that (a) any waiting period under the HSR Act applicable to
the issuance of the Option Shares hereunder shall have expired or been
terminated; (b) all material consents, approvals, orders or authorizations of,
or registrations, declarations or filings with, any Federal, state or local
administrative agency or commission or other Federal state or local governmental
authority or instrumentality, if any, required in connection with the issuance
of the Option Shares hereunder shall have been obtained or made, as the case may
be; and (c) no preliminary or permanent injunction or other order by any court
of competent jurisdiction prohibiting or otherwise restraining such issuance
shall be in effect. It is understood and agreed that at any time during which
the Option is exercisable or if Tencor shall have delivered to KLA a Conditional
Exercise Notice, the parties will use their respective best efforts to satisfy
all conditions to Closing, so that a Closing may take place as promptly as
practicable, and in any event, prior to consummation of a tender or exchange
offer for shares of KLA capital stock; provided that neither KLA nor Tencor nor
any subsidiary or affiliate thereof will be
2
required to agree to any divestiture by itself or any of its affiliates of
shares of capital stock or of any business, assets or property, or the
imposition of any material limitation on the ability of any of them to conduct
their businesses or to own or exercise control of such assets, properties and
stock.
4. CLOSING
At any Closing, (a) KLA shall deliver to Tencor a single certificate in
definitive form representing the number of KLA Shares designated by Tencor in
its Exercise Notice, such certificate to be registered in the name of Tencor and
to bear the legend set forth in Section 10 hereof, against delivery of (b)
payment by Tencor to KLA of the aggregate purchase price for the KLA Shares so
designated and being purchased by delivery of (i) a certified check or bank
check and/or, at Tencor's election, (ii) a single certificate in definitive form
representing the number of Tencor Shares being issued by Tencor in consideration
therefor (based on the Exercise Ratio), such certificate to be registered in the
name of KLA and to bear the legend set forth in Section 10 hereof.
5. REPRESENTATIONS AND WARRANTIES OF KLA
KLA represents and warrants to Tencor that (a) KLA is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power and authority to enter into this Agreement
and to carry out its obligations hereunder; (b) the execution and delivery of
this Agreement by KLA and consummation by KLA of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of KLA and no other corporate proceedings on the part of KLA are necessary to
authorize this Agreement or any of the transactions contemplated hereby; (c)
this Agreement has been duly executed and delivered by KLA and constitutes a
legal, valid and binding obligation of KLA and, assuming this Agreement
constitutes a legal, valid and binding obligation of Tencor, is enforceable
against KLA in accordance with its terms, except as enforceability may be
limited by bankruptcy and other laws affecting the rights and remedies of
creditors generally and general principles of equity; (d) except for any filings
required under the HSR Act, KLA has taken all necessary corporate and other
action to authorize and reserve for issuance and to permit it to issue upon
exercise of the Option, and at all times from the date hereof until the
termination of the Option will have reserved for issuance, a sufficient number
of unissued KLA Shares for Tencor to exercise the Option in full and will take
all necessary corporate or other action to authorize and reserve for issuance
all additional KLA Shares or other securities which may be issuable pursuant to
Section 9(a) upon exercise of the Option, all of which, upon their issuance and
delivery in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable; (e) upon delivery of the KLA Shares and any other
securities to Tencor upon exercise of the Option, Tencor will acquire such KLA
Shares or other securities free and clear of all material claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by Tencor; (f) the execution and delivery of this
Agreement by KLA do not, and the performance of this Agreement by KLA will not,
(i) violate the Certificate of Incorporation or By-Laws of KLA, (ii) conflict
with or violate any order applicable to KLA or any of its subsidiaries or by
which they or any of their property is bound or affected or (iii) result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give rise to any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of KLA or any
of its subsidiaries pursuant to, any contract or agreement to which KLA or any
of its subsidiaries is a party or by which KLA or any of its subsidiaries or any
of their property is bound or affected, except, in the case of clauses (ii) and
(iii) above, for violations, conflicts, breaches, defaults, rights of
termination, amendment, acceleration or cancellation, liens or encumbrances
which would not, individually or in the aggregate, have a Material Adverse
Effect on KLA; (g) the execution and delivery of this Agreement by KLA does not,
and the performance of this Agreement by KLA will not, require any consent,
approval, authorization or permit of, or filing with, or notification to, any
Governmental Entity except pursuant to the HSR Act; and (h) any Tencor Shares
acquired pursuant to this Agreement will not be acquired by KLA with a view to
the public distribution thereof and KLA will not sell or otherwise dispose of
such shares in violation of applicable law or this Agreement.
3
6. REPRESENTATIONS AND WARRANTIES OF TENCOR
Tencor represents and warrants to KLA that (a) Tencor is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of California and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by Tencor and the consummation by Tencor of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Tencor and no other corporate proceedings on the
part of Tencor are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed and
delivered by Tencor and constitutes a legal, valid and binding obligation of
Tencor and, assuming this Agreement constitutes a legal, valid and binding
obligation of KLA, is enforceable against Tencor in accordance with its terms,
except as enforceability may be limited by bankruptcy and other laws affecting
the rights and remedies of creditors generally and general principles of equity;
(d) except for any filings required under the HSR Act, Tencor has taken (or will
in a timely manner take) all necessary corporate and other action to authorize
and reserve for issuance and to permit it to issue upon exercise of the Option
and will take all necessary corporate or other action to authorize and reserve
for issuance all additional Tencor Shares or other securities which may be
issuable pursuant to Section 9(b) upon exercise of the Option, all of which,
upon their issuance and delivery in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable; (e) upon delivery of
Tencor Shares to KLA in consideration of any acquisition of KLA Shares pursuant
hereto, KLA will acquire such Tencor Shares free and clear of all material
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, excluding those imposed by KLA; (f) the execution and
delivery of this Agreement by Tencor do not, and the performance of this
Agreement by Tencor will not, (i) violate the Articles of Incorporation or
ByLaws of Tencor, (ii) conflict with or violate any order applicable to Tencor
or any of its subsidiaries or by which they or any of their property is bound or
affected or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give rise to any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or encumbrance on any of the property or
assets of Tencor or any of its subsidiaries pursuant to, any contract or
agreement to which Tencor or any of its subsidiaries is a party or by which
Tencor or any of its subsidiaries or any of their property is bound or affected,
except, in the case of clauses (ii) and (iii) above, for violations, conflicts,
breaches, defaults, rights of termination, amendment, acceleration or
cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on Tencor; (g) the execution and
delivery of this Agreement by Tencor does not, and the performance of this
Agreement by Tencor will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any Governmental Entity except
pursuant to the HSR Act; and (h) any KLA Shares acquired upon exercise of the
Option will not be acquired by Tencor with a view to the public distribution
thereof and Tencor will not sell or otherwise dispose of such shares in
violation of applicable law or this Agreement.
7. CERTAIN RIGHTS
(a) TENCOR PUT. At the request of and upon notice by Tencor (the "PUT
NOTICE"), at any time during the period during which the Option is exercisable
pursuant to Section 2 (the "PURCHASE PERIOD") or in accordance with subparagraph
(iv) below, KLA (or any successor entity thereof) shall purchase from Tencor the
Option, to the extent not previously exercised, at the price set forth in
subparagraph (i) below (as limited by subparagraph (iii) below), and the Option
Shares, if any, acquired by Tencor pursuant thereto, at the price set forth in
subparagraph (ii) below (as limited by subparagraph (iii) below):
(i) The difference between the "MARKET/TENDER OFFER PRICE" for KLA
Shares as of the date Tencor gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any Acquisition
Proposal which was made prior to such date and not terminated or withdrawn
as of such date and (B) the highest closing sale price of KLA Shares on the
Nasdaq National Market during the twenty (20) trading days ending on the
trading day immediately preceding such date) and the Exercise Price,
multiplied by the number of KLA Shares purchasable pursuant to the Option,
but only if the Market/Tender Offer Price is greater than the
4
Exercise Price. For purposes of determining the highest price offered
pursuant to any Acquisition Proposal which involves consideration other
than cash, the value of such consideration shall be equal to the higher of
(x) if securities of the same class of the proponent as such consideration
are traded on any national securities exchange or by any registered
securities association, a value based on the closing sale price or asked
price for such securities on their principal trading market on such date
and (y) the value ascribed to such consideration by the proponent of such
Acquisition Proposal, or if no such value is ascribed, a value determined
in good faith by the Board of Directors of KLA.
