EXHIBIT 13.1 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1995 Fiscal 1996 Quarter Ended Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 - -------------------------------------------------------------------------------------------------------------------------------- (In millions, except per share amounts) NET SALES $ 83.2 $ 104.7 $ 118.1 $ 136.4 $ 149.1 $ 165.8 $ 187.5 $ 192.5 Gross profit 42.6 56.3 63.9 75.0 82.4 90.4 102.3 103.2 (% of net sales) 51.2% 53.8% 54.1% 55.0% 55.3% 54.5% 54.6% 53.6% Engineering, research and development expense 8.2 8.8 12.3 16.0 15.6 18.0 20.9 20.1 (% of net sales) 9.9% 8.4% 10.4% 11.7% 10.5% 10.9% 11.1% 10.4% Selling, general and administrative expense 16.5 21.7 21.6 25.5 27.9 29.4 33.7 35.2 (% of net sales) 19.8% 20.7% 18.3% 18.7% 18.7% 17.7% 18.0% 18.3% Net income 12.8 1.0(a) 20.8 24.0 27.3 29.8 31.8 32.0 (% of net sales) 15.4% 1.0% 17.6% 17.6% 18.3% 18.0% 17.0% 16.6% NET INCOME PER SHARE $ 0.27 $ 0.02(a) $ 0.43 $ 0.47 $ 0.52 $ 0.57 $ 0.61 $ 0.61 Shares used in computing net income per share 47.8 48.2 48.6 51.0 52.4 52.4 52.2 52.4 - --------------------------------------------------------------------------------------------------------------------------------
(a) Includes a net charge of $16.2 million or $0.33 per share, for write-off of acquired in-process technology. NET SALES NET INCOME (in millions) (in millions) [FIGURE 1] [FIGURE 2] MANAGEMENT'S FINANCIAL COMMENTARY Fiscal 1996 will be recalled as the peak year in a cycle which began in 1992. KLA grew faster than the equipment industry during this period even though the industry was quite strong. This incrementally faster growth occurred because the semiconductor industry began the first steps toward a more sophisticated approach to process control, a natural step in the evolution of the industry. Mature process industries, such as oil refining and chemical production, use complex measurements and feedback and feed forward systems to benchmark and control the manufacturing processes tightly. These industries spend upwards of 15% to 18% of their capital on the process control systems which ensure high yields with few variations. In contrast, the semiconductor processes are comparatively immature; measurements are difficult to make and feedback loops are just getting started. Correlations between measurements and known problems are still primitive. In this environment, the industry is spending about 7% of capital on process control -- a much lower level than the mature industries -- but it is rising rapidly. KLA has the good fortune to be the clear leader in this process control segment of the semiconductor industry -- a segment which can get growth both from new fabs and from outfitting older fabs, to upgrade their capabilities. Now the industry is experiencing a significant slowing in the rate of new fab construction and expenditures which, will adversely affect our aggregate bookings and ultimately lead to lower revenues. Fortunately for KLA, many of our businesses are driven by factors other than the rate of new fab construction. For example, the RAPID (Reticle Inspection Systems) is experiencing a strong resurgence in orders and shipments because the mask shops, both captive and merchant, must acquire the new technology contained in the KLA 351 in order to compete effectively and produce masks and reticles for next generation devices. Their old tools are "out of gas," and the entire industry segment is re-tooling - -- a trend which is driving RAPID's business. Similarly, our linewidth metrology business, part of our Metrology Group, appears to have the position of "best of breed" in comparison to competitive products. As a result, that business is growing despite the industry softness because the product superiority is resulting in gains in market share. Additionally, our SEMSpec product line is beginning to grow because the manufacturers of 256Mb DRAMS and 1 Gigabit DRAMS realize that this Electron Beam technology is necessary for the development of the pilot lines for those devices. As we enter a period of adjustment in the supply of manufacturing capacity, KLA is well positioned with leading-edge technology products that enjoy competitive advantages and result in either the leading market share, or the prospect of obtaining the leading share. Finally, products that enhance the yield of fabs enjoy incremental demand from recently completed and older fabs where the customers obtain excellent returns on their investment by adopting more sophisticated methods of process control. ANNUAL RESULTS OF OPERATIONS Earnings per share in fiscal 1996 was a record $2.31 compared to the previous year's $1.53 (prior to the $16.2 million after-tax write-off resulting from the Metrologix acquisition) and $0.68 in fiscal 1994. Sales increased 57% in fiscal 1996 compared with increases of 82% and 46% in fiscal 1995 and 1994, respectively. The dollar sales increase in fiscal 1996 was primarily attributable to the continued success of the 2100 series product line manufactured by the Wafer Inspection Business Unit (WISARD), which grew at a strong pace, but slightly lower than in fiscal 1995. By year end more than 137 fabs had multiple 2100 