SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-9992
KLA INSTRUMENTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2564110
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
160 RIO ROBLES 95134
SAN JOSE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 468-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the average bid and asked prices of the registrant's
stock, as of August 31, 1996, was $761,763,320. Shares of common stock held by
each officer and director and by each person or group who owns 5% or more of the
outstanding common stock have been excluded in that such persons or groups may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The registrant had 51,050,005 shares of Common Stock outstanding as of
August 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1996 ("1996 Annual Report to Stockholders" ) are incorporated by
reference into Parts I, II and IV of this Report.
Portions of the Proxy Statement for the Annual Meeting of Stockholders
("Proxy Statement" ) to be held on November 18, 1996, and to be filed pursuant
to Regulation 14A within 120 days after registrant's fiscal year ended June 30,
1996, are incorporated by reference into Part III of this Report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY AND ITS PRODUCTS
KLA Instruments Corporation was incorporated in Delaware in July 1975. The
Company's headquarters are located at 160 Rio Robles, San Jose, California,
95134, telephone (408) 468-4200. Unless the text requires otherwise, the
"Company" or "KLA" refers to KLA Instruments Corporation and its subsidiaries.
KLA is the leader in the design, manufacture, marketing and service of
yield management and process monitoring systems for the semiconductor industry.
KLA believes that it is the world's largest supplier to the wafer and reticle
inspection and optical metrology equipment markets. KLA's systems are used to
analyze product and process quality at critical steps in the manufacture of
integrated circuits and to provide feedback so that fabrication problems can be
identified, addressed and contained. This understanding of defect sources and
how to contain them enables semiconductor manufacturers to increase yields.
Quickly attaining and then maintaining high yields is one of the most important
determinants of profitability in the semiconductor industry. The Company
believes that its customers typically experience rapid paybacks on their
investments in the Company's systems. The Company sells to virtually all of the
world's semiconductor manufacturers and has achieved very high market shares in
its principal businesses.
The Company's technological strength has enabled it to develop and
introduce major new product families in the past four years for the following
three business units: WISARD, which addresses semiconductor wafer inspection;
RAPID, which addresses reticle inspection; and Metrology, which addresses
overlay registration and linewidth measurement. The Company believes that its
WISARD and RAPID product families incorporate proprietary technologies which
provide greater sensitivity to defects than any competing systems.
YIELD MANAGEMENT
Maximizing yields, or the number of good die per wafer, is a key goal of
modern semiconductor manufacturing. Higher yields increase the revenue a
manufacturer can obtain for each semiconductor wafer processed. As geometry
linewidths decrease, yields become more sensitive to the size and density of
defects. Semiconductor manufacturers use yield management and process monitoring
systems to improve yields by identifying defects, by analyzing them to determine
process problems, and, after corrective action has been taken, by monitoring
subsequent results to ensure that the problem has been contained. Monitoring and
analysis often takes place at various points in the fabrication process as
wafers move through a production cycle consisting of hundreds of separate
process steps.
Semiconductor factories are increasingly expensive to build and equip.
Yield management and process monitoring systems, which typically represent a
small percentage of the total investment required to build and equip a
fabrication facility, enable integrated circuit manufacturers to leverage these
expensive facilities and improve their returns on investment.
The most significant opportunities for yield improvement generally occur
when production is started at new factories and when new products are first
built. Equipment that helps a manufacturer quickly increase new product yields
enables the manufacturer to offer these new products in volume at a time when
they are likely to generate the greatest profits.
2
The following are some of the methods used to manage yield, all of which
require the capture and analysis of data gathered through many measurements:
- - Engineering analysis is performed off the manufacturing line to identify
and analyze defect sources. Engineering analysis equipment operates with
very high sensitivity to enable comprehensive analysis of wafers. Because
they operate off-line, engineering analysis systems do not require high
speeds of operation.
- - In-line monitoring is used to review the status of circuits during
production steps. Information generated is used to determine whether the
fabrication process steps are within required tolerances and to make any
necessary process adjustments in real-time before wafer lots move to
subsequent process stations. Because the information is needed quickly to
be of greatest value, in-line monitoring requires both high throughput and
high sensitivity.
- - Pass/fail tests are used at several steps in the manufacturing process to
evaluate products. For example, a pass/fail test is used to determine
whether reticles used in photolithography are defect-free; electrical
pass/fail testing is performed at the end of the manufacturing process to
determine whether products meet performance specifications.
YIELD MANAGEMENT AND PROCESS MONITORING SYSTEMS
KLA's systems are developed to offer customers integrated yield management
solutions. KLA offers inspection systems for key steps in the semiconductor
manufacturing process and analysis systems comprised of database management
hardware and software to translate raw inspection data into patterns which
reveal process problems. The Company's wafer inspection and metrology systems
are used for engineering analysis and in-line monitoring, and its reticle
inspection systems are used for pass/fail tests. The Company's software
productivity and analysis systems collect, store and analyze data collected by
test equipment manufactured by both the Company and others to provide
semiconductor manufacturers with an integrated yield management application. The
Company's principal business units are: Wafer Inspection Systems (WISARD);
Reticle Inspection Systems (RAPID); Metrology, including Optical Metrology and
E-Beam Metrology; Software Productivity and Analysis Systems (PRISM); Scanning
Electron Microscope Inspection Systems (SEMSpec); and ATS Watcher Division
(ATS).