(ii) The Exercise Price paid by Tencor for KLA Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of KLA Shares so
purchased. If Tencor issued Tencor Shares in connection with any exercise
of the Option, the Exercise Price in connection with such exercise shall be
calculated as set forth in the last sentence of Section 4 as if Tencor had
exercised its right to pay cash instead of issuing Tencor Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to
this Section 7 KLA shall not be required to pay Tencor in excess of an
aggregate of (x) $60,000,000 plus (y) the Exercise Price paid by Tencor for
KLA Shares acquired pursuant to the Option minus (z) any amounts paid to
Tencor by KLA pursuant to Section 7.3(c) of the Merger Agreement.
(iv) Notwithstanding the foregoing, upon the commencement of a tender
or exchange offer for 25% or more of any class of KLA's capital stock
(and/or during any time which such a tender or exchange offer remains
open), Tencor may deliver to KLA a Put Notice (a "CONDITIONAL PUT NOTICE")
specifying that it wishes to exercise and close immediately prior to the
consummation of such tender or exchange offer, a sale to KLA pursuant to
this Section 7(a) of the Option, to the extent not previously exercised,
and the Option Shares, if any, acquired by Tencor pursuant thereto. Unless
the Conditional Put Notice is withdrawn by Tencor, the Closing of any such
sale specified in a Conditional Put Notice shall take place immediately
prior to the consummation of such tender or exchange offer. In the event
that such tender or exchange offer is not consummated prior to termination
of the Option, such Conditional Put Notice shall be void and of no further
force and effect.
(b) REDELIVERY OF TENCOR SHARES. If Tencor has acquired KLA Shares
pursuant to exercise of the Option by the issuance and delivery of Tencor
Shares, then KLA shall, if so requested by Tencor, in fulfillment of its
obligation pursuant to the first clause of Section 7(a)(ii) with respect to the
Exercise Price paid in the form of Tencor Shares only, redeliver the
certificate(s) for such Tencor Shares to Tencor, free and clear of all claims,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever, other than those imposed by Tencor.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. In the event Tencor
exercises its rights under Sections 7(a) or (b), KLA shall, within ten business
days after Tencor delivers notice pursuant to Section 7(a), pay the required
amount to Tencor in immediately available funds (and Tencor Shares, if
applicable) and Tencor shall surrender to KLA the Option and the certificates
evidencing the KLA Shares purchased by Tencor pursuant thereto, and Tencor shall
represent and warrant that such shares are then free and clear of all claims,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever, other than those imposed by KLA.
(d) KLA CALL. If Tencor has acquired Option Shares pursuant to exercise of
the Option (the date of any Closing relating to any such exercise herein
referred to as an "EXERCISE DATE") and no Acquisition Proposal with respect to
KLA has been consummated at any time after the date of this Agreement and prior
to the date one year following such Exercise Date (nor has KLA entered into a
definitive agreement or letter of intent with respect to such an Acquisition
Proposal which agreement or letter of intent remains in effect at the end of
such year), then, at any time after the date one year following such Exercise
Date and prior to the date eighteen months following such Exercise Date, KLA may
require Tencor, upon delivery to Tencor of written notice, to sell to KLA any
KLA Shares held by Tencor as of the day that is ten business days after the date
of such notice, up to a number of shares equal to the number of Option Shares
acquired by Tencor pursuant to exercise of the Option in connection with such
Exercise Date. The per share purchase price for
5
such sale (the "KLA CALL PRICE") shall be equal to the Exercise Price less any
dividends paid on the KLA Shares to be purchased by KLA pursuant to this Section
7(d). The closing of any sale of KLA Shares pursuant to this Section 7(d) shall
take place at the principal offices of KLA at a time and on a date designated by
KLA in the aforementioned notice to Tencor, which date shall be no more than 20
and no less than 12 business days from the date of such notice. The KLA Call
Price shall be paid in immediately available funds, provided that, in the event
Tencor has acquired Option Shares pursuant to exercise of the Option by issuance
and delivery of Tencor Shares, at the option of KLA, the KLA Call Price for part
or all of any purchase of KLA Shares pursuant to this Section 7(d), up to a
number of such shares equal to the number of Option Shares acquired by Tencor by
issuance and delivery of Tencor Shares, shall be paid by delivery of a number of
Tencor Shares equal to the KLA Call Price divided by the closing sale price of
Tencor Shares on the Nasdaq National Market for the trading day immediately
preceding the date of the Exercise Date on which the Option Shares to be
purchased by KLA pursuant to this Section 7(d) were originally issued to Tencor.
(e) RESTRICTIONS ON TRANSFER. Until the expiration of the Purchase Period,
KLA shall not sell, transfer or otherwise dispose of any Tencor Shares acquired
by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
(a) Following the termination of the Merger Agreement, each party hereto (a
"HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other party
(the "REGISTRANT") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this Agreement
(the "REGISTRABLE SECURITIES") in order to permit the sale or other disposition
of such shares pursuant to a bona fide firm commitment underwritten public
offering in which the Holder and the underwriters shall effect as wide a
distribution of such Registrable Securities as is reasonably practicable and
shall use reasonable efforts to prevent any person or group from purchasing
through such offering shares representing more than 1% of the outstanding shares
of Common Stock of the Registrant on a fully diluted basis (a "PERMITTED
OFFERING"); provided, however, that any such Registration Notice must relate to
a number of shares equal to at least 2% of the outstanding shares of Common
Stock of the Registrant on a fully diluted basis and that any rights to require
registration hereunder shall terminate with respect to any shares that may be
sold pursuant to Rule 144(k) under the Securities Act. The Registration Notice
shall include a certificate executed by the Holder and its proposed managing
underwriter, which underwriter shall be an investment banking firm of nationally
recognized standing (the "MANAGER"), stating that (i) the Holder and the Manager
have a good faith intention to commence a Permitted Offering and (ii) the
Manager in good faith believes that, based on the then prevailing market
conditions, it will be able to sell the Registrable Securities at a per share
price equal to at least 80% of the per share average of the closing sale prices
of the Registrant's Common Stock on the Nasdaq National Market for the twenty
trading days immediately preceding the date of the Registration Notice. The
Registrant shall thereupon have the option exercisable by written notice
delivered to the Holder within ten business days after the receipt of the
Registration Notice, irrevocably to agree to purchase all or any part of the
Registrable Securities for cash at a price (the "OPTION PRICE" equal to the
product of (i) the number of Registrable Securities so purchased and (ii) the
per share average of the closing sale prices of the Registrant's Common Stock on
the Nasdaq National Market for the twenty trading days immediately preceding the
date of the Registration Notice. Any such purchase of Registrable Securities by
the Registrant hereunder shall take place at a closing to be held at the
principal executive offices of the Registrant or its counsel at any reasonable
date and time designated by the Registrant in such notice within 10 business
days after delivery of such notice. The payment for the shares to be purchased
shall be made by delivery at the time of such closing of the Option Price in
immediately available funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be
6
required to file any such registration statement during any period of time (not
to exceed 40 days after a Registration Notice in the case of clause (A) below or
90 days after a Registration Notice in the case of clauses (B) and (C) below)
when (A) the Registrant is in possession of material non-public information
which it reasonably believes would be detrimental to be disclosed at such time
and, in the written opinion of counsel to such Registrant, such information
would have to be disclosed if a registration statement were filed at that time;
(B) such Registrant is required under the Securities Act to include audited
financial statements for any period in such registration statement and such
financial statements are not yet available for inclusion in such registration
statement; or (C) such Registrant determines, in its reasonable judgment, that
such registration would interfere with any financing, acquisition or other
material transaction involving the Registrant. If consummation of the sale of
any Registrable Securities pursuant to a registration hereunder does not occur
within 180 days after the filing with the SEC of the initial registration
statement therefor, the provisions of this Section 8 shall again be applicable
to any proposed registration, it being understood that neither party shall be
entitled to more than an aggregate of two effective registration statements
hereunder. The Registrant shall use all reasonable efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified for
sale under the securities or blue sky laws of such jurisdictions as the Holder
may reasonably request and shall continue such registration or qualification in
effect in such jurisdictions; provided, however, that the Registrant shall not
be required to qualify to do business in, or consent to general service of
process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to such Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all material facts required to
be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to the Holder, and the Registrant shall provide to
the underwriters such documentation (including certificates, opinions of counsel
and "comfort" letters from auditors) as are customary in connection with
underwritten public offerings and as such underwriters may reasonably require.
In connection with any registration, the Holder and the Registrant agree to
enter into an underwriting agreement reasonably acceptable to each such party,
in form and substance customary for transactions of this type with the
underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors
and officers and each person who controls the Holder within the meaning of
Section 15 of the Securities Act, and each underwriter of the Registrant's
securities, with respect to any registration, qualification or compliance
which has been effected pursuant to this Agreement, against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or
any amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by the Registrant of any rule
or regulation promulgated under the Securities Act applicable to the
Registrant in connection with any such registration, qualification or
compliance, and the Registrant will reimburse the Holder and, each of its
directors and officers and each person who controls the Holder within the
meaning of Section 15 of the Securities Act, and each underwriter for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage,
liability or action, provided that the Registrant will not be liable in any
such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or
alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Registrant by such
Holder or director or officer or controlling person or underwriter seeking
indemnification.