series products installed or on order, compared to 88 fabs at the end of fiscal 1995. RAPID recorded the highest percentage growth in sales, reflecting the industry's re-tooling requirements described above and the enthusiasm for its STARlight (Simultaneous Transmitted and Reflected Light) systems. KLA believes that this new measurement capability redefined the standard of acceptability between mask makers and fab users and spawned demand from both to verify the quality of the tooling used to make 1C devices. This verification technology, introduced in fiscal 1995, is the first of several important new products in the pipeline for this business unit over the next several years. The 82% sales increase in fiscal 1995 was primarily attributable to rising demand for WISARD's 2100 series product. International sales as a percentage of total sales were 68%, 69% and 65% in fiscal years 1996, 1995 and 1994, respectively. Gross margins were 54%, 54% and 45% in fiscal years 1996, 1995 and 1994, respectively. While the gross margin ratio remained flat year to year in fiscal 1996. RAPID improved sharply from a lower base level, because of volume efficiencies, while WISARD experienced a small decline. WISARD's margin reduction resulted from the introduction of the KLA 2135. Overall margins were also negatively affected by spending in KLA's start-up businesses, particularly E-Beam Metrology and SEMSpec, and by higher installation and warranty costs. The gross margin improvements in fiscal years 1995 and 1994 were due to improving manufacturing efficiencies in WISARD as the sales volume grew, the mix of business effect of WISARD's rising share of KLA's total revenues, and the absorption of fixed overhead costs by overall higher sales volumes. Engineering, research and development expenses were 11%, 10% and 9% of revenue in fiscal 1996, 1995 and 1994, respectively. Expenses of $74.6 million in fiscal 1996 increased 65% over fiscal 1995 expenses of $45.3 million. A large part of the increase in fiscal 1996 was due to new initiatives in the WISARD Division during the year, including the introduction of the 2135 inspection tool and improved software applications. Other areas of concentrated investment include E-Beam Metrology and the development of advanced wafer inspection systems; in both cases, these investments are expected to help fuel growth into the next century. In fiscal 1995, these expenses doubled over fiscal 1994 with WISARD and RAPID being the main drivers for this growth. Selling, general and administrative costs were 18%, 19% and 20% in fiscal years 1996, 1995 and 1994, respectively. The percentage decrease in fiscal 1996 is attributable in equal parts to administration costs growing more slowly than revenue and to a decrease in the percentage of external commission expenses due to a higher proportion of direct sales. However, these improvements were partially offset by an increase in sales expense related in part to the introduction of KLA's key account organization in fiscal 1996. In fiscal 1995, decreases in sales and administration expenses as a percentage of sales were partially offset by increases in profit-sharing expenses resulting directly from the continued improvement in KLA's financial performance. The provision for income taxes on pretax income was 36%, 34% and 25% in fiscal 1996, 1995 and 1994, respectively. KLA's tax rate increased from fiscal 1995 to fiscal 1996 as a result of the expiration of the federal Research and Development tax credit on June 30, 1995 and a lower benefit from the release of the valuation reserves against deferred tax assets. KLA's tax rate increased from fiscal 1994 to fiscal 1995 as a result of a greater percentage of worldwide earnings being taxable in the U.S. in fiscal 1995 than in prior years. In fiscal 1994, the income tax rate was lower than the statutory U.S. tax rate primarily due to tax advantages in Switzerland that resulted in a lower net foreign tax rate and as a result of recognizing deferred tax assets that were previously reserved. Additionally, the fiscal 1994 rate was reduced by the utilization of $1.9 million in foreign tax credits. The IRS is currently auditing the Company's federal income tax returns for fiscal years 1985 to 1992. During fiscal 1996, the Company received a notice of proposed tax deficiency for such years and filed a tax protest letter with the IRS in response to the IRS notice. Management believes sufficient taxes have been provided in prior years and that the ultimate outcome of the IRS audit will not have a material adverse impact on the Company's financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents, short term investments and marketable securities increased by $16.7 million in fiscal 1996. This increase was due primarily to $64.7 million generated from operations and $14.9 million from the after-tax impact of stock option and stock purchase plans, offset by a $21.3 million cash payment to repay debt and $39.1 million in capital expenditures. In fiscal 1995, cash, cash equivalents, short term investments and marketable securities increased by $105.6 million, with $22.3 million from operations, $90.7 million raised in a secondary public offering