WISARD-WAFER INSPECTION SYSTEMS
KLA's WISARD business unit created the market for automated inspection of
semiconductor wafers with the introduction of the KLA 2000 series over eleven
years ago. KLA continues to have a predominant market share with its current
generation of wafer inspection systems, the 2100 series.
The 2100 series of inspection systems offers an increase in inspection
speed of up to 2,000 times over that of KLA's original wafer inspection system.
This marked increase in speed and sensitivity allows customers to obtain very
prompt feedback on process status by placing wafer inspection systems on the
production line. The selection of the technology architecture for the 2100
series was made to allow the base unit to support a family of products capable
of performance enhancements through upgrades of various subsystems. The first
model, the KLA 2110, was introduced in 1991 with sufficient speed and
sensitivity to enable in-line inspection of repeating arrays typical in memory
devices. Since then, KLA has introduced three new repeating array models in
succession, the 2111, 2112 and 2115. Each new model has had greater sensitivity
and greater maximum speed compared to its predecessor. The 2115 was introduced
in 1996 with twice the throughput and higher sensitivity compared to the 2112.
In 1992, KLA introduced the KLA 2130 which is capable of "all pattern"
inspection required for microprocessors and other logic devices as well as both
the logic and repeating array portions of memory devices. Since then, KLA has
introduced three new all pattern inspection models in succession, the 2131, 2132
and 2135. Each new model has had greater sensitivity and greater maximum speed
compared to its predecessor. The 2135 was introduced in 1996 with twice the
throughput and higher sensitivity compared to the 2132. The Company believes
that there are further opportunities to expand the 2100 series and has several
new models under development.
3
RAPID-RETICLE INSPECTION SYSTEMS
RAPID, KLA's first business unit, created the market for automated
inspection of reticles and photomasks for the semiconductor manufacturing
industry over 18 years ago and continues to have a predominant market share. KLA
has delivered over 750 reticle and photomask inspection systems worldwide.
During photolithography, a stepper projects a circuit pattern from a
reticle onto a wafer. Error-free reticles are the first step in ensuring high
yields in the manufacturing process because defects in reticles can translate
into millions of ruined die.
In 1992, KLA introduced a new generation of reticle inspection systems, the
300 series. The KLA 301 Reticle Inspection System and the KLA 50 Reference Data
Computer together form the KLA 351 Inspection System, which represents a major
advance in speed, sensitivity and flexibility. The KLA 351 offers the highest
inspection sensitivity available in the marketplace, which the Company believes
is vital to meet reticle inspection requirements for today's more complex
microprocessors and larger DRAMs. This dedicated image processor employs a
flexible system architecture which permits future upgrades and enhancements
through software, rather than hardware changes. Furthermore, the KLA 351's
optics include a rotating telescope turret to provide three sensitivities in one
system. The KLA 351 offers flexibility for users who need a versatile inspection
system to address the inspection needs of both the most demanding and the more
routine semiconductor manufacturing processes. Users may obtain higher
throughput by selecting lower sensitivity inspections.
The KLA 351 incorporates a reference database generator and data
preparation system which gives full die-to-database functionality to the
inspection, permitting inspection against the ideal reticle pattern as specified
by the user's CAD program. The Company is continuing to develop enhancements to
the KLA 351 inspection system to improve performance, serviceability and
reliability.
In 1995, the Company introduced a new reticle inspection product,
STARlight, which uses reflected and transmitted light detection techniques
simultaneously to identify reticle contaminants, including particles. STARlight
permits users to identify defects which previously had not been detectable. The
Company believes STARlight will be applied by mask manufacturers and
semiconductor manufacturers. STARlight is offered as an option on the KLA 351
inspection system and as a stand-alone unit.
METROLOGY GROUP
Optical Metrology Business Unit. Lithography for sub-micron semiconductor
fabrication requires increasingly stringent overlay and critical dimension
tolerances. In particular, decreasing linewidths, larger die sizes, and
additional layers have made overlay mis-registration errors a crucial cause of
yield loss. To address these challenges, KLA offers the KLA 5000 series
metrology systems: the 5100 for overlay; and the 5105 for both overlay and
critical dimension measurement. In June 1996, KLA introduced the 5200 overlay
system, which has performance and usability enhancements compared to the 5100.
KLA estimates that during fiscal 1994, 1995 and 1996, it had the leading share
in the worldwide market for overlay registration systems.
The KLA 5000 series uses a patented coherence probe microscopy technology
which permits fast autofocus and precision critical dimension measurements.
Applying its expertise in digital image processing, KLA has developed
sophisticated measurement algorithms that are more tolerant of process
variations. With coherence probe microscopy, the system scans the image-forming
coherence region through the wafer plane, only gathering information from
in-focus surfaces. As a result, measurements are more tolerant of process and
substrate reflectivity variations than those from ordinary optical systems.
The precision measurements from the KLA 5000 series identify the magnitude
and direction of overlay mis-registration errors arising from the stepping
process and from optical distortion inherent in the stepper lens. Based upon
these measurements, users can fine-tune the stepper program to compensate for
these errors, and improve process yield.
The disk drive manufacturing industry is an emerging market for KLA's
metrology systems. Disk drive manufacturers use a semiconductor photolithography
process to produce thin film heads. The Company's coherence probe technology is
particularly well-suited to handle the complex topography characteristics
encountered in the thin film head process. The Company believes that its
solution to these requirements has allowed it to achieve the major share of the
thin film head metrology market.