7
(ii) The Holder will indemnify the Registrant, each of its directors
and officers and each underwriter of the Registrant's securities covered by
such registration statement and each person who controls the Registrant
within the meaning of Section 15 of the Securities Act, against all claims,
losses, damages and liabilities (or actions in respect thereof), including
any of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission
(or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
or any violation by the Holder of any rule or regulation promulgated under
the Securities Act applicable to the Holder in connection with any such
registration, qualification or compliance, and will reimburse the
Registrant, such directors, officers or control persons or underwriters for
any legal or any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Registrant by the Holder for use
therein, provided that in no event shall any indemnity under this Section
8(e) exceed the gross proceeds of the offering received by the Holder..
(iii) Each party entitled to indemnification under this Section 8(e)
(the "INDEMNIFIED PARTY") shall give notice to the party required to
provide indemnification (the "INDEMNIFYING PARTY") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense at such party's expense; provided, however,
that the Indemnifying Party shall pay such expense if representation of the
Indemnified Party by counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interests between the
Indemnified Party and any other party represented by such counsel in such
proceeding, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 8(e) unless the failure to give such
notice is materially prejudicial to an Indemnifying Party's ability to
defend such action. No Indemnifying Party, in the defense of any such claim
or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation. No Indemnifying Party shall be
required to indemnify any Indemnified Party with respect to any settlement
entered into without such Indemnifying Party's prior consent (which shall
not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
(a) In the event of any change in the KLA Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option, the Exercise Ratio and the
Exercise Price shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction so that Tencor shall receive,
upon exercise of the Option, the number and class of shares or other securities
or property that Tencor would have received in respect of the KLA Shares if the
Option had been exercised immediately prior to such event or the record date
therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), Tencor shall not
adopt a shareholders rights plan (a so-called "poison pill"), and KLA shall not
amend the KLA Rights Plan or adopt a new shareholders rights plan, that contains
provisions for the distribution of rights thereunder as a result of the other
party being the beneficial owner of shares of the first party by virtue of the
Option being exercisable or having been exercised (or as a result of such other
party
8
beneficially owning shares issuable in respect of any Option Shares). It is
understood, however, that following termination (if any) of the Merger
Agreement, a party may adopt (or in the case of KLA, adopt and/or amend) a
shareholders rights plan, that contains provisions for the distribution of
rights thereunder as a result of the other party being the beneficial owner of
shares of the first party in addition to those that may be beneficially owned by
virtue of the Option being exercisable or having been exercised (or as a result
of such other party beneficially owning shares issuable in respect of any Option
Shares).
10. RESTRICTIVE LEGENDS
Each certificate representing Option Shares issued to Tencor hereunder, and
each certificate representing Tencor Shares delivered to KLA at a Closing, shall
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR
SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF
JANUARY 14, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
11. LISTING AND HSR FILING
KLA, upon the request of Tencor, shall promptly file an application to list
the KLA Shares to be acquired upon exercise of the Option for quotation on the
Nasdaq National Market and shall use its best efforts to obtain approval of such
listing as soon as practicable. Tencor, upon the request of KLA, shall promptly
file an application to list the Tencor Shares issued and delivered to KLA
pursuant to Section 4 for quotation on the Nasdaq National Market and shall use
its best efforts to obtain approval of such listing as soon as practicable.
Promptly after the date hereof, each of the parties hereto shall promptly file
with the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice all required premerger notification and report
forms and other documents and exhibits required to be filed under the HSR Act to
permit the acquisition of the KLA Shares subject to the Option at the earliest
possible date.
12. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon any
person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions of
Section 8 shall, upon consummation of such sale, be free of the restrictions
imposed with respect to such shares by this Agreement and any transferee of such
shares shall not be entitled to the rights of such party. Certificates
representing shares sold in a registered public offering pursuant to Section 8
shall not be required to bear the legend set forth in Section 10.
13. SPECIFIC PERFORMANCE
The parties recognize and agree that if for any reason any of the
provisions of this Agreement are not performed in accordance with their specific
terms or are otherwise breached, immediate and irreparable harm or injury would
be caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be brought
in equity to enforce the provisions of the Agreement, neither party will allege,
and each party hereby waives the defense, that there is an adequate remedy at
law.
9
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof.
15. FURTHER ASSURANCES
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
16. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall negotiate
in good faith and shall execute and deliver an amendment to this Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision.
17. NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by commercial delivery service,
or sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers for
a party as shall be specified by like notice):
(1) if to Tencor, to:
Tencor Instruments
One Technology Drive
Milpitas, California 95035
Attention: President
Telephone No.: (408) 970-9500
Telecopy No.: (408) 988-6420
with a copy to:
Heller, Ehrman, White & McAuliffe
525 University Avenue
Palo Alto, CA 94301
Attention: Sarah A. O'Dowd, Esq.
Telephone No.: 415-324-7045
Telecopy No.: 415-324-0638
10
(2) if to KLA, to:
KLA Instruments Corporation
160 Rio Robles
P.O. Box 49055
San Jose, California 95161-9055
Attention: Chief Executive Officer
Telephone No.: (408) 434-4200
Telecopy No.: (408) 468-4266
with a copy to:
KLA Instruments Corporation
160 Rio Robles
P.O. Box 49055
San Jose, California 95161-9055
Attention: General Counsel
Telephone No.: (408) 434-4200
Telecopy No.: (408) 468-4266
with another copy to:
Wilson, Sonsini, Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Telephone No.: (415) 493-9300
Telecopy No.: (415) 493-6811
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed entirely within such State.
19. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
20. EXPENSES
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions contemplated
by this Agreement shall be paid by the party incurring such expenses.
21. AMENDMENTS; WAIVER
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
22. ASSIGNMENT
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure to
the benefit of and be binding upon any successor of a party hereto.
11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
TENCOR INSTRUMENTS
By: /s/ JON D. TOMPKINS
------------------------------------
Name: Jon D. Tompkins
Title: President and Chief Executive
Officer
KLA INSTRUMENTS CORPORATION
By: /s/ KENNETH LEVY
------------------------------------
Name: Kenneth Levy
Title: Chief Executive Officer
***STOCK OPTION AGREEMENT***
(KLA option to TENCOR)
[OPTION FROM TENCOR TO KLA]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of January 14, 1997 (the "AGREEMENT")
is entered into by and between Tencor Instruments, a California corporation
("TENCOR"), and KLA Instruments Corporation, a Delaware corporation ("KLA").
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
Tencor, KLA and Tiger Acquisition Corp., a California corporation and a wholly
owned subsidiary of KLA ("SUB"), are entering into an Agreement and Plan of
Reorganization (the "MERGER AGREEMENT"), which provides that, among other
things, upon the terms and subject to the conditions thereof, Tencor and KLA
will to enter into a business combination transaction to pursue their long-term
business strategies (the "MERGER"); and
WHEREAS, as a condition to KLA's willingness to enter into the Merger
Agreement, KLA has requested that Tencor agree, and Tencor has so agreed, to
grant to KLA an option to acquire shares of Tencor's Common Stock, no par value,
upon the terms and subject to the conditions set forth herein;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
Tencor hereby grants to KLA an irrevocable option (the "OPTION") to acquire
up to a number of shares of the Common Stock, no par value, of Tencor ("TENCOR
SHARES") equal to 19.9% of the issued and outstanding shares as of the first
date, if any, upon which an Exercise Event (as defined in Section 2(a) below)
shall occur (the "OPTION SHARES") (provided that the Option Shares shall not
upon timely issuance constitute more than 19.9% of the then issued and
outstanding Tencor Shares), in the manner set forth below (i) by paying cash at
a price of $40.00 per share (the "EXERCISE PRICE") and/or, at KLA's election,
(ii) by exchanging therefor shares of the Common Stock, par value $0.001 per
share, of KLA ("KLA SHARES") at a rate (the "EXERCISE RATIO"), for each Option
Share, of a number of KLA Shares equal to the Exercise Price divided by the
closing sale price of KLA Shares on the Nasdaq National Market for the trading
day immediately preceding the date of the Closing (as defined below) of the
particular Option exercise. All references in this Agreement to KLA Shares
hereunder shall be deemed to include the associated KLA Rights. Capitalized
terms used in this Agreement but not defined herein shall have the meanings
ascribed thereto in the Merger Agreement.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
(a) The Option may be exercised by KLA, in whole or in part, at any time or
from time to time, (i) immediately prior to the consummation of a tender or
exchange offer for 25% or more of any class of Tencor's capital stock, (ii) upon
the occurrence of all of the events specified in Section 7.3(b)(ii) of the
Merger Agreement, (iii) if and when the Board of Directors of Tencor shall have
withheld, withdrawn or modified in a manner adverse to KLA its recommendation in
favor of approving the issuance of the shares of Tencor Common Stock by virtue
of the Merger after receipt of and in connection with an Acquisition Proposal
with respect to Tencor or (iv) if and when the Board of Directors of Tencor
recommends a Tencor Superior Proposal to the shareholders of Tencor (any of the
events specified in clauses (i), (ii), (iii)or (iv) of this sentence being
referred to herein as an "EXERCISE EVENT"). In the event KLA wishes to exercise
the Option, KLA shall deliver to Tencor a written notice (each an "EXERCISE
NOTICE") specifying the total number of Option Shares it wishes to acquire and
the form of consideration to be paid. Each closing of a
purchase of Option Shares (a "CLOSING") shall occur on a date and at a time
prior to the termination of the Option designated by KLA in an Exercise Notice
delivered at least two business days prior to the date of such Closing, which
Closing shall be held at the principal offices of Tencor.