in May 1995, and $24.7 million from the after-tax impact of stock option and stock purchase plans. This was partially offset by a $14.2 million cash payment to purchase Metrologix and $19.0 million in capital expenditures. Cash provided by operations in fiscal 1996 and fiscal 1995 was substantially less than reported earnings due to the working capital investment required to support the rise in revenues; in fiscal 1996, accounts receivable and inventories increased by $74.2 million and $52.6 million respectively. [Photo of Robert J. Boehlke, Vice President, Finance and Administration and Chief Financial Officer.] Capital expenditures totaled $39.1 million in fiscal 1996, compared with depreciation charges of approximately $16.3 million, and represented a 106% increase over the fiscal 1995 amount. The major uses of capital were the facility expansion at KLA's main campus, investments in tooling for greater manufacturing capacity and purchases of equipment and software for improved information systems. Under current market forecasts, capital expenditures for fiscal 1997 are expected to be greater than depreciation but less than the fiscal 1996 amount. Fiscal 1995 had capital expenditures of $19.0 million and $10.6 million of depreciation charges. During fiscal 1996, KLA moved the reticle inspection business unit into a new, leased 105,000 square-foot facility constructed at its main campus site. The Company also moved into an additional 120,000 square feet of office and manufacturing space in two buildings on the San Jose campus. The lessor of these three buildings funded $31.2 million to acquire, construct and improve these three buildings. KLA believes that its current level of liquid assets, borrowing facilities, working capital and cash expected to be generated from operations will be sufficient to fund its growth through at least fiscal 1997. The current policy of KLA is not to pay dividends. BUSINESS RISKS AND UNCERTAINTIES The Company's future results will depend on its ability to continuously introduce new products and enhancements to its customers as demands for higher productivity and specifications of semiconductor test equipment change or increase. Due to the risks inherent in transitioning to new products, the Company must accurately forecast demand in both volume and configuration and also manage the transition from older products. The Company's results could be affected by the ability of competitors to introduce new products which have technological or pricing advantages. Results also will be affected by strategic decisions made by management regarding whether to continue particular product lines, and by volume, mix and timing of orders received during a period, fluctuations in foreign exchange rates, and changing conditions in both the semiconductor industry and key semiconductor markets around the world. As a result, the Company's operating results may fluctuate, especially when measured on a quarterly basis. - ------------------------------------------------------------------------------- This Annual Report includes a number of forward-looking statements including, but not limited to, statements with respect to the Company's future financial performance, operating results, plans and objectives. Actual results may differ materially from those currently anticipated depending upon a variety of factors some of which are itemized in the "Business Risks and Uncertainties" section above. - ------------------------------------------------------------------------------- SELECTED FINANCIAL DATA (UNAUDITED)
1992 1993 1994 1995 1996 - ------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) YEARS ENDED JUNE 30, Net sales $155,963 $167,236 $243,737 $442,416 $694,867 Restructuring charges (recovery) 8,158 (718) - - - Income (loss) from continuing operations (16,610) 6,961 30,188 58,618 120,884 Net income (loss) (13,810) 6,961 30,188 58,618 120,884 Income (loss) per share from continuing operations (0.45) 0.18 0.68 1.20 2.31 Net income (loss) per share (0.38) 0.18 0.68 1.20 2.31 Shares used in computing net income(loss) per share 36,902 39,414 44,088 48,870 52,329 AT JUNE 30, Cash, cash equivalents and marketable securities 23,711 52,362 139,126 244,753 261,411 Working capital 83,961 93,611 212,873 228,026 324,356 Total assets 188,457 199,089 321,570 546,296 712,772 Long-term debt 24,000 20,000 20,000 -- -- Stockholders' equity 103,032 114,050 227,382 403,969 537,249