4
E-Beam Metrology Business Unit. KLA broadened its portfolio of metrology
products in December 1994 with the acquisition of Metrologix, Inc., a
manufacturer of advanced electron beam measurement equipment. With this
acquisition, KLA's E-Beam Metrology business gained an established position in
the CD SEM inspection market, a market which KLA believes is larger than the
optical overlay market, and one which it believes will grow as semiconductor
manufacturers continue to produce more complex semiconductor devices.
KLA's first generation E-Beam metrology system features high throughput and
automated setup. One major U.S. memory manufacturer and two major U.S.
microprocessor manufacturers have purchased multiple systems for use in both
production and research and development. The Company has made substantial
investments in engineering and manufacturing to bring to market the
next-generation tool, the KLA 8100. Production shipments of this product began
in June 1996.
PRISM-SOFTWARE PRODUCTIVITY AND ANALYSIS SYSTEMS
The PRISM division was formed in April 1994 to address the market for
software products that can be utilized in semiconductor fabrication applications
for yield management and productivity improvement. The PRISM division is
developing and marketing two software product lines, Discovery and CIMA.
Discovery is an enterprise-wide yield management system that collects, stores
and correlates yield information from multiple data sources in a fabrication
facility. This product was the result of a cooperative development project with
Motorola. The Company released production versions of Discovery in early fiscal
1996. CIMA is a test floor automation product that was developed by the Company
and introduced in August 1994. CIMA collects test data from, and automates the
operation of, the wafer floor. CIMA is currently in production and is installed
in several modern fabrication facilities. PRISM has formed a client services
organization to provide system integration and consulting services to assist its
customers in the integration of its software products into the facility's
information systems.
SEMSPEC-SCANNING ELECTRON MICROSCOPE INSPECTION SYSTEMS
As feature sizes of semiconductor circuits continue to decrease for leading
edge semiconductor products, the Company believes that conventional optical
technologies ultimately will begin to reach physical limits imposed by the
wavelength of light and fail to provide the necessary inspection resolution.
Working closely with those customers with the most advanced inspection
requirements, KLA has developed the world's only fully automatic electron beam
inspection systems. These systems, comprised of the world's fastest scanning
electron-optical column and a high speed image computer, are used for wafer and
x-ray mask inspection. The development of these systems was funded in part by
customer-sponsored research and development programs. KLA expects the market for
these inspection systems to emerge slowly.
ATS WATCHER DIVISION-IMAGE PROCESSING SUBSYSTEMS
The ATS Watcher division develops and manufactures the image processing
electronics and optical subsystems sold to Tokyo Electron, Limited ("TEL") for
inclusion in TEL's wafer probers. TEL manufactures the prober's mechanical
chassis and incorporates the KLA electronics and subsystems.
On April 30, 1996, TEL and KLA reached agreement to transfer all of KLA's
prober distribution operations to TEL. Under the agreement, KLA transferred all
prober related assets to TEL, and KLA is no longer selling or servicing prober
systems.
CUSTOMERS AND APPLICATIONS
The Company believes that it is one of the few suppliers which sells its
systems to virtually all of the world's semiconductor manufacturers. In fiscal
1994, 1995 and 1996, no single customer accounted for more than 10% of the
Company's revenues.
5
SALES, SERVICE AND MARKETING
The Company believes that the size and location of its field sales, service
and applications engineering organization represents a competitive advantage
in its served markets. In the United States, Europe, Asia Pacific and Japan the
Company has a direct sales force located in major geographical markets. The
Company's sales, service and applications facilities throughout the world
employ over 600 sales, service and applications engineers.
In fiscal 1996, the Company sold its systems in Japan, Singapore and Taiwan
through local sales representatives. Starting in July 1996, KLA began selling
direct in these countries and no longer uses a local sales representative,
except in Japan. In Japan, the Company took over the majority of the sales
duties in July 1996, but will be phasing out its distributor (TEL) through
December 1996.
KLA maintains an export compliance program that fully meets the
requirements of the U.S. Department of Commerce. KLA has never been denied
approval to ship against a purchase order.
For information regarding the Company's revenues from foreign operations
for the Company's last three fiscal years, see Note 10 on page 22 of the 1996
Annual Report to Stockholders, incorporated herein by reference.
TECHNOLOGY
The Company's inspection and metrology systems precisely capture trillions
of features on wafers and reticles that are as small as 10 millionths of an inch
on a side and analyze each of these features for possible defects through the
use of the following technologies:
Image Acquisition. The Company's systems acquire images of sub-micron
features on wafers and reticles. The quality and brightness of the images
greatly influence the speed and sensitivity of the final inspection system. The
Company has developed a wide range of optical imaging systems, such as laser
scanners, interference microscope systems, and conventional white light and deep
UV optical systems. To satisfy the future sensitivity requirements of advanced
lithography, the Company has developed an electron beam system which
incorporates the world's fastest scanning electron-optical column.
Image Conversion. The Company's equipment converts the photon or electron
image to an electronic digital format. The Company has been a pioneer in the use
of time-delay-integration sensors. The Company also utilizes other image
conversion technologies such as avalanche diode detectors, photo multiplier
systems and fixed frame pickups.
Precision Mechanics. In the most common configuration of an inspection
system, the reticle or the wafer is moved at a constant speed through the field
of the imaging system. Since areas of interest are as small as 5 millionths of
an inch, and vibrations in the scanning system of one-tenth of the area of
interest can degrade system performance, the mechanical stage must be extremely
smooth and precise. To address these requirements, the Company has ten years of
experience in the design and manufacture of air-bearing linear drive stages.
