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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: September 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from_____ to______
Commission File Number 0-9992
KLA-Tencor Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-2564110
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Rio Robles
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
(408) 875-3000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No_____
As of October 31, 2002 there were 188,689,136 shares of the
Registrant's Common Stock, $0.001 par value, outstanding.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Unaudited Balance Sheets at
September 30, 2002 and June 30, 2002 ........................................... 3
Condensed Consolidated Unaudited Statements of Operations
for the Three Months Ended September 30, 2002 and 2001.......................... 4
Condensed Consolidated Unaudited Statements of Cash Flows
for the Three Months Ended September 30, 2002 and 2001.......................... 5
Notes to Condensed Consolidated Unaudited Financial Statements.................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk......................... 28
Item 4 Controls and Procedures............................................................ 29
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................................. 30
Item 6 Exhibits and Reports on Form 8-K................................................... 31
SIGNATURES ................................................................................... 32
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CERTIFICATIONS .................................................................................... 33
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, June 30,
(in thousands) 2002 2002
- ------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 435,646 $ 429,820
Marketable securities 316,206 243,526
Accounts receivable, net 256,174 277,006
Inventories 318,896 323,016
Other current assets 353,281 345,920
- ------------------------------------------------------------------------------------------------------------
Total current assets 1,680,203 1,619,288
Land, property and equipment, net 294,025 300,560
Marketable securities 598,828 660,237
Other assets 132,999 137,633
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Total assets $ 2,706,055 $ 2,717,718
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,909 $ 52,988
Deferred profit 172,264 193,852
Unearned revenue 55,034 54,886
Other current liabilities 399,378 385,764
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Total current liabilities 663,585 687,490
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Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock and capital in excess of par value 722,599 765,946
Retained earnings 1,310,960 1,259,695
Accumulated other comprehensive income 8,911 4,587
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,042,470 2,030,228
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,706,055 $ 2,717,718
============================================================================================================
See accompanying notes to condensed consolidated financial statements.
KLA-TENCOR CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended
September 30,
(in thousands, except per share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Product $ 312,508 $ 454,396
Service 63,012 48,436
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Total revenues 375,520 502,832
- ----------------------------------------------------------------------------------------------------------------
Costs and operating expenses:
Costs of goods sold 186,344 244,368
Engineering, research and development 70,853 72,923
Selling, general and administrative 70,441 81,248
Nonrecurring acquisition, restructuring and other, net (9,402) --
- ----------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 318,236 398,539
- ----------------------------------------------------------------------------------------------------------------
Income from operations 57,284 104,293
Interest income and other, net 10,170 12,552
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 67,454 116,845
Provision for income taxes 16,189 30,380
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 51,265 $ 86,465
================================================================================================================
Earnings per basic share:
Net income $ 0.27 $ 0.46
==========================
Earnings per diluted share:
Net income $ 0.26 $ 0.44
==========================
Weighted average number of shares:
Basic 189,279 187,717
=========== ===========
Diluted 194,090 195,079
=========== ===========
See accompanying notes to condensed consolidated financial statements.
KLA-TENCOR CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30,
(in thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 51,265 $ 86,465
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,639 17,889
Deferred income taxes -- (2,645)
Net gain on sale of marketable securities (1,911) (642)
Changes in assets and liabilities:
Accounts receivable, net 20,830 33,463
Inventories 4,115 33,313
Other assets (6,092) 8,084
Accounts payable (16,075) (5,928)
Deferred profit (21,588) (73,490)
Other current liabilities 16,592 (77,115)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 64,775 19,394
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of land, property and equipment, net (6,815) (31,169)
Purchase of marketable securities (308,167) (381,608)
Proceeds from sale of marketable securities 266,396 247,761
Proceeds from maturity of marketable securities 34,830 4,450
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (13,756) (160,566)
- ------------------------------------------------------------------------------------------ -------------------
Cash flows from financing activities:
Issuance of common stock 4,151 2,162
Stock repurchases (47,497) (53,484)
Net borrowings under short-term debt obligations -- 409
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (43,346) (50,913)
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (1,847) 1,582
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,826 (190,503)
Cash and cash equivalents at beginning of period 429,820 529,674
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 435,646 $ 339,171
==============================================================================================================
Supplemental cash flow disclosures:
Income taxes (refunded) paid, net $ (6,037) $ 3,630
=========== ===========
Interest paid $ 48 $ 320
============ ===========
See accompanying notes to condensed consolidated financial statements.
KLA-TENCOR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation The condensed consolidated financial statements
have been prepared by KLA-Tencor Corporation ("KLA-Tencor" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the unaudited
interim financial statements reflect all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods indicated. These
financial statements and notes, however, should be read in conjunction with the
Item 8, "Financial Statements and Supplementary Data" included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002, filed with
the SEC on September 20, 2002.
The results of operations for the three month period ended September
30, 2002 are not necessarily indicative of the results that may be expected for
any other interim period or for the full fiscal year ending June 30, 2003.
Fair Value of Financial Instruments KLA-Tencor has evaluated the
estimated fair value of financial instruments using available market information
and valuation methodologies. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts. The fair value of KLA-Tencor's cash, cash equivalents, accounts
receivable, accounts payable and other current liabilities approximates the
carrying amount due to the relatively short maturity of these items.
Marketable Securities Short-term marketable securities include debt and
equity securities acquired with maturities exceeding three months but less than
one year from the date of acquisition. Non-current marketable securities include
debt securities acquired with maturities exceeding one year from the date of
acquisition. While KLA-Tencor's intent is to hold debt securities to maturity,
KLA-Tencor has classified all debt securities as available-for-sale, as the sale
of such securities may be required prior to maturity to implement management
strategies. Such securities are reported at fair value determined based on
quoted market prices at the reporting date for those instruments, with
unrealized gains and losses excluded from earnings and included in "Accumulated
other comprehensive income," net of applicable taxes, until realized. KLA-Tencor
has classified some equity securities that have readily determinable fair values
in a similar manner. The cost of securities sold is based on the specific
identification method. Realized gains or losses and declines in value, if any,
judged to be other than temporary are reported in "Interest income and other,
net" in the Condensed Consolidated Statements of Operations. For equity
securities where KLA-Tencor has established a hedge against price fluctuation,
KLA-Tencor classifies both the security and the hedge as trading assets. These
trading assets are reported at fair value determined based on quoted market
prices at the reporting date for those instruments, with unrealized gains or
losses included in earnings for the applicable period. The net amount of such
gains and losses for the three months ended September 30, 2002 was not material.
Intangible Assets Purchased technology, patents, trademarks, favorable
leases and goodwill are presented at cost, net of accumulated amortization.
Effective July 1, 2002, KLA-Tencor replaced ratable amortization of goodwill
with periodic testing of goodwill for impairment in accordance with the
provision of Statement of Financial Accounting Standard No. 142, "Goodwill and
Intangible Assets." Intangible assets other than goodwill are amortized over
their estimated useful lives using the straight-line method.
Impairment of Long-Lived Assets KLA-Tencor evaluates the carrying value
of its long-lived assets whenever events or changes in circumstances indicate
that the carrying value of the asset may be impaired in accordance with the
provisions of Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets." An impairment loss is recognized when
estimated future cash flows expected to result from the use of the asset
including disposition, is less than the carrying value of the asset.
Concentration of Credit Risk Financial instruments, which potentially
subject KLA-Tencor to credit risk, consist principally of investments, accounts
receivable and derivative financial instruments used in hedging activities.
Investments are maintained with high-quality institutions, and the
composition and maturities of investments are regularly monitored by management.
Generally, these securities are traded in a highly liquid market, may be
redeemed upon demand and bear minimal risk. KLA-Tencor, by policy, limits the
amount of credit exposure to any one financial institution or commercial issuer.
KLA-Tencor has not experienced any material losses on its investments.
A majority of KLA-Tencor's trade receivables are derived from sales to
large multinational semiconductor manufacturers throughout the world.