(b) Notwithstanding the foregoing, upon the commencement of a tender or
exchange offer for 25% or more of any class of Tencor's capital stock (and/or
during any time which such a tender or exchange offer remains open), KLA may
deliver to Tencor an Exercise Notice (a "CONDITIONAL EXERCISE NOTICE")
specifying that it wishes to exercise and close a purchase of Option Shares
immediately prior to the consummation of such tender or exchange offer. Unless
the Conditional Exercise Notice is withdrawn by KLA, the Closing of a purchase
of Option Shares specified in a Conditional Exercise Notice shall take place
immediately prior to the consummation of such tender or exchange offer. In the
event that such tender or exchange offer is not consummated prior to termination
of the Option, such Conditional Exercise Notice shall be void and of no further
force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 180 days following the termination of the Merger Agreement pursuant to
Article VII thereof if an Exercise Event shall have occurred on or prior to the
date of such termination, (iii) 12 months following the date on which the Merger
Agreement is terminated pursuant to Article VII thereof if (x) there shall have
been a Tencor Negative Vote and (y) prior to such Tencor Negative Vote there
shall have occurred an Acquisition Proposal with respect to Tencor which shall
have been publicly disclosed and not withdrawn, (iv) 12 months following the
date on which the Merger Agreement is terminated pursuant to Article VII thereof
if prior thereto there shall have commenced a tender or exchange offer for 25%
or more of any class of Tencor's capital stock and (v) the date on which the
Merger Agreement is terminated if neither an Exercise Event , nor both of the
events specified in subclauses (x) and (y) of clause (iii), nor the commencement
of a tender or exchange offer for 25% or more of any class of Tencor's capital
stock shall have occurred on or prior to such date of termination; provided,
however, that if the Option cannot be exercised by reason of any applicable
government order or because the waiting period related to the issuance of the
Option Shares under the HSR Act shall not have expired or been terminated, then
the Option shall not terminate until the tenth business day after such
impediment to exercise shall have been removed or shall have become final and
not subject to appeal. Notwithstanding the foregoing, the Option may not be
exercised if (i) KLA shall have breached in any material respect any of its
covenants or agreements contained in the Merger Agreement or (ii) the
representations and warranties of KLA contained in the Merger Agreement shall
not have been true and correct in all material respects on and as of the date
when made.
(d) If KLA receives in the aggregate pursuant to Section 7.3(b) of the
Merger Agreement together with proceeds in connection with any sales or other
dispositions of Option Shares and any dividends received by KLA declared on
Option Shares, more than the sum of (x) $40,000,000 plus (y) the Exercise Price
multiplied by the number of Tencor Shares purchased by KLA pursuant to the
Option, then all proceeds to KLA in excess of such sum shall be remitted by KLA
to Tencor.
3. CONDITIONS TO CLOSING
The obligation of Tencor to issue Option Shares to KLA hereunder is subject
to the conditions that (a) any waiting period under the HSR Act applicable to
the issuance of the Option Shares hereunder shall have expired or been
terminated; (b) all material consents, approvals, orders or authorizations of,
or registrations, declarations or filings with, any Federal, state or local
administrative agency or commission or other Federal state or local governmental
authority or instrumentality, if any, required in connection with the issuance
of the Option Shares hereunder shall have been obtained or made, as the case may
be; and (c) no preliminary or permanent injunction or other order by any court
of competent jurisdiction prohibiting or otherwise restraining such issuance
shall be in effect. It is understood and agreed that at any time during which
the Option is exercisable or if KLA shall have delivered to Tencor a Conditional
Exercise Notice, the parties will use their respective best efforts to satisfy
all conditions to Closing, so that a Closing may take place as promptly as
practicable, and in any event, prior to consummation of a tender or exchange
offer for shares of Tencor capital stock; provided that neither Tencor nor KLA
nor any subsidiary or affiliate thereof will be required to agree to any
divestiture by itself or any of its affiliates of shares of capital stock or of
any business,
2
assets or property, or the imposition of any material limitation on the ability
of any of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
4. CLOSING
At any Closing, (a) Tencor shall deliver to KLA a single certificate in
definitive form representing the number of Tencor Shares designated by KLA in
its Exercise Notice, such certificate to be registered in the name of KLA and to
bear the legend set forth in Section 10 hereof, against delivery of (b) payment
by KLA to Tencor of the aggregate purchase price for the Tencor Shares so
designated and being purchased by delivery of (i) a certified check or bank
check and/or, at KLA's election, (ii) a single certificate in definitive form
representing the number of KLA Shares being issued by KLA in consideration
therefor (based on the Exercise Ratio), such certificate to be registered in the
name of Tencor and to bear the legend set forth in Section 10 hereof.
5. REPRESENTATIONS AND WARRANTIES OF TENCOR
Tencor represents and warrants to KLA that (a) Tencor is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by Tencor and consummation by Tencor of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Tencor and no other corporate proceedings on the
part of Tencor are necessary to authorize this Agreement or any of the
transactions contemplated hereby; (c) this Agreement has been duly executed and
delivered by Tencor and constitutes a legal, valid and binding obligation of
Tencor and, assuming this Agreement constitutes a legal, valid and binding
obligation of KLA, is enforceable against Tencor in accordance with its terms,
except as enforceability may be limited by bankruptcy and other laws affecting
the rights and remedies of creditors generally and general principles of equity;
(d) except for any filings required under the HSR Act, Tencor has taken all
necessary corporate and other action to authorize and reserve for issuance and
to permit it to issue upon exercise of the Option, and at all times from the
date hereof until the termination of the Option will have reserved for issuance,
a sufficient number of unissued Tencor Shares for KLA to exercise the Option in
full and will take all necessary corporate or other action to authorize and
reserve for issuance all additional Tencor Shares or other securities which may
be issuable pursuant to Section 9(a) upon exercise of the Option, all of which,
upon their issuance and delivery in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable; (e) upon delivery of the
Tencor Shares and any other securities to KLA upon exercise of the Option, KLA
will acquire such Tencor Shares or other securities free and clear of all
material claims, liens, charges, encumbrances and security interests of any kind
or nature whatsoever, excluding those imposed by KLA; (f) the execution and
delivery of this Agreement by Tencor do not, and the performance of this
Agreement by Tencor will not, (i) violate the Articles of Incorporation or
By-Laws of Tencor, (ii) conflict with or violate any order applicable to Tencor
or any of its subsidiaries or by which they or any of their property is bound or
affected or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give rise to any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or encumbrance on any of the property or
assets of Tencor or any of its subsidiaries pursuant to, any contract or
agreement to which Tencor or any of its subsidiaries is a party or by which
Tencor or any of its subsidiaries or any of their property is bound or affected,
except, in the case of clauses (ii) and (iii) above, for violations, conflicts,
breaches, defaults, rights of termination, amendment, acceleration or
cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on Tencor; (g) the execution and
delivery of this Agreement by Tencor does not, and the performance of this
Agreement by Tencor will not, require any consent, approval, authorization or
permit of, or filing with, or notification to, any Governmental Entity except
pursuant to the HSR Act; and (h) any KLA Shares acquired pursuant to this
Agreement will not be acquired by Tencor with a view to the public distribution
thereof and Tencor will not sell or otherwise dispose of such shares in
violation of applicable law or this Agreement.