Proprietary Algorithms. To perform the inspection or measurement task, the
Company's equipment examines the properties of the digitized images using a set
of logical steps (algorithms) which measure the desired image property. The
Company's engineers develop sets of algorithms that are specifically tailored to
obtain optimum performance for its wafer, reticle and metrology systems. These
algorithms are largely responsible for the state-of-the-art performance of the
Company's systems.
Image Computers. The combination of proprietary algorithms and special
purpose computers allows the Company's equipment to have a high performance to
cost ratio. While general purpose computers are capable of executing the
Company's algorithms, very few computer architectures can sustain the computing
speed that is required in the Company's systems. To address this requirement,
the Company develops and builds special purpose image computers designed to
execute its algorithms.
Database Analysis. Many of the inspections that the Company's reticle
inspection systems perform require a digital image representation of the ideal
pattern obtained from the data used to manufacture the reticle. This capability
allows inspection systems to compare the actual circuit with its design
specifications. The Company has been developing database systems for over 16
years to satisfy this objective. Its present generation of special purpose
database computers is capable of generating simulated images at the same high
speeds at which the Company's image conversion systems generate the digital
image from the actual reticle.
6
Statistical Process Control. Integrated circuit yield management and
process monitoring systems generate hundreds of thousands of data items each
day. To enhance the utility of this data, the Company has a team of software
engineers who build systems containing statistical process control software to
simplify data and present this data in a useful manner. The Company is
continuing to work on new software to enhance its statistical process control
systems.
RESEARCH AND DEVELOPMENT
The market for yield management and process monitoring systems is
characterized by rapid technological development and product innovation. The
Company believes that continued and timely development of new products and
enhancements to existing products are necessary to maintain its competitive
position. Accordingly, the Company devotes a significant portion of its
personnel and financial resources to research and development programs and seeks
to maintain close relationships with customers to remain responsive to their
needs. In order to meet continuing developments in the semiconductor industry
and to broaden the applications for its image processing technology, the Company
is committed to significant engineering efforts for product improvement and new
product development. The Company reports engineering, research and development
expense net of this funding.
KLA typically receives some external funding from customers, industry
groups, and government sources to augment its engineering, research and
development efforts. The Company reports engineering, research and development
expense net of this funding. Thus, recorded amounts for engineering, research
and development expense were 9%, 10% and 11% of sales in fiscal 1994, 1995 and
1996, respectively. For information regarding the Company's research and
development expense during the last three fiscal years, see Notes 1 and 8 on
pages 18 and 22, respectively, of the 1996 Annual Report to Stockholders
incorporated herein by reference.
MANUFACTURING
The Company's principal manufacturing activities take place in San Jose,
California, and Migdal Ha'Emek, Israel, and consist primarily of manufacturing,
assembling and testing components and subassemblies which are acquired from
third party vendors and then integrated into the Company's finished products.
Due to the discontinuation of the Wafer Probing Systems agreement with TEL, the
Company discontinued manufacturing operations in Bevaix, Switzerland in
April 1996. The Company is also cross-training personnel, so that it can respond
to changes in product mix by reallocating personnel in addition to hiring.
The Company has been working with key vendors to improve inventory
management. Volume purchase agreements and just-in-time delivery schedules have
helped control both inventory levels and costs. The Company's manufacturing
engineers, in conjunction with key vendors, are improving the manufacturability
and reliability of the new wafer and reticle inspection systems and metrology
systems.
Many of the components and subassemblies are standard products, although
certain items are made to Company specifications. Certain of the components and
subassemblies included in the Company's systems are obtained from a single
source or a limited group of suppliers. Those parts subject to single or limited
source supply are routinely monitored by management and the Company endeavors to
ensure that adequate supplies are available to maintain manufacturing schedules,
should supply for any part be interrupted. Although the Company seeks to reduce
its dependence on sole and limited source suppliers, in some cases the partial
or complete loss of certain of these sources could have at least a temporary
adverse effect on the Company's results of operations and damage customer
relationships.
COMPETITION
The market for yield management and process control systems is highly
competitive. In each of the markets it serves, the Company faces competition
from established and potential competitors, some of which may have greater
financial, engineering, manufacturing and marketing resources than the Company.
Significant competitive factors in the market for yield management and process
control systems include system performance, ease of use, reliability, installed
base and technical service and support.
The Company believes that, while price and delivery are important
competitive factors, the customers' overriding requirement is for systems which
easily and effectively incorporate automated, highly accurate inspection
capabilities into their existing manufacturing processes, thereby enhancing
productivity. The Company's yield management and process control systems for the
semiconductor industry are generally higher priced than those of its present
competitors and are intended to compete based upon performance and technical
capabilities. These systems also compete with less expensive, more
labor-intensive manual inspection devices.
The Company's wafer and reticle inspection systems have a predominant share
of their respective markets. The Company believes that it is the leading
provider of overlay registration systems.
7
Many of the Company's competitors are investing in the development of new
products aimed at applications currently served by the Company. The Company's
competitors can be expected to continue to improve the design and performance of
their products in each product area and to introduce new products with
competitive price/performance characteristics. Competitive pressures often
necessitate price reductions which can adversely affect operating results.
Although the Company believes that it has certain technical and other advantages
over its competitors, maintaining such advantages will require a continued high
level of investment by the Company in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to continue to make such investments or that the Company will be able
to make the technological advances necessary to maintain these competitive
advantages.
The yield management and process control industry is characterized by
rapidly changing technology and a high rate of technological obsolescence.