Concentration of credit risk with respect to trade receivables is considered to
be limited due to its customer base and the diversity of its geographic sales
areas. KLA-Tencor performs ongoing credit evaluations of its customers'
financial condition. KLA-Tencor maintains a reserve for potential credit losses
based upon expected collectibility of all accounts receivable.
KLA-Tencor is exposed to credit loss in the event of nonperformance by
counterparties on the foreign exchange contracts used in hedging activities.
KLA-Tencor does not anticipate nonperformance by these counterparties.
Warranty KLA-Tencor provides warranty coverage to its systems for a
period of time, providing labor and parts necessary to repair the systems during
the warranty period. The Company accounts for the estimated warranty cost as a
charge to cost of goods sold when revenue is recognized. The estimated warranty
cost is based on its historical experience with the product's performance in the
field. If actual warranty activities differ from its estimates, the Company
records revisions to the estimated warranty liability as required.
Revenue Recognition In December 1999, the SEC issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The SEC
Staff addressed several issues in SAB 101, including the timing of revenue
recognition for sales that involve contractual customer acceptance provisions
and installation of the product if these events occur after shipment and
transfer of title. KLA-Tencor implemented the provisions of SAB 101 in the
fourth fiscal quarter of 2001, retroactive to July 1, 2000. Prior to adoption of
SAB 101, KLA-Tencor's general policy was to recognize revenue on shipment.
Accordingly, KLA-Tencor did not have any formal centralized processes for
tracking, obtaining and filing customer acceptance reports; therefore, pro forma
amounts for the periods before July 1, 2000 were not presented as the effect of
the change in accounting principle could not be reasonably determined.
KLA-Tencor derives revenue from four sources - system sales, spare part
sales, service contracts and software license fees. System sales include
hardware and software that is incidental to the product. SAB 101 has no impact
on KLA-Tencor's revenue recognition policy for spare part sales, service
contracts and software license fees.
Prior to the implementation of SAB 101, system revenue was generally
recognized upon shipment. Effective July 1, 2000, KLA-Tencor changed its method
of accounting for system sales to generally recognize revenue upon a positive
affirmation by the customer that the system has been installed and is operating
according to predetermined specifications. In certain limited cases, KLA-Tencor
may deviate from the need for a written acceptance by the customer, as follows:
o When system sales to independent distributors have no
installation, contain no acceptance agreement, and 100%
payment is due upon shipment, revenue is recognized on
shipment;
o When the system requires no integration and installation is
inconsequential, revenue is recognized on shipment. In these
cases we are required to perform the installation but we
consider installation not essential to the functionality of
the equipment, and there are no additional tests required to
be performed on-site. In addition, third party distributors
and customers regularly complete the installation of these
tools;
o When the customer fab has already accepted the same tool, with
the same specifications on the same process, for the same
application, and it can be objectively demonstrated that it
meets all of the required acceptance criteria upon shipment, a
portion of revenue can be recognized at the time of shipment.
Revenue recognized upon shipment is exclusive of the amount
allocable to the installation element. Revenue attributable to
the installation element is the higher of the payment amount
due upon acceptance or the fair value of installation;
o When the system is performing in production and meets all
published and contractually agreed specifications, but the
customer withholds signature on our acceptance document due to
warranty or other issues unrelated to product performance.
Total revenue recognized under conditions where KLA-Tencor deviates
from the need for a written acceptance by the customer were less than 2.5% of
total revenue for each of the three months ended September 30, 2002 and 2001.
In accordance with SAB 101, KLA-Tencor also allows for multiple element
revenue arrangement in cases where certain elements of a sales contract are not
delivered and accepted at the same time. In such cases, KLA-Tencor defers the
fair value of the unaccepted element until that element is delivered to and
accepted by the customer. To be considered a separate element, the product or
service in question must represent a separate earnings process, and is not
essential to the functionality of the delivered and accepted portion of the same
sales contract. If the unaccepted element is essential to the functionality of
the delivered and accepted portion, the whole amount of the sales contract is
deferred until all elements are accepted.
Spare parts revenue is recognized when the product has been shipped,
risk of loss has passed to the customer and collection of the resulting
receivable is probable.
Service and maintenance revenue is recognized ratably over the term of
the maintenance contract. If maintenance is included in an arrangement, which
includes a software license agreement, amounts related to maintenance are
allocated based on vendor specific objective evidence. Non-standard warranty
includes services incremental to the standard 40-hour per week coverage for
twelve months. Non-standard warranty is deferred as unearned revenue and is
recognized ratably as revenue when the applicable warranty term period
commences. Consulting and training revenue is recognized when the related
services are performed.
Revenue from software license fees is typically recognized upon
shipment if collection of the resulting receivable is probable, the fee is fixed
or determinable, and vendor-specific objective evidence exists to allocate a
portion of the total fee to any undelivered elements of the arrangement. Such
undelivered elements in these arrangements typically consist of services and/or
upgrades. If vendor-specific objective evidence does not exist for the
undelivered elements of the arrangement, all revenue is deferred until such
evidence does exist, or until all elements are delivered, whichever is earlier.
In instances where an arrangement to deliver software requires significant
modification or customization, license fees are recognized under the percentage
of completion method of contract accounting. Allowances are established for
potential product returns and credit losses. To date, revenue from license fees
have been less than 10% of total revenue.
As a result of implementing SAB 101, KLA-Tencor changed its method of
accounting for revenue recognition. This change resulted in cumulative deferred
revenue of $660.9 million as of July 1, 2000, which was recorded as a non-cash
charge of $306.4 million (after reduction for product and warranty costs of $207
million and income taxes of $147.5 million). The deferred profit balance as of
September 30, 2002 was $172.3 million and equals the amount of system revenue
that was invoiced and due on shipment but deferred under SAB 101 less applicable
product and warranty costs. KLA-Tencor also defers the fair value of
non-standard warranty bundled with equipment sales as unearned revenue. The
unearned revenue balance at September 30, 2002 and 2001 was $55 million and $57
million, respectively.
Strategic Development Agreements Net engineering, research and
development expenses were partially offset by $6.0 million and $2.8 million in
external funding received under certain strategic development programs funded by
KLA-Tencor's customers and government agencies in the three months ended
September 30, 2002 and 2001, respectively.
Earnings Per Share Basic earnings per share ("EPS") is calculated by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is calculated by using the weighted average number of common shares
outstanding during the period and gives effect to all dilutive potential common
shares outstanding during the period. The reconciling difference between the
computation of basic and diluted earnings per share for all periods presented is
the inclusion of the dilutive effect of stock options issued to employees under
employee stock option plans.
During the three months ended September 30, 2002, options to purchase
approximately 5,454,000 shares, respectively, at prices ranging from $41.32 to
$68.00, were not included in the computation of diluted EPS because the exercise
price was greater than the average market price of common shares. During the
three months ended September 30, 2001, options to purchase approximately 866,000
shares at prices ranging from $49.58 to $68.00 were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of common shares.
Reclassifications Certain prior year balances have been reclassified to
conform to the current financial statement presentation. These reclassifications
had no impact on previously reported results of operations or stockholder's
equity.
Recent Accounting Pronouncements We have adopted SFAS No. 143,
"Accounting for Obligations Associated with the Retirement of Long-Lived Assets"
and SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived
Assets". SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides guidance for legal obligations associated with
the retirement of tangible long-lived assets. SFAS No. 144 establishes a single
accounting model for the impairment or disposal of long-lived assets, including
discontinued operations. Adoption of these pronouncements did not have a
significant effect on our consolidated financial statements.
In June 2002, the FASB issued Statement No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities, and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liabilities Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability for costs associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. SFAS 146 will be effective for exit
or disposal activities that are initiated after December 31, 2002. The standard
will in certain circumstances change the timing of recognition of restructuring
costs.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of standard cost (which
approximates the first-in, first-out basis) or market. The components of
inventories are as follows:
September 30, June 30,
(in thousands) 2002 2002
- ---------------------------------------------------------------------------------------------------------------
Inventories
Customer service parts $ 114,635 $ 116,240
Raw materials 59,751 75,753
Work-in-process 66,252 53,542
Demonstration equipment 44,969 54,003
Finished goods 33,289 23,478
- --------------------------------------------------------------------------------------------------------------
Total $ 318,896 $ 323,016
==============================================================================================================
NOTE 3 - STOCK REPURCHASE PROGRAM
The Company has adopted a plan to repurchase shares of its Common Stock
on the open market for the purpose of partially offsetting dilution created by
employee stock options and stock purchase plans. During the three months ended
September 30, 2002 and 2001, the Company repurchased 1,443,000 and 2,068,000
shares of its Common Stock at a cost of approximately $47 million and $74
million, of which $47 million and $53 million was paid, respectively.