3
6. REPRESENTATIONS AND WARRANTIES OF KLA
KLA represents and warrants to Tencor that (a) KLA is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder; (b) the execution and
delivery of this Agreement by KLA and the consummation by KLA of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of KLA and no other corporate proceedings on the
part of KLA are necessary to authorize this Agreement or any of the transactions
contemplated hereby; (c) this Agreement has been duly executed and delivered by
KLA and constitutes a legal, valid and binding obligation of KLA and, assuming
this Agreement constitutes a legal, valid and binding obligation of Tencor, is
enforceable against KLA in accordance with its terms, except as enforceability
may be limited by bankruptcy and other laws affecting the rights and remedies of
creditors generally and general principles of equity; (d) except for any filings
required under the HSR Act, KLA has taken (or will in a timely manner take) all
necessary corporate and other action to authorize and reserve for issuance and
to permit it to issue upon exercise of the Option and will take all necessary
corporate or other action to authorize and reserve for issuance all additional
KLA Shares or other securities which may be issuable pursuant to Section 9(b)
upon exercise of the Option, all of which, upon their issuance and delivery in
accordance with the terms of this Agreement, will be validly issued, fully paid
and nonassessable; (e) upon delivery of KLA Shares to Tencor in consideration of
any acquisition of Tencor Shares pursuant hereto, Tencor will acquire such KLA
Shares free and clear of all material claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever, excluding those imposed by
Tencor; (f) the execution and delivery of this Agreement by KLA do not, and the
performance of this Agreement by KLA will not, (i) violate the Certificate of
Incorporation or By-Laws of KLA, (ii) conflict with or violate any order
applicable to KLA or any of its subsidiaries or by which they or any of their
property is bound or affected or (iii) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give rise to any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the property or assets of KLA or any of its subsidiaries
pursuant to, any contract or agreement to which KLA or any of its subsidiaries
is a party or by which KLA or any of its subsidiaries or any of their property
is bound or affected, except, in the case of clauses (ii) and (iii) above, for
violations, conflicts, breaches, defaults, rights of termination, amendment,
acceleration or cancellation, liens or encumbrances which would not,
individually or in the aggregate, have a Material Adverse Effect on KLA; (g) the
execution and delivery of this Agreement by KLA does not, and the performance of
this Agreement by KLA will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any Governmental Entity except
pursuant to the HSR Act; and (h) any Tencor Shares acquired upon exercise of the
Option will not be acquired by KLA with a view to the public distribution
thereof and KLA will not sell or otherwise dispose of such shares in violation
of applicable law or this Agreement.
7. CERTAIN RIGHTS
(a) KLA PUT. At the request of and upon notice by KLA (the "PUT NOTICE"),
at any time during the period during which the Option is exercisable pursuant to
Section 2 (the "PURCHASE PERIOD") or in accordance with subparagraph (iv) below,
Tencor (or any successor entity thereof) shall purchase from KLA the Option, to
the extent not previously exercised, at the price set forth in subparagraph (i)
below (as limited by subparagraph (iii) below), and the Option Shares, if any,
acquired by KLA pursuant thereto, at the price set forth in subparagraph (ii)
below (as limited by subparagraph (iii) below):
(i) The difference between the "MARKET/TENDER OFFER PRICE" for Tencor
Shares as of the date KLA gives notice of its intent to exercise its rights
under this Section 7(a) (defined as the higher of (A) the highest price per
share offered as of such date pursuant to any Acquisition Proposal which
was made prior to such date and not terminated or withdrawn as of such date
and (B) the highest closing sale price of Tencor Shares on the Nasdaq
National Market during the twenty (20) trading days ending on the trading
day immediately preceding such date) and the Exercise Price, multiplied by
the number of Tencor Shares purchasable pursuant to the Option, but only if
the Market/Tender Offer Price is greater than the Exercise Price. For
purposes of determining the highest price offered pursuant to any
4
Acquisition Proposal which involves consideration other than cash, the
value of such consideration shall be equal to the higher of (x) if
securities of the same class of the proponent as such consideration are
traded on any national securities exchange or by any registered securities
association, a value based on the closing sale price or asked price for
such securities on their principal trading market on such date and (y) the
value ascribed to such consideration by the proponent of such Acquisition
Proposal, or if no such value is ascribed, a value determined in good faith
by the Board of Directors of Tencor.
(ii) The Exercise Price paid by KLA for Tencor Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of Tencor Shares
so purchased. If KLA issued KLA Shares in connection with any exercise of
the Option, the Exercise Price in connection with such exercise shall be
calculated as set forth in the last sentence of Section 4 as if KLA had
exercised its right to pay cash instead of issuing KLA Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to
this Section 7 Tencor shall not be required to pay KLA in excess of an
aggregate of (x) $40,000,000 plus (y) the Exercise Price paid by KLA for
Tencor Shares acquired pursuant to the Option minus (z) any amounts paid to
KLA by Tencor pursuant to Section 7.3(b) of the Merger Agreement.
(iv) Notwithstanding the foregoing, upon the commencement of a tender
or exchange offer for 25% or more of any class of Tencor's capital stock
(and/or during any time which such a tender or exchange offer remains
open), KLA may deliver to Tencor a Put Notice (a "CONDITIONAL PUT NOTICE")
specifying that it wishes to exercise and close immediately prior to the
consummation of such tender or exchange offer, a sale to Tencor pursuant to
this Section 7(a) of the Option, to the extent not previously exercised,
and the Option Shares, if any, acquired by KLA pursuant thereto,. Unless
the Conditional Put Notice is withdrawn by KLA, the Closing of any such
sale specified in a Conditional Put Notice shall take place immediately
prior to the consummation of such tender or exchange offer. In the event
that such tender or exchange offer is not consummated prior to termination
of the Option, such Conditional Put Notice shall be void and of no further
force and effect.
(b) REDELIVERY OF KLA SHARES. If KLA has acquired Tencor Shares pursuant to
exercise of the Option by the issuance and delivery of KLA Shares, then Tencor
shall, if so requested by KLA, in fulfillment of its obligation pursuant to the
first clause of Section 7(a)(ii) with respect to the Exercise Price paid in the
form of KLA Shares only, redeliver the certificate(s) for such KLA Shares to
KLA, free and clear of all claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever, other than those imposed by KLA.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. In the event KLA exercises
its rights under Sections 7(a) or (b), Tencor shall, within ten business days
after KLA delivers notice pursuant to Section 7(a), pay the required amount to
KLA in immediately available funds (and KLA Shares, if applicable) and KLA shall
surrender to Tencor the Option and the certificates evidencing the Tencor Shares
purchased by KLA pursuant thereto, and KLA shall represent and warrant that such
shares are then free and clear of all claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever, other than those imposed by
Tencor.
(d) TENCOR CALL. If KLA has acquired Option Shares pursuant to exercise of
the Option (the date of any Closing relating to any such exercise herein
referred to as an "EXERCISE DATE") and no Acquisition Proposal with respect to
Tencor has been consummated at any time after the date of this Agreement and
prior to the date one year following such Exercise Date (nor has Tencor entered
into a definitive agreement or letter of intent with respect to such an
Acquisition Proposal which agreement or letter of intent remains in effect at
the end of such year), then, at any time after the date one year following such
Exercise Date and prior to the date eighteen months following such Exercise
Date, Tencor may require KLA, upon delivery to KLA of written notice, to sell to
Tencor any Tencor Shares held by KLA as of the day that is ten business days
after the date of such notice, up to a number of shares equal to the number of
Option Shares acquired by KLA pursuant to exercise of the Option in connection
with such Exercise Date. The per share purchase price for such sale (the "TENCOR
CALL PRICE") shall be equal to the Exercise Price less any
5
dividends paid on the Tencor Shares to be purchased by Tencor pursuant to this
Section 7(d). The closing of any sale of Tencor Shares pursuant to this Section
7(d) shall take place at the principal offices of Tencor at a time and on a date
designated by Tencor in the aforementioned notice to KLA, which date shall be no
more than 20 and no less than 12 business days from the date of such notice. The
Tencor Call Price shall be paid in immediately available funds, provided that,
in the event KLA has acquired Option Shares pursuant to exercise of the Option
by issuance and delivery of KLA Shares, at the option of Tencor, the Tencor Call
Price for part or all of any purchase of Tencor Shares pursuant to this Section
7(d), up to a number of such shares equal to the number of Option Shares
acquired by KLA by issuance and delivery of KLA Shares, shall be paid by
delivery of a number of KLA Shares equal to the Tencor Call Price divided by the
closing sale price of KLA Shares on the Nasdaq National Market for the trading
day immediately preceding the date of the Exercise Date on which the Option
Shares to be purchased by Tencor pursuant to this Section 7(d) were originally
issued to KLA.