Development of new technologies that have price/performance characteristics
superior to the Company's technologies could adversely affect the Company's
results of operations. In order to remain competitive, the Company believes that
it will be necessary to expend substantial effort on continuing product
improvement and new product development. There can be no assurance that the
Company will be able to develop and market new products successfully or that the
products introduced by others will not render the Company's products or
technologies non-competitive or obsolete.
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company believes that, due to the rapid pace of innovation within the
yield management and process control systems industry, its protection of patent
and other intellectual property rights is less important than factors such as
its technological expertise, continuing development of new systems, market
penetration and installed base and the ability to provide comprehensive support
and service to customers.
The Company protects its proprietary technology through a variety of
intellectual property laws including patents, copyrights and trade secrets. The
Company's source code is protected as a trade secret and as an unpublished
copyright work. The Company has a number of United States and foreign patents
and patent applications. The Company's effort to protect its intellectual
property rights through trade secret and copyright protection may be impaired if
third parties are able to copy or otherwise obtain and use the Company's
technology without authorization. Effective intellectual property protection may
be unavailable or limited in certain foreign countries. In addition, the
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights. No assurance can be given that any
patent held by the Company will provide sufficient protection.
BACKLOG
Backlog orders for systems were $250 and $385 million at June 30, 1995 and
1996, respectively. In general, systems ship within six months to a year after
receipt of a customer's purchase order.
EMPLOYEES
As of August 31, 1996, the Company employed a total of approximately 2,500
persons. None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are good.
Competition in the recruiting of personnel in the semiconductor and
semiconductor equipment industry is intense. The Company believes that its
future success will depend in part on its continued ability to hire and retain
qualified management, marketing and technical employees.
8
ITEM 2. PROPERTIES
The Company owns a corporate facility which houses engineering,
manufacturing and administrative functions in San Jose, California, occupying
approximately 232,000 square feet. The Company purchased this facility in 1990
at a total cost of approximately $30 million, including improvements. The
Company leases additional office space for manufacturing, engineering, sales and
service activities, including seven locations in the U.S., eleven in Japan,
eight in Europe, two each in Korea and Israel, and one each in Malaysia and
Taiwan. The Company leases three buildings adjacent to its campus facility,
consisting of an aggregate of approximately 87,000 square feet. Two of these
leases have been extended to fiscal 2000 (73,000 square feet).
In June 1995, the Company entered into a five-year operating lease for a
105,000 square-foot building constructed on land owned by the Company in San
Jose, California. Monthly rent payments for the building commenced on July 1,
1996, and will vary based on the London interbank offering rate (LIBOR). The
Company may, at its option, purchase the building during the term of the lease
for $12.5 million. In August 1995, the Company entered into a five-year
operating lease agreement for an additional 120,000 square feet in two
buildings in San Jose, California. Monthly rent payments for the buildings
commenced on May 1, 1996, and will vary based on the LIBOR rate. The Company
may, at its option, purchase the buildings during the term of the lease for
$18.7 million. If the Company does not purchase any or all of the buildings at
the end of their respective leases, the Company will guarantee the lessor 85%
of the aforementioned purchase prices of the building or buildings not
purchased. In addition, the lease agreements require the Company to maintain,
among other items, minimum quick ratio, tangible net worth and profitability.
As of June 30, 1996, the Company was in compliance with all of these covenants.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
"Common Stock" on page 24 of the 1996 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" on page 14 of the 1996 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
"Management's Financial Commentary" on pages 12 and 13 of the 1996
Annual Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP dated August 7, 1996, appearing on pages 14 through 24 of
the 1996 Annual Report to Stockholders are incorporated herein by reference.
With the exception of the aforementioned information and the information
incorporated in Items 5, 6, 7 and 8, the 1996 Annual Report to Stockholders is
not to be deemed filed as part of this Form 10-K Annual Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names of the present executive officers of the
Company, their ages and positions held with the Company.
Name Age Position
- ---- --- --------
Kenneth Levy 53 Chairman of the Board of Directors and
Chief Executive Officer
Kenneth L. Schroeder 50 President, Chief Operating Officer and Director
Robert J. Boehlke 55 Vice President of Finance and Administration,
Chief Financial Officer and Assistant Secretary
Frank L. Brienzo 45 Vice President, Asia Operations
Virginia J. DeMars 54 Vice President, Human Resources
Gary E. Dickerson 38 Group Vice President, Wafer Inspection
Samuel A. Harrell 56 Senior Vice President, Strategic Business Development
Michael W. Morrissey 51 Group Vice President, Customer Group
Neil Richardson 41 Vice President, Metrology
Magnus O. W. Ryde 40 Vice President, U.S. and European Sales Organizations
Arthur P. Schnitzer 53 Group Vice President
Christopher Stoddart 40 Treasurer
Bin-Ming Ben Tsai 38 Vice President, Chief Technical Officer
William Turner 40 Vice President, Corporate Finance
Edward W. Barnholt 53 Director
Leo J. Chamberlain 66 Director
Robert E. Lorenzini 59 Director
Yoshio Nishi 56 Director
Samuel Rubinovitz 66 Director
Dag Tellefsen 54 Director
Mr. Levy co-founded the Company in July 1975 and served as President and
Chief Executive Officer and a Director of the Company until November 1991, when
he became Chairman of the Board of Directors and Chief Executive Officer. Since
May 1993, Mr. Levy has been a Director of Ultratech Stepper, Inc., a
manufacturer of photolithography equipment; since April 1993, a Director of
Network Peripherals, Inc., a supplier of high-performance client-server
networking solutions; and since August 1995, a Director of Integrated Process
Equipment Corporation, a manufacturer of chemical, mechanical, polishing and
cleaning equipment which is used in the manufacturing of advanced semiconductor
devices.