NOTE 4 - COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows:
Three months ended
September 30
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Net income $ 51,265 $ 86,465
Other comprehensive income
Currency translation adjustments (2,366) 3,927
Gains (losses) on cash flow hedging instruments 2,825 (2,742)
Unrealized gains (losses) on investment, net of tax benefits of
$2,440 in 2002 and $201 in 2001 3,865 (319)
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income 4,324 866
- ---------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 55,589 $ 87,331
===============================================================================================================
NOTE 5 - NONRECURRING ACQUISITION, RESTRUCTURING AND OTHER COSTS
Restructuring and Other Costs
During the three months ended September 30, 2002, we
restructured certain of our operations and facilities to accommodate the planned
occupancy of our Livermore campus as well as to streamline our operations due to
the industry downturn. Restructuring costs were classified into three main
categories: facilities and other charges of $4.6 million and severance and
benefits of $1.1 million. As part of our facilities consolidation, we are
exiting several of our leased buildings and have included the remaining net book
value of the related leasehold improvements as well as the future lease
payments, net of anticipated sublease revenue, in the charge. Severance and
benefits include involuntary termination of approximately 70 personnel from
manufacturing, engineering, sales, marketing, and administration in the United
States, Japan and Europe. The following table shows the details of the
facilities, severance and other restructuring costs accrual as of September 30,
2002:
Balance at Non-recurring Balance at
(in thousands) June 30, 2002 charges Utilized September 30, 2002
- --------------------------------------------------------------------------------------------------------
Facilities and other $ 405 $ 4,623 $ (215) $ 4,813
Severance and benefits -- 1,127 (270) 857
- --------------------------------------------------------------------------------------------------------
Total $ 405 $ 5,750 $ (485) $ 5,670
========================================================================================================
In addition, during the first fiscal quarter of 2003, KLA-Tencor
received $15.2 million as a second installment on the sale of software and
intellectual property associated with its iSupport(TM) on-line customer support
technology, which was netted against the above non-recurring charges, resulting
in a reported net gain of $9.4 million.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Facilities
KLA-Tencor leases certain of its facilities under operating leases,
which qualify for operating lease accounting treatment under SFAS 13,
"Accounting for Leases," and, as such, these facilities are not included on its
Condensed Consolidated Balance Sheet.
The following is a schedule of operating leases payments (in
thousands):
Fiscal year ended June 30, Amount
2003 $ 9,853
2004 5,503
2005 3,239
2006 1,618
Thereafter 1,089
--------------------------------------------------------------
Total minimum lease payments $ 21,302
==============================================================
The lease agreement for certain Milpitas and San Jose, California
facilities has a term of five years ending in November 2002, with an option to
extend up to two more years. Monthly payments under this lease vary based upon
the London Interbank Offering Rate (LIBOR) plus 0.42%. In addition, under the
terms of the lease, KLA-Tencor must maintain compliance with certain financial
covenants. As of September 30, 2002, KLA-Tencor was in compliance with all of
its covenants. Under the terms of the lease, KLA-Tencor, at its option, can
acquire the properties at their original cost or arrange for the properties to
be acquired. The Company plans to purchase the Milpitas and San Jose, California
facilities at the end of the lease term. The purchase transaction would increase
land and property by approximately $119.3 million and decrease cash by
approximately the same amount.
Factoring
KLA-Tencor has an agreement with a bank to sell certain of its trade
receivables and promissory notes without recourse. During the three months ended
September 30, 2002, approximately $22 million of receivables were sold under
these arrangements. As of September 30, 2002, approximately $33 million were
outstanding. The total amount available under the facility is the Japanese yen
equivalent of $49 million based upon exchange rates as of September 30, 2002.
KLA-Tencor does not believe it is materially at risk for any losses as a result
of this agreement.
Purchase Commitments
KLA-Tencor maintains certain open inventory purchase commitments with
its suppliers to ensure a smooth and continuous supply chain for key components.
KLA-Tencor's liability in these purchase commitments is generally restricted to
a forecasted time-horizon as mutually agreed upon between the parties. This
forecast time-horizon can vary amongst different suppliers. As such, it is
difficult to accurately report its true open commitments at any particular point
in time. However, the Company estimates its open inventory purchase commitment
as of September 30, 2002 to be no more than $51 million.
Derivative Instruments
KLA-Tencor's foreign subsidiaries operate and sell KLA-Tencor's
products in various global markets. As a result, KLA-Tencor is exposed to
changes in foreign currency exchange rates. KLA-Tencor utilizes foreign currency
forward exchange contracts to hedge against certain future movements in foreign
exchange rates that affect certain foreign currency denominated sales and
purchase transactions. KLA-Tencor does not use derivative financial instruments
for speculative or trading purposes. At September 30, 2002, KLA-Tencor had
foreign exchange forward contracts maturing throughout fiscal 2003 to sell and
purchase $181 million and $42 million, respectively, in foreign currency,
primarily Japanese yen.
Legal Matters
A discussion regarding certain pending legal proceedings is included in
Part I, Item 3, "Legal Proceedings," included in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2002. Since the fiscal year ended June 30,
2002, certain developments have occurred with respect to the legal proceedings
described in our Annual Report as follows:
ADE Corporation
On October 11, 2000, ADE Corporation ("ADE"), a competitor, filed a
patent infringement lawsuit against KLA-Tencor in the U.S. District Court in
Delaware. ADE claimed damages and sought an injunction under U.S. Patent No.
6,118,525 (`525 patent). We filed a counterclaim in the same court alleging that
ADE has infringed four of our patents. We are seeking damages and a permanent
injunction against ADE. In addition, we are seeking a declaration from the
District Court that ADE's patent is invalid and not infringed by KLA-Tencor. On
October 22, 2001, we filed a separate action for declaratory judgment against
ADE in the Northern District of California requesting a declaration that U.S.
Patent No. 6,292,259 (`259 patent) is invalid and not infringed. That action has
now been consolidated with the prior action in the Delaware proceeding, and ADE
has amended its complaint in that proceeding to allege that KLA-Tencor is
infringing the `259 patent. On August 8, 2002, the magistrate presiding over the
action issued a recommendation that the court enter summary judgment in favor of
KLA-Tencor on the issue of non-infringement under ADE's `525 patent. On the same
day, the magistrate issued recommendations that the court enter summary judgment
in favor of ADE on the issue of non-infringement of two of KLA-Tencor's patents.
While we cannot predict the outcome, we believe that we have valid defenses and
further believe that our counterclaims have merit.
Tokyo Seimitsu Co. Ltd.
On June 27, 2001,we sued Tokyo Seimitsu Co. Ltd. and TSK America Inc.
("TSK"), a competitor, in the U.S. District Court in the Northern District
of California alleging that TSK infringes on one of the Company's patents.
The suit seeks damages and an injunction under U.S. Patent No. 4,805,123
(`123 patent). TSK filed a counterclaim in the same court seeking a declaration
that the `123 patent is invalid, unenforceable and not infringed, and also
alleged violations of the antitrust and unfair competition laws.
Schlumberger, Inc. and Rigg Systems, Inc.
The Schlumberger, Inc. and Rigg Systems, Inc. actions have been
dismissed under circumstances that the parties have agreed to treat as
confidential.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, KLA-Tencor adopted Statement of Financial
Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill
and Other Intangible Assets." Under these accounting standards, KLA-Tencor
ceased amortization of goodwill recorded for business combinations consummated
prior to July 1, 2001, and reclassified amounts attributed to workforce in
acquisitions made prior to July 1, 2001 that did not meet the criteria for
separate recognition as other intangible assets under SFAS 141 to goodwill.