(e) RESTRICTIONS ON TRANSFER. Until the expiration of the Purchase Period,
Tencor shall not sell, transfer or otherwise dispose of any KLA Shares acquired
by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
(a) Following the termination of the Merger Agreement, each party hereto (a
"HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other party
(the "REGISTRANT") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this Agreement
(the "REGISTRABLE SECURITIES") in order to permit the sale or other disposition
of such shares pursuant to a bona fide firm commitment underwritten public
offering in which the Holder and the underwriters shall effect as wide a
distribution of such Registrable Securities as is reasonably practicable and
shall use reasonable efforts to prevent any person or group from purchasing
through such offering shares representing more than 1% of the outstanding shares
of Common Stock of the Registrant on a fully diluted basis (a "PERMITTED
OFFERING"); provided, however, that any such Registration Notice must relate to
a number of shares equal to at least 2% of the outstanding shares of Common
Stock of the Registrant on a fully diluted basis and that any rights to require
registration hereunder shall terminate with respect to any shares that may be
sold pursuant to Rule 144(k) under the Securities Act. The Registration Notice
shall include a certificate executed by the Holder and its proposed managing
underwriter, which underwriter shall be an investment banking firm of nationally
recognized standing (the "MANAGER"), stating that (i) the Holder and the Manager
have a good faith intention to commence a Permitted Offering and (ii) the
Manager in good faith believes that, based on the then prevailing market
conditions, it will be able to sell the Registrable Securities at a per share
price equal to at least 80% of the per share average of the closing sale prices
of the Registrant's Common Stock on the Nasdaq National Market for the twenty
trading days immediately preceding the date of the Registration Notice. The
Registrant shall thereupon have the option exercisable by written notice
delivered to the Holder within ten business days after the receipt of the
Registration Notice, irrevocably to agree to purchase all or any part of the
Registrable Securities for cash at a price (the "OPTION PRICE" equal to the
product of (i) the number of Registrable Securities so purchased and (ii) the
per share average of the closing sale prices of the Registrant's Common Stock on
the Nasdaq National Market for the twenty trading days immediately preceding the
date of the Registration Notice. Any such purchase of Registrable Securities by
the Registrant hereunder shall take place at a closing to be held at the
principle executive offices of the Registrant or its counsel at any reasonable
date and time designated by the Registrant in such notice within 10 business
days after delivery of such notice. The payment for the shares to be purchased
shall be made by delivery at the time of such closing of the Option Price in
immediately available funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a
6
Registration Notice in the case of clause (A) below or 90 days after a
Registration Notice in the case of clauses (B) and (C) below) when (A) the
Registrant is in possession of material non-public information which it
reasonably believes would be detrimental to be disclosed at such time and, in
the written opinion of counsel to such Registrant, such information would have
to be disclosed if a registration statement were filed at that time; (B) such
Registrant is required under the Securities Act to include audited financial
statements for any period in such registration statement and such financial
statements are not yet available for inclusion in such registration statement;
or (C) such Registrant determines, in its reasonable judgment, that such
registration would interfere with any financing, acquisition or other material
transaction involving the Registrant. If consummation of the sale of any
Registrable Securities pursuant to a registration hereunder does not occur
within 180 days after the filing with the SEC of the initial registration
statement therefor, the provisions of this Section 8 shall again be applicable
to any proposed registration, it being understood that neither party shall be
entitled to more than an aggregate of two effective registration statements
hereunder. The Registrant shall use all reasonable efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified for
sale under the securities or blue sky laws of such jurisdictions as the Holder
may reasonably request and shall continue such registration or qualification in
effect in such jurisdictions; provided, however, that the Registrant shall not
be required to qualify to do business in, or consent to general service of
process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for distribution
thereof, and such other information with respect to such Holder as, in the
reasonable judgment of counsel for the Registrant, is necessary to enable the
Registrant to include in a registration statement all material facts required to
be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to the Holder, and the Registrant shall provide to
the underwriters such documentation (including certificates, opinions of counsel
and "comfort" letters from auditors) as are customary in connection with
underwritten public offerings and as such underwriters may reasonably require.
In connection with any registration, the Holder and the Registrant agree to
enter into an underwriting agreement reasonably acceptable to each such party,
in form and substance customary for transactions of this type with the
underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors
and officers and each person who controls the Holder within the meaning of
Section 15 of the Securities Act, and each underwriter of the Registrant's
securities, with respect to any registration, qualification or compliance
which has been effected pursuant to this Agreement, against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or
any amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by the Registrant of any rule
or regulation promulgated under the Securities Act applicable to the
Registrant in connection with any such registration, qualification or
compliance, and the Registrant will reimburse the Holder and, each of its
directors and officers and each person who controls the Holder within the
meaning of Section 15 of the Securities Act, and each underwriter for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage,
liability or action, provided that the Registrant will not be liable in any
such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or
alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Registrant by such
Holder or director or officer or controlling person or underwriter seeking
indemnification.
7
(ii) The Holder will indemnify the Registrant, each of its directors
and officers and each underwriter of the Registrant's securities covered by
such registration statement and each person who controls the Registrant
within the meaning of Section 15 of the Securities Act, against all claims,
losses, damages and liabilities (or actions in respect thereof), including
any of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission
(or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
or any violation by the Holder of any rule or regulation promulgated under
the Securities Act applicable to the Holder in connection with any such
registration, qualification or compliance, and will reimburse the
Registrant, such directors, officers or control persons or underwriters for
any legal or any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Registrant by the Holder for use
therein, provided that in no event shall any indemnity under this Section
8(e) exceed the gross proceeds of the offering received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e)
(the "INDEMNIFIED PARTY") shall give notice to the party required to
provide indemnification (the "INDEMNIFYING PARTY") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense at such party's expense; provided, however,
that the Indemnifying Party shall pay such expense if representation of the
Indemnified Party by counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interests between the
Indemnified Party and any other party represented by such counsel in such
proceeding, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 8(e) unless the failure to give such
notice is materially prejudicial to an Indemnifying Party's ability to
defend such action. No Indemnifying Party, in the defense of any such claim
or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation. No Indemnifying Party shall be
required to indemnify any Indemnified Party with respect to any settlement
entered into without such Indemnifying Party's prior consent (which shall
not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
(a) In the event of any change in the Tencor Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option, the Exercise Ratio and the
Exercise Price shall be adjusted appropriately, and proper provision shall be
made in the agreements governing such transaction so that KLA shall receive,
upon exercise of the Option, the number and class of shares or other securities
or property that KLA would have received in respect of the Tencor Shares if the
Option had been exercised immediately prior to such event or the record date
therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), Tencor shall not
adopt a shareholders rights plan (a so-called "poison pill"), and KLA shall not
amend the KLA Rights Plan or adopt a new shareholders rights plan, that contains
provisions for the distribution of rights thereunder as a result of the other
party being the beneficial owner of shares of the first party by virtue of the
Option being exercisable or having been exercised (or as a result of such other
party
8
beneficially owning shares issuable in respect of any Option Shares). It is
understood, however, that following termination (if any) of the Merger
Agreement, a party may adopt (or in the case of KLA, adopt and/or amend) a
shareholders rights plan, that contains provisions for the distribution of
rights thereunder as a result of the other party being the beneficial owner of
shares of the first party in addition to those that may be beneficially owned by
virtue of the Option being exercisable or having been exercised (or as a result
of such other party beneficially owning shares issuable in respect of any Option
Shares).
10. RESTRICTIVE LEGENDS
Each certificate representing Option Shares issued to KLA hereunder, and
each certificate representing KLA Shares delivered to Tencor at a Closing, shall
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR
SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF
JANUARY 14, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
11. LISTING AND HSR FILING
Tencor, upon the request of KLA, shall promptly file an application to list
the Tencor Shares to be acquired upon exercise of the Option for quotation on
the Nasdaq National Market and shall use its best efforts to obtain approval of
such listing as soon as practicable. KLA, upon the request of Tencor, shall
promptly file an application to list the KLA Shares issued and delivered to
Tencor pursuant to Section 4 for quotation on the Nasdaq National Market and
shall use its best efforts to obtain approval of such listing as soon as
practicable. Promptly after the date hereof, each of the parties hereto shall
promptly file with the Federal Trade Commission and the Antitrust Division of
the United States Department of Justice all required premerger notification and
report forms and other documents and exhibits required to be filed under the HSR
Act to permit the acquisition of the Tencor Shares subject to the Option at the
earliest possible date.
12. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon any
person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions of
Section 8 shall, upon consummation of such sale, be free of the restrictions
imposed with respect to such shares by this Agreement and any transferee of such
shares shall not be entitled to the rights of such party. Certificates
representing shares sold in a registered public offering pursuant to Section 8
shall not be required to bear the legend set forth in Section 10.