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended June 30, 1994 1995 1996 - ---------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Net sales $ 243,737 $ 442,416 $ 694,867 - ---------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 133,028 204,618 316,573 Engineering, research and development 22,435 45,252 74,616 Selling, general and administrative 48,192 85,255 126,174 Write-off of acquired in-process technology -- 25,240 -- - ---------------------------------------------------------------------------------------------- 203,655 360,365 517,363 - ---------------------------------------------------------------------------------------------- Income from operations 40,082 82,051 177,504 Interest income and other, net 2,174 9,127 12,754 Interest expense (2,005) (2,364) (1,364) - ---------------------------------------------------------------------------------------------- Income before income taxes 40,251 88,814 188,894 Provision for income taxes 10,063 30,196 68,010 - ---------------------------------------------------------------------------------------------- Net income $ 30,188 $ 58,618 $ 120,884 - ---------------------------------------------------------------------------------------------- Net income per share $ 0.68 $ 1.20 $ 2.31 - ---------------------------------------------------------------------------------------------- Shares used in computing net income per share 44,088 48,870 52,329 ==============================================================================================
See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEET ASSETS
AT JUNE 30, 1995 1996 - ----------------------------------------------------------------------------------------------- (In thousands, except per share amount) Current assets: Cash and cash equivalents $ 92,059 $ 109,404 Short-term investments 26,681 14,279 Accounts receivable, net of allowances of $2,196 and $3,121 129,274 203,470 Inventories 79,759 132,377 Deferred income taxes 18,155 27,246 Other current assets 14,949 6,783 - ----------------------------------------------------------------------------------------------- Total current assets 360,877 493,559 Land, property and equipment, net 49,004 71,825 Marketable securities 126,013 137,728 Other assets 10,402 9,660 - ----------------------------------------------------------------------------------------------- Total assets $ 546,296 $ 712,772 =============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 4,458 $ 3,111 Current portion of long-term debt 20,000 -- Accounts payable 19,376 27,330 Income taxes payable 22,797 34,595 Other current liabilities 66,220 104,167 - ----------------------------------------------------------------------------------------------- Total current liabilities 132,851 169,203 - ----------------------------------------------------------------------------------------------- Deferred income taxes 9,476 6,320 - ----------------------------------------------------------------------------------------------- Commitments and contingencies, Note 4 Stockholders' equity: Preferred Stock $.001 par value, 1,000 shares authorized, none issued and outstanding -- -- Common Stock, $.001 par value, 75,000 shares authorized, 50,160 and 51,030 shares issued and outstanding 50 51 Capital in excess of par value 262,991 277,892 Retained earnings 138,893 259,777 Treasury stock (581) (581) Net unrealized gain (loss) on investments 1,241 (131) Cumulative translation adjustment 1,375 241 - ----------------------------------------------------------------------------------------------- Total stockholders' equity 403,969 537,249 - ----------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 546,296 $ 712,772 ===============================================================================================
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock and Capital Net Unrealized Cumulative in Excess of Par Value Retained Treasury Stock Gain (Loss) on Translation Shares Amount Earnings Shares Amount Investments Adjustment - --------------------------------------------------------------------------------------------------------------------------- (In thousands) Balance at June 30, 1993 39,006 $ 64,658 $ 50,087 (110) $ (581) $ -- $ (114) - ------------------------------------------------------------------------------------------------------------------------ Exercise of stock options 1,708 6,960 Tax benefit on exercise of stock options 5,232 Shares sold in stock purchase plan 414 1,965 Shares sold in stock offering 4,600 68,566 Net income 30,188 Translation adjustment 421 - ------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1994 45,728 147,381 80,275 (110) (581) -- 307 - ------------------------------------------------------------------------------------------------------------------------ Exercise of stock options 1,256 5,271 Tax benefit on exercise of stock options 15,427 Shares sold in stock purchase plan 176 3,995 Shares sold in stock offering 3,000 90,967 Net income 58,618 Net unrealized gain on investments 1,241 Translation adjustment 1,068 - ------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1995 50,160 263,041 138,893 (110) (581) 1,241 1,375 - ------------------------------------------------------------------------------------------------------------------------ Exercise of stock options 444 2,077 Tax benefit on exercise of stock options 5,231 Shares sold in stock purchase plan 536 7,594 Net income 120,884 Net unrealized loss on investments (1,372) Translation adjustment (1,134) - ------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1996 51,140 $277,943 $259,777 (110) $ (581) $ (131) $ 241 ========================================================================================================================