The net carrying value of goodwill recorded through acquisitions is
$15.1 million as of September 30, 2002. In accordance with SFAS 142, KLA-Tencor
concluded there was no impairment of goodwill. The net carrying value of other
intangible assets as of September 30, 2002 is $7.0 million; the components of
which are as follows (in thousands):
Gross Carrying Accumulated Net
Amount Amortization Amount
- -------------------------------------------------------------------------------------------
Existing technology $ 6,062 $ 2,757 $ 3,305
Patents 4,021 919 3,102
Trademark 625 198 427
Favorable leases and other 270 135 135
- -------------------------------------------------------------------------------------------
Subtotal $ 10,978 $ 4,009 $ 6,969
===========================================================================================
Other intangible assets are amortized on a straight-line basis over
their estimated useful lives. For the three months ended September 30, 2002 and
2001, amortization expense for other intangible assets was $0.6 million and $0.3
million, respectively. Estimated amortization expense for each of the four
succeeding fiscal years is as follows:
Fiscal year ended June 30:............................. Amount
2003 2,396
2004 2,396
2005 2,137
2006 631
NOTE 8 -- GEOGRAPHIC INFORMATION
KLA-Tencor's has significant operations outside the United States,
which include a manufacturing facility in Israel and sales, marketing and
service offices in Western Europe, Japan, and the Asia Pacific region. For
geographical revenue reporting, revenues are attributed to the geographic
regions in which the customer is located. No single customer accounted for 10%
or more of net revenues or accounts receivable in any of the periods presented.
Long-lived assets consist of net property and equipment, goodwill, capitalized
software and other intangibles, and other long-term assets, excluding long-term
deferred tax assets and are attributed to the geographic region in which they
are located. The following is a summary of operations by entities located within
the indicated geographic regions for three months ended September 30, 2002 and
2001.
Three months ended September 30, (in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Revenues:
United States $ 90,098 $ 136,292
Western Europe 72,186 80,774
Japan 92,030 115,352
Taiwan 65,153 67,206
Asia Pacific 56,053 103,208
- ---------------------------------------------------------------------------------------------------------------
Total $ 375,520 $ 502,832
===============================================================================================================
September 30, June 30,
(in thousands) 2002 2002
- ---------------------------------------------------------------------------------------------------------------
Long-lived assets:
United States $ 366,355 $ 375,600
Western Europe 7,797 8,079
Japan 7,541 8,878
Taiwan 3,396 3,732
Asia Pacific 5,433 5,435
- ---------------------------------------------------------------------------------------------------------------
Total $ 390,522 $ 401,724
===============================================================================================================
The following is a summary of revenues by major products for three
months ended September 30, 2002 and 2001 (as a percentage of total revenue).
Three months ended September 30, 2002 2001
- -------------------------------------------------------------------------
Defect Inspection 65% 68%
Metrology 16% 16%
Service 17% 10%
Software and other 2% 6%
- -------------------------------------------------------------------------
Total 100% 100%
=========================================================================
NOTE 9 - SUBSEQUENT EVENTS
On October 10, 2002, the Board of Directors authorized the repurchase
of an additional 5.0 million shares under KLA-Tencor's Stock Repurchase Program.
The Stock Repurchase Program allows the Company to systematically buy back its
stock from the open market.
On November 1, 2002, KLA-Tencor exercised its purchase option under
certain operating lease agreements to purchase the properties under the lease
agreements for $119.3 million.
On November 8, 2002, the compensation committee authorized
approximately 5.5 million options as part of the annual performance review cycle
for KLA-Tencor. There were approximately 5.0 million options authorized to
non-executive employees under the 2000 Stock Option Plan, and 0.5 million
options authorized to executive employees under the 1982 Stock Option Plan.
KLA-Tencor intends to grant these options in four quarterly installments. The
first installment of 1.4 million options (1.3 million to non-executive employees
and 0.1 million to executive employees) was granted on November 8, 2002.
Additionally, 60 thousand options were granted on November 8, 2002 to outside
directors under the 1998 Outside Director Option Plan.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements included in or incorporated by
reference in this Quarterly Report on Form 10-Q, other than statements of
historical fact, are forward-looking statements. Such forward-looking statements
include, among others, those statements regarding the future results of our
operations; technological trends in the semiconductor industry; our future
product offerings and product features, as well as market acceptance of new
products; anticipated revenue from various domestic and international regions;
international sales and operations; maintenance of competitive advantage;
success of our product offerings; creation of programs for research and
development; attraction and retention of employees; management of risks involved
in acquisitions of third parties, or the technology or assets thereof; benefits
received from any acquisitions and development of acquired technologies; the
outcome of any litigation to which we are a party; results of our investment in
leading edge technologies and strategic acquisitions and alliances; our future
income tax rate; sufficiency of our existing cash balance, investments and cash
generated from operations to meet our operating and working capital
requirements; and the effects of hedging transactions.
Our actual results may differ significantly from those projected in the
forward-looking statements in this report. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those set forth in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 1,
"Business" in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2002, filed with the SEC on September 20, 2002. You should carefully
review these risks and also review the risks described in other documents we
file from time to time with the Securities and Exchange Commission. You are
cautioned not to place undue reliance on these forward-looking statements. We
expressly disclaim any obligation to update or alter our forward-looking
statements, whether, as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
The preparation of our Condensed Consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We based these estimates and
assumptions on historical experience, and evaluate them on an on-going basis to
ensure they remain reasonable under current conditions. Actual results could
differ from those estimates. We discuss the development and selection of the
critical accounting estimates with the audit committee of our board of directors
on a quarterly basis, and the audit committee has reviewed the Company's
critical accounting estimates as described in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002, filed with
the SEC on September 20, 2002. For the three months ended September 30, 2002
there have been no changes to these critical accounting policies.
RESULTS OF OPERATIONS
KLA-Tencor Corporation is the world's leading supplier of process
control and yield management solutions for the semiconductor and related
microelectronics industries. Our comprehensive portfolio of products, software,
analysis, services and expertise is designed to help integrated circuit
manufacturers manage yield throughout the entire wafer fabrication process -
from research and development to final mass production yield analysis.
During the three months ended September 30, 2002, we continued to face
a significant downturn in the semiconductor industry which started early in
calendar year 2001. For several quarters, there has been a worldwide softening
in demand for semiconductors resulting in excess capacity and reduced demand for
semiconductor manufacturing equipment. In addition there has been limited
visibility as to the timing of turnaround in demand growth.
New orders by region were as follows (in millions):
Three months ended
September 30, 2002
- -------------------------------------------------------------------------------
United States $ 80
Western Europe 30
Japan 57
Taiwan 46
Asia Pacific 29
- -------------------------------------------------------------------------------
Total orders $ 242
===============================================================================
KLA-Tencor's backlog for unshipped orders as of September 30, 2002 was
approximately $529 million.
Revenues and Gross Margin
Product revenue decreased $141 million, or 31%, to $313 million for the
three months ended September 30, 2002 from $454 million for the three months
ended September 30, 2001. Product revenue declines were mostly the result of
reduced capital spending as a result of a semiconductor industry downturn. For
the three months ended September 30, 2002, international revenue slightly
increased to 76% of revenue, from 73% for the three months ended September 30,
2001, due to higher demand in Japan, Taiwan and Europe, partially offset by
lower demand in Asia Pacific.
Service revenue is generated from maintenance service contracts, as
well as time and material billable service calls made to our customers after the
expiration of the warranty period. Service revenues were $63 million and $48
million for the three months ended September 30, 2002 and 2001 respectively.
Service revenue continued to increase throughout fiscal year 2002 and first
quarter of 2003 as our installed base of equipment at our customers' sites
continued to grow. The amount of service revenue generated is generally
proportional to the number of post-warranty systems installed at our customers'
sites and the degree of utilization of those systems.