Mr. Schroeder rejoined the Company in November 1991 as President, Chief
Operating Officer and Director. Mr. Schroeder had worked previously at KLA from
1979 through 1987, during which time he held the positions of Vice President of
Operations (1979); Vice President and General Manager, RAPID (1982); Vice
President and General Manager, WISARD (1983); and Senior Vice President (1985).
In July 1988, he became President and Chief Executive Officer of Photon
Dynamics, Inc., a manufacturer of electro-optic test equipment. In mid-1990, he
was appointed President, Chief Operating Officer and Director of Genus, Inc., a
manufacturer of CVD chemical vapor deposition and ion implant equipment. He left
Genus in October 1991, to rejoin KLA. Since July, 1993, Mr. Schroeder has been a
director of SEMI/SEMATECH, an organization of American equipment companies
supporting SEMATECH and its mission; since August, 1995, Mr. Schroeder has been
a director of GaSonics, International, a supplier of resist stripping, cleaning,
etching and deposition equipment.
Mr. Boehlke joined the Company in April 1983 as Vice President and General
Manager of the RAPID Division. Subsequently, he was General Manager of several
divisions and groups of divisions at KLA. In June 1985, Mr. Boehlke was elected
to Senior Vice President and to Executive Vice President in January 1989, and to
Chief Operating Officer in August 1989 until July 1990, when he became Chief
Financial Officer. From 1988 until 1993 he served on the Board of Directors of
SEMI/SEMATECH, where he was a member of the executive committee.
Mr. Brienzo joined the Company in March 1986 as Director of Quality
Assurance and Customer Acceptance, WISARD Division. In Sept. 1986, he became
Vice President of Operations, WISARD Division. In October 1990, he was named
President of KLA Acrotec. He served there until September 1994, when he took the
position of Vice
10
President Operations, KLA Japan. In July 1995, he was promoted to Vice
President, Asia Operations and General Manager, KLA Japan.
Ms. DeMars joined KLA in 1988 as Director of Human Resources after a 13
year career in Employee Relations at Monolithic Memories, Inc. and Advanced
Micro Devices. In November 1991, KLA promoted Ms. DeMars to Vice President of
Human Resources, worldwide.
Mr. Dickerson joined KLA in January 1986 as a Senior Applications Engineer
in the Wafer Inspection Division. In July 1987 he was promoted to Manager of
Applications Engineering for the Wafer Inspection Division, followed by Manager
of Product Planning in July 1989, Director of Marketing in July 1990, and Vice
President of Marketing in July 1992. In July 1993, he was promoted to Vice
President and Director of the Wafer Inspection Business Unit. In July 1994, he
was elected Vice President of the Company and promoted to Group Vice President
in January, 1996.
Dr. Harrell joined the Company in September 1995 as Senior Vice President
and Chief Strategy Officer. Dr. Harrell is responsible for strategic corporate
development. Dr. Harrell served from October 1992 to December 1995 as the Senior
Vice President and Chief Strategy Officer of SEMATECH. From August 1987 to
September 1992 he served as President of SEMI/SEMATECH.
Mr. Morrissey joined KLA in April 1996 as Group Vice President for the
Customer Group, after a 26 year career with NCR and AT&T. He was Vice President
of NCR's Workstation Product Division from July 1993 to April 1996 and Vice
President of the Microelectronics Division from March 1991 to June 1993. Mr.
Morrissey has also served on the Board of Directors for SEMATECH.
Dr. Richardson joined KLA in June 1993 as Vice President and General
Manager of the Metrology Division, and was elected Vice President of the Company
in July 1994. He served as Vice President and General Manager of the Diagnostic
Systems Group of Schlumberger Technologies from September 1985 to November 1991,
and was the Corporate Technology Adviser for Schlumberger Ltd., a manufacturer
of electronic test equipment, from November 1991 to May 1993.
Mr. Ryde joined KLA in June 1980 as Production Control Manager. In May 1981
he was promoted to Materials Manager, followed by Production Manager in January
1982 and Manager, Advance Manufacturing - KLA208 in May 1984. In March 1985, he
became Product Marketing Manager for the RAPID Division. In December 1988, after
leaving KLA for 6 months to pursue other interests, he returned as Director of
EMMI Business within the ATS Division. In January 1989, he was promoted to
Director of Operations - Europe, and in January 1991 became Vice President of
Operations for the ATS Division. He was promoted to Vice President and General
Manager of the Customer Support Division in July 1992 and was elected to Vice
President of the Company in July 1994. In July 1995, he became Vice President of
the U.S. and European Sales Organizations.
Mr. Schnitzer joined the Company in July 1978 as Software Engineering
Manager, was promoted to Director of Engineering of the RAPID Division in July
1982, and was promoted to Vice President in July 1983. He became Vice President
of Technology and Marketing of RAPID in May 1987, and Vice President of Advanced
Inspection in January 1989. In October 1989, he was promoted to General Manager
of the WISARD Division and, additionally, was elected to Vice President of the
Company in July 1990. In July 1993, he became Group Vice President and is
presently responsible for RAPID, SEMSpec and PRISM.