13. SPECIFIC PERFORMANCE
The parties recognize and agree that if for any reason any of the
provisions of this Agreement are not performed in accordance with their specific
terms or are otherwise breached, immediate and irreparable harm or injury would
be caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be brought
in equity to enforce the provisions of the Agreement, neither party will allege,
and each party hereby waives the defense, that there is an adequate remedy at
law.
9
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the subject
matter hereof and supersede all other prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof.
15. FURTHER ASSURANCES
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
16. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall negotiate
in good faith and shall execute and deliver an amendment to this Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision.
17. NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by commercial delivery service,
or sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers for
a party as shall be specified by like notice):
(1) if to Tencor, to:
Tencor Instruments
One Technology Drive
Milpitas, California 95035
Attention: President
Telephone No.: (408) 970-9500
Telecopy No.: (408) 988-6420
with a copy to:
Heller, Ehrman, White & McAuliffe
525 University Avenue
Palo Alto, CA 94301
Attention: Sarah A. O'Dowd, Esq.
Telephone No.: (415) 324-7045
Telecopy No.: (415) 0638
(2) if to KLA, to:
KLA Instruments Corporation
160 Rio Robles
P.O. Box 49055
San Jose, California 95161-9055
Attention: Chief Executive Officer
Telephone No.: (408) 434-4200
Telecopy No.: (408) 468-4266
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with a copy to:
KLA Instruments Corporation
160 Rio Robles
P.O. Box 49055
San Jose, California 95161-9055
Attention: General Counsel
Telephone No.: (408) 434-4200
Telecopy No.: (408) 468-4266
with another copy to:
Wilson, Sonsini, Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Telephone No.: (415) 493-9300
Telecopy No.: (415) 493-6811
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed entirely within such State.
19. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
20. EXPENSES
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions contemplated
by this Agreement shall be paid by the party incurring such expenses.
21. AMENDMENTS; WAIVER
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
22. ASSIGNMENT
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure to
the benefit of and be binding upon any successor of a party hereto.
[Remainder of Page Intentionally Blank]
11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
TENCOR INSTRUMENTS
By: /s/ JON D. TOMPKINS
------------------------------------
Name: Jon D. Tompkins
Title: President and Chief Executive
Officer
KLA INSTRUMENTS CORPORATION
By: /s/ KENNETH LEVY
------------------------------------
Name: Kenneth Levy
Title: Chief Executive Officer
***STOCK OPTION AGREEMENT***
(TENCOR option to KLA)
12
ANNEX C
CHAPTER 13. DISSENTERS' RIGHTS
1300 RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DENIED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301,1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301 DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302 ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
1303 AGREED PRICE -- TIME OF PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304 DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
2
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305 APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306 DISSENTING SHAREHOLDERS' STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307 DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
1308 CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
3
1309 TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310 SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
1311 EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
1312 ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
4
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
5
ANNEX D
LOGO
Deutsche Morgan Grenfell Inc.
Technology Group
1550 El Camino Real, Suite 100
Menlo Park, California 94025
Telephone: (415) 614-5000
Fax: (415) 614-5030
January 14, 1997
Board of Directors
KLA Instruments Corporation
160 Rio Robles
San Jose, CA 95161
Members of the Board:
We understand that KLA Instruments Corporation ("KLA"), Tencor Instruments
Inc. ("Tencor"), and Tiger Acquisition Corp. ("Merger Sub"), a wholly-owned
subsidiary of KLA, have entered into an Agreement and Plan of Reorganization,
dated as of the date hereof (the "Merger Agreement"), which provides, among
other things, for the merger (the "Merger") of Merger Sub with and into Tencor.
Pursuant to the Merger, Tencor will become a wholly-owned subsidiary of KLA and
each issued and outstanding share of common stock, no par value, of Tencor (the
"Tencor Common Stock"), other than shares held in treasury or held by KLA or any
subsidiary or affiliate of KLA or Tencor or as to which dissenters' rights have
been perfected, shall be converted into the right to receive 1.0 (the "Exchange
Ratio") share of common stock, par value $0.001 per share, of KLA (the "KLA
Common Stock"). In connection with the Merger, KLA and Tencor have also entered
into (i) a stock option agreement pursuant to which Tencor has granted KLA an
option to acquire a number of shares of Tencor Common Stock (the "Tencor Option
Agreement") representing approximately 19.9% of the total shares of Tencor
Common Stock outstanding and (ii) a stock option agreement pursuant to which KLA
has granted Tencor an option to acquire a number of shares of KLA Common Stock
(the "KLA Option Agreement") representing approximately 19.9% of the total
shares of KLA Common Stock outstanding. The terms and conditions of the Merger
are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether, as of the date hereof, the
Exchange Ratio pursuant to the Merger Agreement is fair from a financial point
of view to KLA.
For purposes of the opinion set forth herein, we have:
i. analyzed certain publicly available financial statements and other
information of KLA and Tencor, respectively;
ii. analyzed certain internal financial statements and other financial
and operating data concerning Tencor prepared by the management of
Tencor;
iii. discussed the past and current operations and financial condition
and the prospects of Tencor with senior executives of Tencor and
KLA;
iv. analyzed certain internal financial statements and other financial
and operating data concerning KLA prepared by the management of
KLA;
KLA Instruments Corporation LOGO
January 14, 1997
Page 2
v. discussed the past and current operations and financial condition and the
prospects of KLA with senior executives of KLA;
vi. analyzed the pro forma impact of the Merger on the earnings per share and
consolidated capitalization of KLA;
vii. reviewed the reported prices and trading activity for the Tencor Common
Stock;
viii. compared the financial performance of Tencor and the prices and trading
activity of the Tencor Common Stock with that of certain other
publicly-traded companies which we deemed to be relevant and their
securities;
ix. reviewed the reported prices and trading activity for the KLA Common Stock;
x. compared the financial performance of KLA and the prices and trading activity
of the KLA Common Stock with that of certain other publicly-traded companies
which we deemed to be relevant and their securities;
xi. reviewed the financial terms, to the extent publicly available, of certain
merger and acquisition transactions which we deemed to be relevant;
xii. reviewed and discussed with the senior management of KLA (i) the strategic
rationale for the Merger and their assessment of the synergies and other
benefits expected to be derived from the Merger and (ii) certain alternatives
to the Merger;
xiii. participated in discussions and negotiations among representatives of Tencor
and KLA and their financial and legal advisors;
xiv. reviewed the Merger Agreement, the Tencor Option Agreement and the KLA Option
Agreement; and
xv. performed such other analyses and considered such other factors as we have
deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. We have not been provided with, and therefore have not reviewed,
any internal financial projections or forecasts relating to future operations or
prospects of KLA or Tencor, and therefore, upon the advice of KLA and Tencor, we
have assumed that the publicly available estimates of research analysts are a
reasonable basis upon which to evaluate and analyze the future financial
performance of KLA and Tencor. With respect to the information furnished by KLA
and Tencor, and with respect to the information discussed with the managements
of KLA and Tencor regarding their views of future operations, we have assumed
that such information has been reasonably prepared and reflects the best
currently available estimates and judgments of KLA's or Tencor's management as
to the competitive, operating and regulatory environments and related financial
performance of KLA and Tencor, as the case may be, for the relevant periods. For
purposes of this opinion, we have also relied upon, without independent
verification, the assessment by KLA's management of KLA Instruments Corporation
the cost savings and other synergies as well as the strategic and other benefits
expected to be derived from the Merger. We have not made any independent
valuation or appraisal of the assets, liabilities or technology of KLA or
Tencor, respectively, nor have we been
KLA Instruments Corporation LOGO
January 14, 1997
Page 3
furnished with any such appraisals. We have assumed that the Merger will be
accounted for as a "pooling-of-interests" business combination in accordance
with U.S. Generally Accepted Accounting Principles and will be consummated in
accordance with the terms set forth in the Merger Agreement. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of KLA in
connection with this transaction and will receive a fee for our services. In
addition, in the ordinary course of our business, we may actively trade the
securities and loans of KLA and Tencor for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities and loans.
It is understood that this letter is for the information of the Board of
Directors of KLA and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
filing made by KLA with the Securities and Exchange Commission with respect to
the transactions contemplated by the Merger Agreement. This opinion does not
constitute a recommendation to any shareholder as to how such shareholder should
vote with respect to the Merger.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio pursuant to the Merger Agreement is fair
from a financial point of view to KLA.
Very truly yours,
DEUTSCHE MORGAN GRENFELL INC.