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED JUNE 30, 1994 1995 1996 - ------------------------------------------------------------------------------------------------------------ (In thousands) Cash flows from operating activities: Net income $ 30,188 $ 58,618 $ 120,884 Adjustments required to reconcile net income to cash provided by operations: Depreciation and amortization 10,734 10,642 16,267 Write-off of acquired in-process technology -- 16,154 -- Deferred income taxes (2,053) (9,591) (12,247) Changes in assets and liabilities: Accounts receivable (26,149) (54,462) (74,196) Inventories (10,776) (23,112) (52,618) Other assets (139) (18,313) 8,908 Accounts payable 2,937 6,509 7,954 Income taxes payable 3,063 11,199 11,798 Other current liabilities 3,483 24,692 37,947 - ----------------------------------------------------------------------------------------------------------- Cash provided by operations 11,288 22,336 64,697 - ----------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (5,809) (19,009) (39,089) Purchases of available for sale securities -- (329,729) (456,286) Sales and maturities of available for sale securities -- 178,276 455,602 Investment in Metrologix -- (14,182) -- - ----------------------------------------------------------------------------------------------------------- Cash used for investing activities (5,809) (184,644) (39,773) - ----------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Short-term borrowings, net 2,141 (1,487) (1,347) Payment of current portion of long term debt (4,000) -- (20,000) Sales of common stock / tax benefit of options exercised 82,723 115,660 14,902 - ----------------------------------------------------------------------------------------------------------- Cash provided by (used for) financing activities 80,864 114,173 (6,445) - ----------------------------------------------------------------------------------------------------------- Effect of exchange rate changes 421 1,068 (1,134) - ----------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 86,764 (47,067) 17,345 Cash and cash equivalents at beginning of year 52,362 139,126 92,059 - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 139,126 $ 92,059 $ 109,404 =========================================================================================================== - ----------------------------------------------------------------------------------------------------------- Cash paid during the year for: Interest $ 2,007 $ 2,361 $ 1,163 Income taxes 3,369 22,715 63,645 ===========================================================================================================
See accompanying notes to consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Subsidiaries with accounts denominated in foreign currencies have been translated principally using the local currencies as the functional currencies. Accordingly, the assets and liabilities of these subsidiaries are translated at the rates of exchange on the balance sheet date, income and expense items are translated at average rates of exchange for the year, and the resulting translation gains or losses are included in stockholders' equity. Foreign currency transaction gains and losses have not been material and are included in interest income and other, net. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS AND INVESTMENTS Cash equivalents consist of highly liquid investments with a maturity date at acquisition of three months or less. Cash and cash equivalents are stated at cost, plus accrued interest, which approximates market value. The Company's investments in debt and equity securities are classified as available for sale. Investments classified as available for sale are measured at market value and net unrealized gains and losses are recorded as a separate component of stockholders' equity until realized. Any gains or losses on sales of investments are computed by specific identification. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of investments, trade accounts receivable and financial instruments used in hedging activities. The Company invests in a variety of financial instruments such as certificates of deposit, commercial paper, municipal debt and U.S. Government debt. The Company, by policy, limits the amount of credit exposure to any one financial institution or commercial issuer. The Company sells its systems to semiconductor manufacturers throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectibility of all accounts receivable. The write-off of uncollectable amounts has been insignificant. The Company is exposed to credit loss in the event of nonperformance by counterparties on the foreign exchange contracts used in hedging activities. The Company does not anticipate nonperformance by these counterparties. FOREIGN EXCHANGE HEDGING The Company enters into forward contracts to hedge against currency fluctuations that affect certain foreign currency denominated sales and purchase transactions. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the underlying items being hedged, these financial instruments do not subject the Company to speculative risk that would otherwise result from changes in currency exchange rates. Unrealized gains and losses on these contracts are deferred and accounted for as part of the hedged transactions. Cash flows from these contracts are classified in the Statement of Cash Flows in the same category as the hedged transactions. At June 30, 1995, the Company had forward contracts maturing throughout fiscal 1996 to sell and purchase approximately $147.9 million and $19.1 million, respectively, in foreign currency, primarily Japanese yen. At June 30, 1996, the Company had forward exchange contracts maturing throughout fiscal 1997 to sell and purchase approximately $145.9 million and $5.3 million, respectively, in foreign currency, primarily Japanese yen. Of these contracts, approximately $91.1 million of contracts hedge foreign currency receivables and payables carried on the balance sheet as of June 30, 1996, and consequently the financial statements reflect the fair market value of the contracts and their underlying transactions. Approximately $58.0 million and $2.1 million of the contracts hedge firm commitments for future sales and purchases, respectively, denominated in foreign currency. The fair market value of these contracts on June 30, 1996, based upon prevailing market rates on that date, was approximately $55.0 million and $2.1 million, respectively. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using standard costs, which approximate actual costs on a first-in, first-out basis. NOTE 1 (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are 30 years for buildings, 10 years for building improvements, five years for furniture and fixtures, and three years for machinery and equipment. The life of the lease or the useful life, whichever is shorter, is used for the amortization of leasehold improvements. REVENUE RECOGNITION The Company recognizes sales of wafer inspection, metrology, reticle and photomask inspection systems upon acceptance at the Company's plant, which is when title transfers. Customers may observe and approve satisfactory completion of the tests. Sales of other systems are recognized upon shipment. A provision for the estimated future cost of system installation and warranty is recorded at the time revenue is recognized. Revenues from software licenses are recognized upon delivery of the software, provided that the Company does not have any significant on going obligations. Revenues from service contracts are recognized during the terms of the contracts on a straight-line basis. RESEARCH AND DEVELOPMENT The Company is actively engaged in significant product improvement and new product development efforts. Research and development expenses relating to possible future products aggregated approximately $16.8, $28.4 and $52.8 million for fiscal 1994, 1995 and 1996, respectively. INCOME TAXES The Company accounts for income taxes under the liability method, which requires an adjustment to the provision for income taxes for the effect of changes in corporate tax rates. Undistributed earnings of certain of the Company's foreign subsidiaries, for which no U.S. income taxes have been provided, aggregated approximately $11.7 million at June 30, 1996. The amount of the unrecognized deferred tax expense related to this investment is estimated at approximately $4.1 million at June 30, 1996. NET INCOME PER SHARE Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the respective periods, including the assumed net shares issuable upon exercise of stock options, when dilutive. NOTE 2 DETAILS OF FINANCIAL STATEMENT COMPONENTS
1995 1996 - ----------------------------------------------------------------- (In thousands) Inventories: Customer service spares $ 13,050 $ 13,614 Systems raw materials 18,944 33,521 Work-in-process 26,863 47,012 Demonstration equipment 20,902 38,230 - ----------------------------------------------------------------- $ 79,759 $ 132,377 - ----------------------------------------------------------------- Land, property and equipment: Land $ 10,502 $ 10,502 Buildings and improvements 27,483 30,353 Machinery and equipment 41,203 60,059 Furniture and fixtures 5,542 9,487 Leasehold improvements 3,913 10,372 - ----------------------------------------------------------------- 88,643 120,773 Less accumulated depreciation and amortization (39,639) (48,948) - ----------------------------------------------------------------- $ 49,004 $ 71,825 - ----------------------------------------------------------------- Other current liabilities: Accrued compensation and benefits $ 27,574 $ 43,109 Accrued warranty and installation 22,229 35,501 Unearned revenue 4,867 4,230 Other 11,550 21,327 - ----------------------------------------------------------------- $ 66,220 $ 104,167 =================================================================
NOTE 3 INVESTMENTS The amortized cost and estimated fair value of securities available for sale as of June 30, 1995 and 1996, are as follows:
Gross Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ----------------------------------------------------------------------------------- JUNE 30, 1995 (In thousands) U.S. Treasuries $ 47,720 $ 455 $ 36 $ 48,139 Municipal bonds 83,983 693 100 84,576 Corporate debt securities 43,638 705 -- 44,343 Other 45,324 368 59 45,633 - -------------------------------------------------------------------------------- 220,665 2,221 195 222,691 Less cash equivalents (70,021) (12) (36) (69,997) Less short-term investments (26,614) (77) (10) (26,681) - -------------------------------------------------------------------------------- Long-term investments $ 124,030 $ 2,132 $ 149 $ 126,013 ================================================================================ JUNE 30, 1996 U.S. Treasuries $ 19,739 $ 82 $ 290 $ 19,531 Municipal bonds 129,255 464 284 129,435 Corporate debt securities 32,654 50 320 32,384 Other 52,383 533 449 52,467 - -------------------------------------------------------------------------------- 234,031 1,129 1,343 233,817 Less cash equivalents (81,654) (196) (40) (81,810) Less short-term investments (14,456) (37) (214) (14,279) - -------------------------------------------------------------------------------- Long-term investments $ 137,921 $ 896 $ 1,089 $ 137,728 ================================================================================
Unrealized gains and losses are presented in stockholders' equity, net of the tax effect. NOTE 3 (CONTINUED) The contractual maturities of securities classified as available for sale as of June 30, 1996, regardless of the consolidated balance sheet classification, are as follows:
Estimated Fair Value - -------------------------------------------------------------------------------- (In thousands) Due within one year $ 80,450 Due after one year through five years 64,558 Due after five years 88,809 - -------------------------------------------------------------------------------- $233,817 ================================================================================
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The realized gains and losses for the year ended June 30, 1995 and 1996, were not material to the Company's financial position or results of operations. NOTE 4 COMMITMENTS AND CONTINGENCIES The Company leases several facilities under operating leases expiring at various dates through fiscal 2025 with renewal options at fair market value for additional periods ranging up to ten years. In June 1995, the Company entered into a five-year operating lease for a 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 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. The aggregate minimum rental commitment under these lease agreements as of June 30, 1996, excluding property taxes, insurance and certain other costs to be paid by the Company, are approximately $7.7, $5.6, $5.2, $4.7, $28.0 and $3.8 million in fiscal 1997 through 2001 and thereafter, respectively. Total rental expense under all operating leases was $2.5, $3.5 and $5.8 million in fiscal 1994, 1995 and 1996, respectively. The Company is party to several claims and lawsuits arising in the ordinary course of business. While the outcome of these matters is not presently determinable, in the opinion of management, they are not expected to have a material effect on the financial position or the results of operations of the Company. NOTE 5 STOCKHOLDERS' EQUITY In April 1996, the Company adopted a plan to repurchase, at its discretion, up to $20.0 million of KLA common stock on the open market, through October 1997. Shares repurchased by the Company may be reissued to employees under the Excess Profit Stock Plan or the Employee Stock Purchase Plan, or be used for other corporate purposes. Repurchases of common stock will be made using the Company's cash resources, at the prevailing market price. A two for one stock split was declared by the Board of Directors on July 24, 1995. The stock split was in the form of a 100% stock dividend. The dividend was paid on September 29, 1995, to stockholders of record on August 31, 1995. Financial information in this report has been adjusted to reflect the impact of the common stock split. In May 1995, the Company raised approximately $91 million, net of offering costs, in a public offering of 3,000,000 shares of common stock at $31.75 per share. In February 1994, the Company sold 4,600,000 shares of common stock at $15.75 per share in a public offering resulting in $68.6 million of proceeds to the Company, net of offering expenses. In March 1989, the Company implemented a plan to protect stockholders' rights in the event of a proposed takeover of the Company. Under the plan, each share of the Company's outstanding common stock carries one Common Stock Purchase Right (Right). In April 1996, the Company amended the plan. The amendment reduces the stock ownership level at which the Rights become exercisable. As amended, the plan provides that if any person or group acquires 15% or more of the Company's common stock, each Right not owned by such person or group will entitle its holder to purchase, at the then-current exercise price, the Company's common stock having a value of twice that exercise price. The rights are redeemable by the Company and expire in April 2006. NOTE 6 EMPLOYEE BENEFIT PLANS The Company has a profit sharing program, wherein a percentage of pretax profits, as determined by the Board of Directors, is accumulated and distributed quarterly to all employees who have completed a stipulated employment period. In addition, the Board may approve matching contributions to the Company's savings and investment plan, a qualified salary reduction plan under section 401(k) of the