Gross margins were 50% of revenues for the three months ended September
30, 2002, compared to 51% of revenues for the same period in the prior fiscal
year. Gross margins declined year over year primarily due to reduced capacity
utilization resulting from lower business volume and an increased percentage of
sales in the lower margin service business. Given the downturn in the
semiconductor industry we expect to have slightly decreased gross margins in the
next few quarters, until we begin to experience higher business volume.
Engineering, Research and Development
Net engineering, research and development (R&D) expenses were $71
million for the three months ended September 30, 2002, compared to $73 million
for the same period in the prior fiscal year. As a percentage of revenue, R&D
expenses were 19% for the three months ended September 30, 2002, compared to 15%
for the same period in the prior fiscal year. The absolute dollars for R&D
investment decreased primarily due to company mandated time-off, reductions in
temporary labor and discretionary spending as well as other cost saving measures
implemented over the last several quarters in response to the industry slow
down.
Gross engineering, research and development expenses were partially
offset by $6 million and $3 million in external funding received under certain
strategic development programs conducted with several of our customers and
government grants for the three months ended 2002 and 2001, respectively.
Our future operating results will depend significantly on our ability
to produce products and provide services that have a competitive advantage in
our marketplace. To do this, we believe that we must continue to make
substantial investments in our research and development efforts. We remain
committed to product development in new and emerging technologies as we address
the requirements of 0.18 micron and 0.13 micron feature sizes, real-time review,
and the transition to copper technology. Our investments in new technology and
existing product enhancements are intended to enable our customers to achieve a
higher return on their capital investments and higher productivity through
cost-effective, leading edge technology solutions.
Selling, General and Administrative
Selling, general and administrative expenses were $70 million
(excluding a one-time gain, net of restructuring charges, of $9 million) for the
three months ended September 30, 2002, compared to $81 million for the same
period in the prior fiscal year. As a percentage of revenue, selling, general
and administrative expenses were 19% for the three months ended September 30,
2002, compared to 16% for the same period in the prior fiscal year. The absolute
dollars for selling, general and administrative expenses decreased primarily due
to company mandated time-off, reductions in temporary labor and discretionary
spending as well as other cost saving measures implemented over the last several
quarters in response to the industry slowdown.
Restructuring and Other Costs
During the three months ended September 30, 2002, we
restructured certain of our operations and facilities to accommodate the planned
occupancy of our Livermore campus as well as to streamline our operations due to
the industry downturn. Restructuring costs were classified into three main
categories: facilities and other charges of $4.6 million and severance and
benefits of $1.1 million. As part of our facilities consolidation, we are
exiting several of our leased buildings and have included the remaining net book
value of the related leasehold improvements as well as the future lease
payments, net of anticipated sublease revenue, in the charge. If facilities
rental rates continue to deteriorate or if it takes longer than expected to
sublease these facilities, the actual loss could increase. Severance and
benefits include involuntary termination of approximately 70 personnel from
manufacturing, engineering, sales, marketing, and administration in the United
States, Japan and Europe. The following table shows the details of the
facilities, severance and other restructuring costs accrual as of September 30,
2002:
Balance at Non-recurring Balance at
(in thousands) June 30, 2002 charges Utilized September 30, 2002
- -----------------------------------------------------------------------------------------------------
Facilities $ 405 $ 4,623 $ (215) $ 4,813
Severance and benefits -- 1,127 (270) 857
- -----------------------------------------------------------------------------------------------------
Total $ 405 $ 5,750 $ (485) $ 5,670
=====================================================================================================
In addition, during the first fiscal quarter of 2003, we received $15.2
million as a second installment on the sale of software and intellectual
property associated with its iSupport(TM) on-line customer support technology,
which was netted against the above non-recurring charges, resulting in a net
reported gain of $9.4 million.
Interest Income and Other, Net
Interest income and other, net was $10 million and $13 million for the
three months ended September 30, 2002, and 2001, respectively. Interest income
and other, net is comprised primarily of gains realized on sales of marketable
securities, interest income earned on the investment and cash portfolio, as well
as income recognized upon settlement of certain foreign currency contracts and
unrealized gains and losses from marking to market investments classified as
trading securities. The decrease in fiscal 2002 as compared to fiscal 2001 was
primarily due to decreased interest income resulting from declining interest
rates and to a lesser extent, a decrease in income recognized upon the
settlement of foreign currency contracts.
Provision for Income Taxes
Our effective tax rate for the three months ended September 30, 2002
was 24%. This was lower than the effective tax rate of 26% realized in the same
period of the prior fiscal year. The overall reduction in our effective tax rate
was primarily the result of more R&D credits and tax-exempt interest compared
relatively to these same items as a percentage of pre-tax income of the prior
year quarter. There currently is pending legislation to repeal export incentives
provided by the United States Tax Code. If the legislation were to be approved
it would increase our effective tax rate in future periods.
Stock Option and Incentive Plans
KLA-Tencor's stock option program is a broad-based, long-term retention
program that is intended to attract and retain qualified management and
technical employees ("knowledge employees"), and align stockholder and employee
interests. The plans provide for awards in the form of stock options, stock
appreciation rights, stock purchase rights, and performance shares. As of
September 30, 2002, only stock options have been awarded under the plans. Under
KLA-Tencor's stock option plans, options generally have vesting periods of four
or five years, are exercisable for a period not to exceed ten years from the
date of issuance and are granted at prices not less than the fair market value
of KLA-Tencor's common stock at the grant date. This program consists of three
plans: one under which non-employee directors may be granted options to purchase
shares of our stock, another in which officers, key employees, consultants and
all other employees may be granted options and one other in which consultants
and all employees other than directors and officers may be granted options to
purchase shares of our stock. Substantially all of our employees that meet
established performance goals and that qualify as "knowledge employees"
participate in one of our stock option plans. Options granted to employees from
fiscal year 2000 through the three months ended September 30, 2002 are
summarized as follows (in thousands):
Three months ended
September 30 Fiscal year ended June 30,
2002 2002 2001 2000
---------------- --------------- --------------- ---------------
Weighted average number of shares outstanding
Total options granted during the period 189,279 187,677 185,860 182,177
353 9,760 10,274 8,166
Less options forfeited (512) (2,418) (1,484) (1,786)
---------------- --------------- --------------- ---------------
Net options granted (159) 7,974 7,856 6,682
Net grants during the period as a percentage of
total shares outstanding (0.1)% 4.2% 4.2% 3.6%
Grants to top five officers during the period as a
percentage of total shares outstanding 0.0% 0.3% 0.2% 0.2%
Grants to top five officers during the period as a
percentage of total options granted 0.0% 6.0% 4.0% 5.0%
During the three months ended September 30, 2002, the Company granted
options to purchase approximately 0.4 million shares of stock to employees,
which was a net forfeiture of options of 0.2 million shares after deducting
options forfeited of 0.5 million. The net options granted after forfeiture
represented (0.1)% of total outstanding shares of approximately 189.3 million as
of September 30, 2002.
During the three months ended September 30, 2002, there were no options
granted to any of the top five officers, who represent the chief executive
officer and each of the four other most highly compensated executive officers
whose salary plus bonus exceeded $100,000 for the fiscal year ended June 30,
2002. All stock option grants to officers are made with a review by, and with
the approval of the Compensation Committee of the Board of Directors. All
members of the Compensation Committee are independent directors, as defined in
the applicable rules for issuers traded on the NASDAQ Stock Market.
The following table summarizes stock options exercised by the top five
officers during the three months ended September 30, 2002:
Total Number of
Securities Underlying Total Value of Unexercised,
Unexercised Options at In-the-Money Options at
September 30, 2002 September 20, 2002 (1)
-----------------------------------------------------------
Shares Value Vested Unvested Exercisable Unexercisable
Acquired on Realized
Exercise
Kenneth Levy 0 0 886,011 98,217 $12,531,077 $70,734
Chairman of the Board
Kenneth L. Schroeder 0 0 784,743 467,957 $9,189,417 $91,017
Chief Executive Officer
Gary E. Dickerson 0 0 193,212 204,153 $772,129 $66,611
President & Chief Operating
Officer
John Kispert 0 0 55,249 112,951 $142,824 $21,407
Executive Vice President and
Chief Financial Officer
Dennis Fortino 0 0 81,071 111,846 $83,321 $24,083
Executive Vice President
(1) Total Value of vested options based on fair market value of Company's Common
Stock of $27.94 per share as of September 30, 2002.