By: /s/ GEORGE F. BOUTROS
------------------------------------
George F. Boutros
Managing Director
By: /s/ JOHN C. HODGE
------------------------------------
John C. Hodge
Director
ANNEX E
Corporate Institutional
Client Group
101 California Street, Suite 1200
San Francisco, California 94111
415-676-3200
Fax 415-676-3299
[LOGO] MERRILL LYNCH
January 14, 1997
Board of Directors
KLA Instruments Corporation
160 Rio Robles
P.O. Box 49055
San Jose, CA 95161
Attention: Chairman and Chief Executive Officer
Gentlemen:
KLA Instruments Corporation (the"Company"), Tiger Acquisition Corp., a
wholly owned subsidiary of the Company (the "Merger Sub"), and Tencor
Instruments (the "Subject Company") propose to enter into an agreement and plan
of reorganization (the "Agreement") pursuant to which Merger Sub will be merged
with and into the Subject Company in a transaction (the "Merger") in which each
share of the Subject Company's common stock, no par value (the "Shares"), will
be converted into the right to receive 1.0 share (the "Exchange Ratio") of the
common stock, par value $0.001 per share, of the Company (the "Company Shares").
In connection with the Merger, the Company and the Subject Company also propose
to enter into (i) a stock option agreement (the "Tencor Option Agreement")
pursuant to which the Subject Company will grant the Company an option to
acquire a number of Shares representing approximately 19.9% of the total Shares
outstanding and (ii) a stock option agreement (the "KLA Option Agreement")
pursuant to which the Company will grant the Subject Company an option to
acquire a number of Company Shares representing approximately 19.9% of the total
Company Shares outstanding.
You have asked us whether, in our opinion, as of the date hereof, the
Exchange Ratio is fair to the Company from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the three fiscal years ended June 30, 1996
and the Company's Form 10-Q and the related unaudited financial
information for the quarterly period ending September 30, 1996;
(2) Reviewed the Subject Company's Annual Reports, Forms 10-K and related
financial information for the three fiscal years ended December
31,1995 and the Subject Company's Forms 10-Q and the related unaudited
financial information for the quarterly periods ending March 31, 1996,
June 30, 1996 and September 30, 1996;
(3) Reviewed certain information relating to prior periods concerning the
business, earnings and assets of the Company and the Subject Company
furnished to us by the Company and the Subject Company;
(4) Conducted due diligence discussions with members of senior management
of the Company and the Subject Company and discussed with members of
senior management of the Company and the Subject Company their views
regarding future business, financial and operating benefits arising
from the Merger;
[LOGO] 2
(5) Reviewed the historical market prices and trading activity for the
Company Shares and the Shares and compared them with that of certain
publicly traded companies which we deemed to be relevant to the
Company and the Subject Company, respectively;
(6) Compared the results of operations of the Company and the Subject
Company with that of certain companies which we deemed to be relevant
to the Company and the Subject Company, respectively;
(7) Compared the proposed financial terms of the Merger with the financial
terms of certain other mergers and acquisitions which we deemed to be
relevant;
(8) Considered the pro forma financial effect of the Merger on the
Company's capitalization ratios and earnings, cash flow and book value
per share;
(9) Participated in certain discussions and negotiations among
representatives of the Company and the Subject Company and their
financial and legal advisors;
(10) Reviewed the Agreement, the KLA Option Agreement and the Tencor Option
Agreement (together, the "Transaction Agreements"); and
(11) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market
and monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by the Company and
the Subject Company, and we have not assumed responsibility for independent
verification of such information. We have not assumed responsibility for
undertaking an independent valuation or appraisal of the assets of the Company
or the Subject Company and no such valuation or appraisal has been provided to
us. We have not been provided with, and therefore have not reviewed, any
internal financial projections or forecasts relating to future operations or
prospects of the Company and the Subject Company. With respect to the
information furnished by the Company and the Subject Company, and with respect
to information discussed with managements of the Company and the Subject Company
regarding their views of future operations, we have assumed that such
information has been reasonably prepared and reflects the best currently
available estimates and judgments of the Company's or the Subject Company's
Merrill Lynch management as to the competitive, operating and regulatory
environments and related financial performance of the Company or the Subject
Company, as the case may be, for the relevant periods and as to the strategic
rationale for the Merger. In addition, we have assumed that the Merger will
qualify for pooling-of-interests accounting treatment in accordance with
generally accepted accounting principles and as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. We
have assumed that the Merger will be consummated on the terms set forth in the
Agreement without waiver or amendment of any of the terms or conditions thereof.
Our opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date hereof. In
rendering this opinion, we are not expressing any opinion as to the price at
which the Company Shares will actually trade at any time. Our opinion does not
address the underlying decision by the Company to engage in the Merger and does
not constitute a recommendation to any shareholder as to how such shareholder
should vote with respect to the Merger.
Our opinion is rendered to, and it is understood that this letter is for
the information of, the board of directors of the Company and, except for
inclusion of this letter in its entirety in a prospectus/proxy statement of the
Company relating to the issuance of the Company Shares in the Merger, may not be
used or quoted without our prior written consent
As you are aware, we have acted as financial advisor to the Company in
connection with the Merger and will receive fees from the Company for our
services, a significant portion of which is contingent upon the
[LOGO] 3
consummation of the Merger. In addition, in the ordinary course of our business,
we may actively trade the securities and loans of the Company and the Subject
Company for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities and loans.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Exchange Ratio is fair to the Company from a
financial point of view.
Very truly yours,
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
By /s/ MARK SHAFIR
------------------------------------
Managing Director
Investment Banking Group
ANNEX F
[LOGO]
January 14, 1997
Board of Directors
Tencor Instruments
One Technology Drive
Milpitas, California 95035
Members of the Board:
We understand that Tencor Instruments ("Tencor" or the "Company") is
considering a merger with a wholly-owned subsidiary ("Merger Sub") of KLA
Instruments Corporation ("KLA") (the "Proposed Transaction") pursuant to which
all outstanding shares of Tencor common stock will be exchanged for KLA common
stock at an exchange ratio of one KLA common share for each Tencor common share
(the "Exchange Ratio"). The terms and conditions of the Proposed Transaction are
set forth in more detail in the Agreement and Plan of Reorganization dated
January 14, 1997 between Tencor, KLA and Merger Sub (the "Agreement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's shareholders of the Exchange Ratio to be offered to such shareholders
in the Proposed Transaction. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Proposed Transaction, including with respect to the
corporate governance and management of the combined company following
consummation of the Proposed Transaction, (2) publicly available information
concerning the Company and KLA that we believe to be relevant to our analysis,
(3) financial and operating information with respect to the business, operations
and prospects of the Company and KLA furnished to us by the Company and KLA, (4)
a trading history of the Company's and KLA's common stock from March 9, 1993 to
the present and a comparison of that trading history with those of other
companies that we deemed relevant, (5) a comparison of the historical financial
results and present financial condition of the Company and KLA with those of
other companies that we deemed relevant, (6) the potential pro forma financial
effects of the Proposed Transaction on Tencor and KLA and a comparison of the
relative financial contributions of Tencor and KLA to the combined company
following consummation of the Proposed Transaction, each based on publicly
available estimates from third party research analysts of the future financial
performance of Tencor and KLA, and (7) a comparison of the financial terms of
the Proposed Transaction with the financial terms of certain other transactions
that we deemed relevant. In addition, we have had discussions with managements
of the Company and KLA concerning their respective businesses, operations,
assets, financial conditions and prospects and have undertaken such other
studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of the managements of the Company and
KLA that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. In arriving at our opinion, at the
direction of the Company, we were not provided with and did not have any access
to any financial forecasts or projects prepared by the managements of the
Company or KLA as to the future financial performance of Tencor, KLA or the
combined company, and therefore, upon advice of the Company and KLA, we have
assumed that the publicly available estimates of research analysts are a
reasonable basis upon which to evaluate and analyze the future financial
performance of Tencor and KLA and that Tencor and KLA will perform substantially
in accordance with such estimates. We also have not
LEHMAN BROTHERS
555 CALIFORNIA STREET SAN FRANCISCO, CA 94104
conducted a physical inspection of the properties and facilities of the Company
or KLA and have not made or obtained any evaluations or appraisals of the assets
or liabilities of the Company or KLA.
You have not authorized us to solicit, and we have not solicited, any
indications of interest from any third party with respect to the purchase of all
or a part of the Company's business. In arriving at our opinion, upon advice of
the Company and its legal and accounting advisors, we have assumed that the
Proposed Transaction will qualify (1) for pooling-of-interests accounting
treatment and (2) as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended, and therefore as a tax-free
transaction to the shareholders of the Company. Our opinion necessarily is based
upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Exchange Ratio to be
offered to the Company's shareholders in the Proposed Transaction is fair to
such shareholders.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. We also have performed various investment banking
services for the Company in the past and have received customary fees for such
services. In the ordinary course of our business, we actively trade in the
equity securities of the Company and KLA for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or short
position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any shareholder of the Company as to
how such shareholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
By: /s/ MICHAEL S. WISHART
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Michael S. Wishart
Managing Director