Mr. Stoddart joined the Company in December 1991 as Treasurer. Prior to
joining the Company, Mr. Stoddart was Treasurer of General Cellular Corporation,
a cellular telephone service provider, from October 1989 to September 1991 and
previously with The Cooper Companies, Inc., a manufacturer of pharmaceuticals
and medical and implant equipment, as Assistant Treasurer from August 1986 to
July 1988, and then Treasurer from July 1988 to September 1989.
Dr. Tsai joined the Company in June 1984 as a member of the WISARD
Technical Staff and was promoted to Manager of Algorithm Development for the
WISARD Division. From August 1989 until September 1990 he served as Director of
Engineering for WISARD. In October 1990, he was promoted to Vice President of
Engineering for KLA Acrotec, and in July 1994 he was elected Vice President of
the Company and promoted to Chief Technical Officer.
Mr. Turner joined the Company in September 1983 as a Financial Analyst.
After serving as Controller for the Rapid, ATS and International divisions, he
was named Corporate Controller in December 1989 and was elected Vice President
of the Company in July 1990. In August 1996, he was named Vice President of
Corporate Finance.
11
Mr. Barnholt has served as a Director of the Company since September 1995.
From October 1990 to October 1993 he served as Vice President and General
Manager of the Test and Measurement Organization for Hewlett-Packard. In
November 1993 he was promoted to Senior Vice President and General Manager of
the Test and Measurement Organization.
Mr. Chamberlain has served as a Director of the Company since 1982. He has
also served as a Director of Octel Communications Corporation, a manufacturer of
high performance voice processing systems since March 1989.
Mr. Lorenzini has served as a Director of the Company since 1976. He has
served since January 1993 as Chairman of SunPower Corporation, a manufacturer of
optoelectronic devices, and from October 1988 to January 1993, he served as
President and Chief Executive Officer. Since July 1993, he has also been a
Principal in Dalton Partners, a turn-around management company. He was a founder
and, until December 1986, Chairman of the Board of Siltec Corporation, a
manufacturer of semiconductor materials and manufacturing equipment. Since
October 1986, Mr. Lorenzini has also served as a Director of FSI International,
a semiconductor process equipment manufacturer.
Dr. Nishi has served as a Director of the Company since 1989. He has served
as Senior Vice President and Director of Research and Development for the
Semiconductor Group of Texas Instruments since May 1995. Mr. Nishi served as a
Director of numerous research laboratories at Hewlett-Packard from January 1986
to April 1995. He is a consulting professor in the Stanford University
Department of Electrical Engineering and teaches at Waseda University in Japan
as a visiting Professor of the Materials Science and Engineering Department and
the Electronic Communication Engineering Department.
Mr. Rubinovitz previously served as a Director of the Company from October
1979 to January 1989, and rejoined the Company as a Director in 1990. From April
1989 through January 1994, he served as Executive Vice President of EG&G, Inc.,
a diversified manufacturer of scientific instruments and electronic, optical and
mechanical equipment, and previously as Senior Vice President of EG&G, Inc.
between April 1986 and April 1989. From April 1989 to April 1996, Mr. Rubinovitz
served as a Director of EG&G. Since October 1984, he has served as Director of
Richardson Electronics, Inc., a manufacturer and distributor of electron tubes
and semiconductors and, since October 1986, Director of Kronos, Inc., a
manufacturer of electronic time keeping systems. Since December 1994, he has
served as a Director of LTX Corporation, a manufacturer of Semiconductor Test
Equipment.
Mr. Tellefsen has served as a Director of the Company since 1978. He is
Managing Partner of Glenwood Management, a venture capital firm. Since January
1983, he has served as a Director of Iwerks Entertainment, a producer of
movie-based specialty theaters, and since 1982, as a director of Octel
Communications Corporation.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding Executive Compensation as it appears in the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding Security Ownership of Certain Beneficial Owners
and Management as it appears in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding Certain Relationships and Related Transactions as
it appears in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORT ON FORM 8-K
(a) (1) Financial Statements: See Index to Financial Statements, page 14.
(2) Financial Statement Schedules: See Index to Financial Statement
Schedules, page 14.
(3) Exhibits: See Index to Exhibits, pages 15 and 16.
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1996.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California, on the 26th day of September 1996.
KLA INSTRUMENTS CORPORATION
By /s/ WILLIAM TURNER
------------------------------------
William Turner
Vice President of Corporate Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of this
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ KENNETH LEVY Director, Chairman of the Board, and September 26, 1996
- ------------------------------------ Chief Executive Officer
Kenneth Levy
/s/ KENNETH L. SCHROEDER Director, President September 26, 1996
- ------------------------------------ and Chief Operating Officer
Kenneth L. Schroeder
/s/ ROBERT J. BOEHLKE Vice President of Finance September 26, 1996
- ------------------------------------ and Administration,
Robert J. Boehlke Chief Financial Officer,
and Assistant Secretary
/s/ EDWARD W. BARNHOLT Director September 26, 1996
- ------------------------------------
Edward W. Barnholt
/s/ LEO J. CHAMBERLAIN Director September 26, 1996
- ------------------------------------
Leo J. Chamberlain
/s/ ROBERT E. LORENZINI Director September 26, 1996
- ------------------------------------
Robert E. Lorenzini
/s/ DR. YOSHIO NISHI Director September 26, 1996
- ------------------------------------
Dr. Yoshio Nishi
/s/ SAMUEL RUBINOVITZ Director September 26, 1996
- ------------------------------------
Samuel Rubinovitz
/s/ DAG TELLEFSEN Director September 26, 1996
- ------------------------------------
Dag Tellefsen
13
KLA INSTRUMENTS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page(s) in
1996 Annual
Report*
------------
Consolidated Statement of Operations for the three years ended June 30, 1996 .......................... 14
Consolidated Balance Sheet at June 30, 1995 and 1996 .................................................. 15
Consolidated Statement of Stockholders' Equity for the three years ended June 30, 1996 ............... 16
Consolidated Statement of Cash Flows for the three years ended June 30, 1996 .......................... 17
Notes to the Consolidated Financial Statements ........................................................ 18-23
Report of Independent Accountants ..................................................................... 24
*Incorporated by reference from the indicated pages of the 1996 Annual Report to
Stockholders.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules not included in this Form 10-K Annual Report
have been omitted because they are not applicable or the required information is
shown in the consolidated financial statements or notes thereto.