The following table summarizes KLA-Tencor's stock option plans as of
September 30, 2002(1):
Number of securitie
Number of securities to Weighted-average remaining availabl
be issued upon exercise exercise price of or future issuance
of outstanding options outstanding options under stock option plan
------------------------ ------------------- ----------------------------
Stock option
plan approved by
stockholders (3) 23,966,066 $ 27.29 12,067,495
Stock option plan
not approved by
stockholders(1)(2) 5,660,648 35.38 7,440,047 (1)
------------------------ ------------------- -----------------------------
Total 29,626,714 $ 28.70 19,507,542
======================== =================== ============================
(1) In August 2002, the Board of Directors authorized an increase in the number
of securities reserved for additional future issuance under the Company's
stock option plans (other than the Company's [Director Stock Option Plan])
of an aggregate of 7,589,102 shares.
(2) Officers and directors are not eligible to receive options granted under
this plan.
(3) In August 2002, the 1982 Stock Option plan, the Company reserved an
additional 5,691,826 shares of its common stock in accordance with the
provisions of the plan
The summary activity under the stock option plans, was as follows:
Weighted-
Available Options Average
For Grant Outstanding Price
- ----------------------------------------------------------------------------------------------------------
Balances at June 30, 2000 5,146,702 22,355,712 $ 20.23
Additional shares reserved 11,216,391 -- --
Options granted (10,273,504) 10,273,504 37.09
Options canceled/expired 2,418,485 (2,418,485) 36.15
Options exercised -- (3,921,145) 14.71
- ----------------------------------------------------------------------------------------------------------
Balances at June 30, 2001 8,508,074 26,289,586 $ 26.18
Additional shares reserved 5,610,752 -- --
Options granted (9,760,303) 9,760,303 31.83
Options canceled/expired 1,786,295 (1,786,295) 32.55
Options exercised --- (4,173,887) 19.36
- ------------------------------------------------------------------------------------------------------------
Balances at June 30, 2002 6,144,818 30,089,707 $ 28.60
Additional shares reserved 13,280,928 -- --
Options granted (352,550) 352,550 30.31
Options canceled/expired 511,686 (511,686) 34.14
Options exercised 303,857 (303,857) 14.00
- ----------------------------------------------------------------------------------------------------------
Balances at September 30, 2002 19,888,739 29,626,714 $ 28.72
==========================================================================================================
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments balances during the
three months ended September 30, 2002 increased to $752 million from $673
million at June 30, 2002. In addition marketable securities classified as
long-term at September 30, 2002 decreased to $599 million from $660 million at
June 30, 2002. KLA-Tencor has historically financed its operations through cash
generated from operations. Net cash provided by operating activities for the
three months ended September 30, 2002 was $65 million, compared to $19 million
of net cash from operating activities for the same period of the prior fiscal
year. The increase primarily resulted from a lower accounts receivable balance
and increase in other current liabilities balances. Accounts receivable declined
primarily due to strong collections, as well as lower shipments. Net cash used
in investing activities for the three months ended September 30, 2002 was $14
million, compared to $161 million for the same period of the prior fiscal year,
primarily from decreased net purchases of marketable securities and to a lesser
extent a decrease in capital expenditures.
Net cash used in financing activities for the three months ended
September 30, 2002 was $43 million as compared to $51 million for the same
period of the prior fiscal year. This decline was primarily due to decreases in
stock repurchases. We paid $47 million for the repurchase of our common stock
under our stock repurchase program during the three months ended September 30,
2002 compared to $53 million for the same period of the prior year.
The lease agreement for certain Milpitas and San Jose, California
facilities has a term of five years ending in November 2002, with an option to
extend up to two more years. Monthly payments under this lease vary based upon
the London Interbank Offering Rate (LIBOR) plus 0.42%. Under the terms of the
lease, KLA-Tencor, at its option, can acquire the properties at their original
cost or arrange for the properties to be acquired. We plan to purchase the
Milpitas and San Jose, California facilities at the end of the lease term. The
purchase transaction would increase land and property by approximately $119.3
million and decrease cash by approximately the same amount.
The following is a schedule summarizing our significant commitments as
of June 30, 2002 (in millions):
Payments Due by Period
---------------------------------------------------------------
Total 1 year 2-3 years 3-4 years Over 5 years
--------------------------------------------------------------
Operating leases $ 21.3 $ 9.9 $ 8.7 $ 1.6 $ 1.1
Lease at maturity 119.3 119.3 - - -
----------------------------------------------------------------
$ 140.6 $ 129.2 $ 8.7 $ 1.6 $ 1.1
================================================================
We have an agreement with a bank to sell certain of its trade
receivables and promissory notes without recourse. During the three months ended
September 30, 2002, approximately $22 million of receivables were sold under
these arrangements. As of September 30, 2002, approximately $33 million were
outstanding. The total amount available under the facility is the Japanese yen
equivalent of $49 million based upon exchange rates as of September 30, 2002. We
do not believe we are materially at risk for any losses as a result of this
agreement.
Additionally, we maintain certain open inventory purchase commitments
with our suppliers to ensure a smooth and continuous supply chain for key
components. Our liability in these purchase commitments is generally restricted
to a forecasted time-horizon as mutually agreed upon between the parties. This
forecast time-horizon can vary amongst different suppliers. As such, it is
difficult to accurately report our true open commitments at any particular point
in time. However, we estimate our open inventory purchase commitment as of
September 30, 2002 to be no more than $51 million.
Working capital increased to $1.02 billion as of September 30,
2002, compared to $932 million at June 30, 2002. We believe that existing liquid
capital resources and funds generated from operations combined with the ability,
if necessary, to borrow funds will be adequate to meet our business requirements
for the foreseeable future, including potential acquisitions or strategic
investments, capital expenditures for the expansion or upgrading of
manufacturing capacity and working capital requirements. However, we can give no
assurances that we will continue to generate sufficient funds from operations or
that we will be able to borrow funds on reasonable terms in the future, if
necessary.
FACTORS AFFECTING RESULTS, INCLUDING RISKS AND UNCERTAINTIES
Fluctuations in Operating Results and Stock Price
Our operating results have varied widely in the past, and our future
operating results will continue to be subject to quarterly variations based upon
a wide variety of factors, including those listed in this section and those set
forth in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 1, "Business" in the Company's s Annual
Report on Form 10-K for the fiscal year ended June 30, 2002, filed with the SEC
on September 20, 2002. In addition, future operating results may not follow any
past trends. We believe the factors that could make our results fluctuate and
difficult to predict include:
o global economic uncertainty;
o the cyclical nature of the semiconductor industry;
o changing international economic conditions;
o competitive pressure;
o our ability to develop and implement new technologies and introduction
of new products;
o our ability to manage our manufacturing requirements;
o intellectual property protection;
o the shortage of qualified workers in the areas in which
we operate; and
o worldwide political instability.
Operating results also could be affected by sudden changes in customer
requirements, currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or more of the
global markets in which we do business. As a result of these or other factors,
we could fail to achieve our expectations as to future revenues, gross profit
and income from operations. Our failure to meet the performance expectations set
and published by external sources could result in a sudden and significant drop
in the price of our stock, particularly on a short-term basis, and could
negatively affect the value of any investment in our stock.
Global Economic Uncertainty
Our business is ultimately driven by the global demand for electronic
devices by consumers and businesses. This end-user demand has been significantly
depressed over the last few quarters, and there has been very limited visibility
as to the timing of turnaround in demand growth, and from which sector this
growth will come from. A protracted global economic slowdown will continue to
exacerbate this issue and may adversely affect our business and results of
operation.
Semiconductor Equipment Industry Volatility
The semiconductor equipment industry is highly cyclical. The purchasing
decisions of our customers are highly dependent on the economies of both the
local markets in which they are located and the semiconductor industry
worldwide. The timing, length and severity of the up-and-down cycles in the
semiconductor equipment industry are difficult to predict. This cyclical nature
of the industry in which we operate affects our ability to accurately predict
future revenue and, thus, future expense levels. When cyclical fluctuations
result in lower than expected revenue levels, operating results may be adversely
affected and cost reduction measures may be necessary in order for us to remain
competitive and financially sound. During a down cycle, we must be in a position
to adjust our cost and expense structure to prevailing market conditions and to
continue to motivate and retain our key employees. In addition, during periods
of rapid growth, we must be able to increase manufacturing capacity and
personnel to meet customer demand. We can provide no assurance that these
objectives can be met in a timely manner in response to industry cycles. If we
fail to respond to industry cycles, our business could be seriously harmed.
Currently, we are in an industry down cycle. We are not able to predict
when the semiconductor industry will recover. During a down cycle, the
semiconductor industry typically experiences excess production capacity that
causes semiconductor manufacturers to decrease capital spending. We generally do
not have long-term volume production contracts with our customers, and we do not
control the timing or volume of orders placed by our customers. Whether and to
what extent our customers place orders for any specific products, as well as the
mix and quantities of products included in those orders, are factors beyond our
control. Insufficient orders, especially in our down cycles, will result in
under-utilization of our manufacturing facilities and infrastructure and will
negatively affect our operating results and financial condition.
International Trade and Economic Conditions
We serve an increasingly global market. A majority of our annual
revenues are derived from outside the United States, and we expect that
international revenues will continue to represent a substantial percentage of
our revenues. Our international revenues and operations are affected by economic
conditions specific to each country and region. Because of our significant
dependence on international revenues, a decline in the economies of any of the
countries or regions in which we do business could negatively affect our
operating results.
Managing global operations and sites located throughout the world
presents challenges associated with, among other things, cultural diversity and
organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic local or international economic downturns, trade balance issues,
political instability in regions where we have operations, such as Israel, and
fluctuations in interest and currency exchange rates could negatively affect our
business and results of operations. Although we attempt to manage near-term
currency risks through the use of hedging instruments, there can be no assurance
that such efforts will be adequate.
Competition
Our industry includes large manufacturers with substantial resources to
support customers worldwide. Our future performance depends, in part, upon our
ability to continue to compete successfully worldwide. Some of our competitors
are diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products and services, some of which
compete with the products and services that we offer. These competitors may
bundle their products in a manner that may discourage customers from purchasing
our products. In addition, we face competition from smaller emerging
semiconductor equipment companies whose strategy is to provide a portion of the
products and services, which we offer, using innovative technology to sell
products into specialized markets. Loss of competitive position could negatively
impact our prices, customer orders, revenues, gross margins, and market share,
any of which would negatively affect our operating results and financial
condition. Our failure to compete successfully with these other companies would
seriously harm our business.
Technological Change and Customer Requirements
Success in the semiconductor equipment industry depends, in part, on
continual improvement of existing technologies and rapid innovation of new
solutions. For example, the semiconductor industry continues to shrink the size
of semiconductor devices which increasing wafer size and has begun to
commercialize the process of copper-based interconnects. These and other
evolving customer needs require us to respond with continued development
programs and to cut back or discontinue older programs, which may no longer have
industry-wide support. Technical innovations are inherently complex and require
long development cycles and appropriate professional staffing. Our competitive
advantage and future business success depend on our ability to accurately
predict evolving industry standards, to develop and introduce new products which
successfully address changing customer needs, to win market acceptance of these
new products and to manufacture these new products in a timely and
cost-effective manner. If we do not develop and introduce new products and
technologies in a timely manner in response to changing market conditions or
customer requirements, our business could be seriously harmed.
In this environment, we must continue to make significant investments
in research and development in order to enhance the performance and
functionality of our products, to keep pace with competitive products and to
satisfy customer demands for improved performance, features and functionality.
There can be no assurance that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that we will be able to secure the financial
resources necessary to fund future development. Substantial research and
development costs typically are incurred before we confirm the technical
feasibility and commercial viability of a product, and not all development
activities result in commercially viable products. In addition, we cannot ensure
that these products or enhancements will receive market acceptance or that we
will be able to sell these products at prices that are favorable to us. Our
business will be seriously harmed if we are unable to sell our products at
favorable prices or if the market in which we operate does not accept our
products.
Key Suppliers
We use a wide range of materials in the production of our products,
including custom electronic and mechanical components, and we use numerous
suppliers to supply materials. We generally do not have guaranteed supply
arrangements with our suppliers. Because of the variability and uniqueness of
customers' orders, we do not maintain an extensive inventory of materials for
manufacturing. We seek to minimize the risk of production and service
interruptions and/or shortages of key parts by selecting and qualifying
alternative suppliers for key parts, monitoring the financial stability of key
suppliers and maintaining appropriate inventories of key parts. Although we make
reasonable efforts to ensure that parts are available from multiple suppliers,
key parts may be available only from a single supplier or a limited group of
suppliers. Our business would be harmed if we do not receive sufficient parts to
meet our production requirements in a timely and cost-effective manner.
Manufacturing Disruption
Operations at our primary manufacturing facilities and our assembly
subcontractors are subject to disruption for a variety of reasons, including
work stoppages, terrorism, fire, earthquake, energy shortages, flooding or other
natural disasters. In addition, last year California suffered from a severe
energy shortage, causing rolling blackouts throughout the state. In recent
months there has also been a marked increase in hostility in the Middle East.
Such disruption could cause delays in shipments of products to our customers. We
cannot ensure that alternate production capacity would be available if a major
disruption were to occur or that, if it were available, it could be obtained on
favorable terms. Such a disruption could result in cancellation of orders or
loss of customers and could seriously harm our business.
Intellectual Property Obsolescence and Infringement
Our success is dependent in part on our technology and other
proprietary rights. We own various United States and international patents and
have additional pending patent applications relating to some of our products and
technologies. The process of seeking patent protection is lengthy and expensive,
and we cannot be certain that pending or future applications will actually
result in issued patents or that issued patents will be of sufficient scope or
strength to provide meaningful protection or commercial advantage to us. Other
companies and individuals, including our larger competitors, may develop
technologies that are similar or superior to our technology or may design around
the patents we own.
We also maintain trademarks on certain of our products and services and
claim copyright protection for certain proprietary software and documentation.
However, we can give no assurance that our trademarks and copyrights will be
upheld or successfully deter infringement by third parties.
While patent, copyright and trademark protection for our intellectual
property is important, we believe our future success in highly dynamic markets
is most dependent upon the technical competence and creative skills of our
personnel. We attempt to protect our trade secrets and other proprietary
information through confidentiality and other agreements with our customers,
suppliers, employees and consultants and through other security measures. We
also maintain exclusive and non-exclusive licenses with third parties for
strategic technology used in certain products. However, these employees,
consultants and third parties may breach these agreements, and we may not have
adequate remedies for wrongdoing. In addition, the laws of certain territories
in which we develop, manufacture or sell our products may not protect our
intellectual property rights to the same extent, as do the laws of the United
States.
As is typical in the semiconductor equipment industry, from time to
time we have received communications from other parties asserting the existence
of patent rights, copyrights, trademark rights or other intellectual property
rights which they believe cover certain of our products, processes, technologies
or information. Our customary practice is to evaluate such assertions and to
consider whether to seek licenses where appropriate. However, we cannot ensure
that licenses can be obtained or, if obtained, will be on acceptable terms or
that costly litigation or other administrative proceedings will not occur. The
inability to obtain necessary licenses or other rights on reasonable terms could
seriously harm our operating results and financial condition.
Key Employees
Our employees are vital to our success, and our key management,
engineering and other employees are difficult to replace. We generally do not
have employment contracts with our key employees. Further, we do not maintain
key person life insurance on any of our employees. The expansion of high
technology companies worldwide has increased demand and competition for
qualified personnel. If we are unable to retain key personnel, or if we are not
able to attract, assimilate or retain additional highly qualified employees to
meet our needs in the future, our business and operations could be harmed. These
factors could seriously harm our business.