14
INDEX TO EXHIBITS
(i) EXHIBITS INCORPORATED BY REFERENCE:
3.1 Certificate of Incorporation as amended(7)
3.2 Bylaws, as amended(7)
4.1 Amended and Restated Rights Agreement dated as of August 26, 1995,
between the Company and First National Bank of Boston, as Rights
Agent. The Rights Agreement includes as Exhibit A, the form of
Right Certificate and as Exhibit B, the summary of transactions of
Rights.(1)
10.15 Statement of Partnership to Triangle Partners dated April 12, 1983(2)
10.16 Lease Agreement and Addendum thereto dated January 10, 1983, between
BB&K Partnership and the Company(2)
10.18 Purchase and Sale Agreement dated January 10, 1983, between BB&K
Partnership, Triangle Partners and the Company(2)
10.35 Research and Development Agreement, Cross License and Technology
Transfer Agreement and Agreement for Option to License and Purchase
Resulting Technology, all dated October 1, 1986, by and between KLA
Development No. 4, Ltd., and the Company(3)
10.45 Distribution Agreement dated July 1990, by and between Tokyo Electron
Limited, a Japanese Corporation, and the Company(4)
10.46 Principal facility Purchase Agreement dated July 1990, including
all exhibits and amendments; Lease Agreement, Termination of Lease,
Lot line adjustment, rights of first refusal, Deeds of Trust(4)
10.47 Joint Venture Agreement between the Company and Nippon Mining Company,
Limited, dated September 18, 1990(5)
10.49 Exercise of Option to Purchase Technology made effective as of January
1, 1990, by and between KLA Development No. 4, and the Company(5)
10.54 Micrion Corporation Series E Preferred Stock Purchase Agreement, dated
September 13, 1991(6)
10.67 Amendment of Credit Agreement between Bank of America NT & SA and the
Company, dated April 30, 1994(9)
10.68 Credit Agreement between Bank of America NT & SA and the Company as
amended, on February 7, 1996(9)
10.71 1990 Outside Directors Stock Option Plan(8)
10.73 Amendment of Credit Agreement between Bank of America NT & SA and the
Company dated December 31, 1994(10)
10.74 1981 Employee Stock Purchase Plan, as amended by the Board of Directors
on October 7, 1994(10)
10.75 1982 Stock Option Plan, as amended on November 15, 1995(10)
10.76 Amendment of Credit Agreement between Bank of America NT & SA and the
Company dated February 15, 1995(10)
10.77 Lease Agreement, Ground Lease Agreement and Purchase Agreement dated
June 5, 1995, between BNP Leasing Corporation and the Company(10)
10.78 Lease Agreement and Purchase Agreement dated August 10, 1995, between
BNP Leasing Corporation and the Company(10)
10.79 Amendment of Credit Agreement between Bank of America NT & SA and the
Company dated December 29, 1995(11)
(ii) EXHIBITS INCLUDED HEREWITH:
10.80 Mortgage Loan Supplement Program between Bank of the West and the
Company dated May 8, 1996.
13.1 1996 Annual Report to Stockholders. This Annual Report shall not be
deemed to be filed except to the extent that the information is
specifically incorporated by reference.
21 List of Subsidiaries of KLA Instruments Corporation
23.1 Consent of Independent Accountants
27 Financial Data Schedule
(1)Filed as exhibit number 1 to Registrant's Form 8-A/A Amendment number
2 to Registration Statement, filed on September 24, 1996
15
(2)Filed as the same exhibit number as set forth herein to Registrant's Form
10-K for the year ended June 30, 1983
(3)Filed as the same exhibit number as set forth herein to Registrant's Form
10-K for the year ended June 30, 1987
(4)Filed as the same exhibit number as set forth herein to Registrant's Form
10-K for the year ended June 30, 1990
(5)Filed as the same exhibit number as set forth herein to Registrant's Form
10-K for the year ended June 30, 1991
(6)Filed as the same exhibit number as set forth herein to Registrant's Form
10-K for the year ended June 30, 1992
(7)Filed as the same exhibit number to Registrant's registration statement
no.33-51819 on Form S-3, dated February 2, 1994
(8)Filed as exhibit number 4.6 as set forth herein to Registrant's Form 10-K for
the year ended June 30, 1991
(9)Filed as the same exhibit number as set forth herein to Registrant's Form
10-K for the year ended June 30, 1994
(10)Filed as the same exhibit number as set forth herein to Registrant's Form
10-K for the year ended June 30, 1995
(11)Filed as the same exhibit number as set forth herein to Registrant's Form
10-Q for the quarter ended December 31, 1995
16