Acquisitions
In addition to our efforts to develop new technologies from internal
sources, we also seek to acquire new technologies from external sources. As part
of this effort, we may make acquisitions of, or significant investments in,
businesses with complementary products, services and/or technologies.
Acquisitions involve numerous risks, including management issues and costs in
connection with the integration of the operations and personnel, technologies
and products of the acquired companies, the possible write-downs of impaired
assets, and the potential loss of key employees of the acquired companies. The
inability to manage these risks effectively could seriously harm our business.
Litigation
From time to time we are involved in litigation of various types,
including litigation that alleges infringement of intellectual property rights
and other claims. Litigation tends to be expensive and requires significant
management time and attention and could have a negative effect on our results of
operations or business if we lose or have to settle a case on significantly
adverse terms. If we lose in a dispute concerning intellectual property, a court
could require us to pay substantial damages and/or royalties or could issue an
injunction prohibiting us from using essential technologies. For these and other
reasons, this type of litigation could have a material adverse effect on our
business, financial condition and results of operations. Also, although we may
seek to obtain a license under a third party's intellectual property rights in
order to bring an end to certain claims or actions asserted against us, we may
not be able to obtain such a license on reasonable terms or at all.
Terrorism and Political Instability
The threat of terrorism targeted at the regions of the world in which
we do business, including the United States, increases the uncertainty in our
markets and may delay any recovery in the general economy. Any delay in the
recovery of the economy and the semiconductor industry could seriously impact
our business.
Increased international political instability, as demonstrated by the
September 2001 terrorist attacks, disruption in air transportation and further
enhanced security measures as a result of the September 2001 terrorist attacks,
the conflict in Afghanistan and the increasing tension in the Middle East, may
hinder our ability to do business and may increase our costs of operations. To
the extent this instability continues or otherwise increases, we could incur
increased costs in transportation, make such transportation unreliable, increase
insurance costs, and cause international currency markets to fluctuate. This
same instability could have the same effects on our suppliers and their ability
to timely deliver their products. If this international political instability
continues or increases, our business and results of operations could be harmed.
Effects of Recent Accounting Pronouncements
We have adopted SFAS No. 143, "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets" and SFAS No. 144 "Accounting for the
Impairment of Disposal of Long-Lived Assets". SFAS No. 143 establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. It also provides guidance
for legal obligations associated with the retirement of tangible long-lived
assets. SFAS No. 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. Adoption of
these pronouncements did not have a significant effect on our consolidated
financial statements.
In June 2002, the FASB issued Statement No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities, and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liabilities Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability for costs associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. SFAS 146 will be effective for exit
or disposal activities that are initiated after December 31, 2002. The standard
will in certain circumstances change the timing of recognition of restructuring
costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. To
mitigate these risks, we utilize derivative financial instruments. We do not use
derivative financial instruments for speculative or trading purposes. All of the
potential changes noted below are based on sensitivity analyses performed on our
financial position at September 30, 2002 . Actual results may differ materially.
As of September 30, 2002, we had an investment portfolio of fixed
income securities of $895 million excluding those classified as cash and cash
equivalents. These securities, as with all fixed income instruments, are subject
to interest rate risk and will fall in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of September 30, 2002, the fair value of portfolio would decline by $7
million.
As of September 30, 2002, we had net forward contracts to sell U.S.
dollar equivalent of $139 million in foreign currency in order to hedge our
currency exposures. If we had entered into these contracts on September 30,
2002, the U.S. dollar equivalent would be $137 million. A 10% adverse move in
currency exchange rates affecting the contracts from their September 30, 2002
would decrease the fair value of the contracts by $17 million. However, if this
occurred, the fair value of the underlying exposures hedged by the contracts
would increase by a similar amount. Accordingly, we believe that our hedging
strategy should yield no material net impact to net income or cash flows.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report (the Evaluation Date),
the Company's Chief Executive Officer (principal executive officer) and
Executive Vice President and Chief Financial Officer (principal financial
officer), carried out an evaluation of the effectiveness of the Company's
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 Rules 13a-14(c) and 15(d)-14(c)). Based on that evaluation, these
officers have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and designed to ensure that material
information relating to the Company and the Company's consolidated subsidiaries
would be made known to them by others within those entities.
Changes in internal controls
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A discussion regarding certain pending legal proceedings is included in
Part I, Item 3, "Legal Proceedings," included in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2002. Since the fiscal year ended June 30,
2002, certain developments have occurred with respect to the legal proceedings
described in our Annual Report as follows:
ADE Corporation
On October 11, 2000, ADE Corporation ("ADE"), a competitor, filed a
patent infringement lawsuit against KLA-Tencor in the U.S. District Court in
Delaware. ADE claimed damages and sought an injunction under U.S. Patent No.
6,118,525 (`525 patent). We filed a counterclaim in the same court alleging that
ADE has infringed four of our patents. We are seeking damages and a permanent
injunction against ADE. In addition, we are seeking a declaration from the
District Court that ADE's patent is invalid and not infringed by KLA-Tencor. On
October 22, 2001, we filed a separate action for declaratory judgment against
ADE in the Northern District of California requesting a declaration that U.S.
Patent No. 6,292,259 (`259 patent) is invalid and not infringed. That action has
now been consolidated with the prior action in the Delaware proceeding, and ADE
has amended its complaint in that proceeding to allege that KLA-Tencor is
infringing the `259 patent. On August 8, 2002, the magistrate presiding over the
action issued a recommendation that the court enter summary judgment in favor of
KLA-Tencor on the issue of non-infringement under ADE's `525 patent. On the same
day, the magistrate issued recommendations that the court enter summary judgment
in favor of ADE on the issue of non-infringement of two of KLA-Tencor's patents.
While we cannot predict the outcome, we believe that we have valid defenses and
further believe that our counterclaims have merit.
Tokyo Seimitsu Co. Ltd.
On June 27, 2001,we sued Tokyo Seimitsu Co. Ltd. and TSK America Inc.
("TSK"), a competitor, in the U.S. District Court in the Northern District
of California alleging that TSK infringes on one of the Company's patents.
The suit seeks damages and an injunction under U.S. Patent No. 4,805,123
(`123 patent). TSK filed a counterclaim in the same court seeking a declaration
that the `123 patent is invalid, unenforceable and not infringed, and also
alleged violations of the antitrust and unfair competition laws.
Schlumberger, Inc. and Rigg Systems, Inc.
The Schlumberger, Inc. and Rigg Systems, Inc. actions have been
dismissed under circumstances that the parties have agreed to treat as
confidential.
Although we cannot predict the outcome of these claims, we do not
believe that any of these legal matters will have a material adverse effect on
KLA-Tencor. Were an unfavorable ruling to occur in one or more of the pending
claims, there exists the possibility of a material impact on our operating
results for the period in which the ruling occurred.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Form 8-K
The Registrant filed a Report on Form 8-K dated September 25,
2002 to report an event under Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KLA-Tencor Corporation
(Registrant)
November 13, 2002 /s/ KENNETH L. SCHROEDER
- ------------------------------- ---------------------------------------
(Date) Kenneth L. Schroeder
Chief Executive Officer and Director
(Principal Executive Officer)
November 13, 2002 /s/ JOHN H. KISPERT
- ------------------------------- ---------------------------------------
(Date) John H. Kispert
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
CERTIFICATIONS
I, Kenneth L. Schroeder certify that:
1. I have reviewed this quarterly report on Form 10-Q of KLA-Tencor
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 13, 2002 /s/ KENNETH L. SCHROEDER
- --------------------- ---------------------------------------
(Date) Kenneth L. Schroeder
Chief Executive Officer and Director
(Principal Executive Officer)
I, John H. Kispert certify that:
1. I have reviewed this quarterly report on Form 10-Q of KLA-Tencor
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 13, 2002 /s/ JOHN H. KISPERT
- --------------------------- ---------------------------------
(Date) John H. Kispert
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)