Internal Revenue Code. In April 1996, the Company adopted the Excess Profit Stock Plan. Under the plan, profit sharing distributions that exceed the 401(k) limits will be used to purchase shares of common stock. These shares then will become eligible for distribution to employees, after a two and one half year vesting period. The total charge to operations under the profit sharing and 401(k) programs aggregated approximately $3.3, $16.6 and $26.5 million in fiscal 1994, 1995 and 1996, respectively. Under the 1982 Stock Option Plan, as amended, 14,900,000 shares have been reserved for issuance to eligible employees and directors as either Incentive Stock Options (ISO's) or nonqualified options. Options under this plan are granted at prices determined by the Board of Directors, but not less than the fair market value on the date of grant, and expire ten years after the date of grant. Generally, options become exercisable within five years of the date of grant, vesting monthly after a waiting period of six to thirty months. In October 1990, the Company adopted the 1990 Outside Directors Stock Option Plan to grant options to non-employee directors. This plan calls for an annual grant of 5,000 options, at fair market value, to each outside director. The options become exercisable at one fifty-fourth per month beginning six months from date of grant and expire ten years from grant date. A total of 200,000 shares have been reserved for issuance under this plan. These options carry exercise prices ranging from $3.50 to $46.56 per share, with 115,974 options outstanding at June 30, 1996. In October 1989, the Company adopted the Supplemental Executive Benefit Plan (SEBP), a non-qualified deferred compensation plan. Under the terms of the plan, certain key executives may defer a portion of their salary and bonus into the plan. The Company may also elect to make contributions to certain participants' SEBP accounts. Amounts deferred or contributed into the plan are used to purchase variable life insurance policies which are funded by mutual funds managed by the insurance company issuing the policies. Participants direct the investment of their account balances among these mutual funds. Account balances appreciate based upon the performance of the funds selected by the participants. Distributions from the plan commence following a participant's retirement or termination of employment. At June 30, 1996, the Company had a deferred compensation liability under this plan of $7.1 million, which will be funded by the Cash Surrender Value of insurance policies. At June 30, 1996, the Cash Surrender Value amounted to $6.5 million. Following is a summary of stock option and outside director plan transactions:
Stock Reserved Options Shares Option Price Outstanding Available - ----------------------------------------------------------------------------------------- Balance at June 30, 1993 $ 3.50-10.63 5,577,230 841,932 Options granted 9.57-20.82 470,100 (470,100) Options cancelled 3.50-15.88 (227,498) 227,498 Options exercised 3.50-15.88 (1,707,018) - ----------------------------------------------------------------------------------------- Balance at June 30, 1994 $ 3.50-20.82 4,112,814 599,330 Options granted 2.35-30.63 2,659,536 (2,653,078) Options cancelled 2.35-26.19 (392,492) 392,492 Options exercised 2.35-20.82 (1,256,576) Increase in reserved shares 3,200,000 - ----------------------------------------------------------------------------------------- Balance at June 30, 1995 $ 2.35-30.63 5,123,282 1,538,744 Options granted 23.75-46.56 1,332,100 (1,332,100) Options cancelled 3.50-46.56 (183,310) 183,310 Options exercised 2.35-26.00 (443,597) Increase in reserved shares 2,200,000 - ----------------------------------------------------------------------------------------- Balance at June 30, 1996 $2.35-46.56 5,828,475 2,589,954 =========================================================================================
At June 30, 1996, options to purchase 1,536,016 shares of stock were exercisable under all option plans. The Company has reserved 4,000,000 shares of common stock to be issued under the 1981 Employee Stock Purchase Plan. The Plan permits eligible employees to purchase common stock, through payroll deductions, at 85% of the lower of the fair market value of the common stock on the date at the beginning of the two-year offering period or the last day of the purchase period. Substantially all employees are eligible to participate in the Plan. At June 30, 1996, 297,411 shares were available for future issuance under the Plan. NOTE 7 FINANCING ARRANGEMENTS In May 1996, the Company entered into an agreement with a bank whereby the bank may extend up to $3.0 million in loans to certain employees of the Company as specified by the Company. The loans are secured by second mortgages on the primary residences of borrowers and by a guaranty from the Company. Interest on borrowings is charged at the prime rate plus 1.00% per annum. As of June 30, 1996, there were no outstanding borrowings under this arrangement. As of June 30, 1996, the Company had a $15.0 million committed multicurrency line of credit with a bank, expiring December 31, 1996. The line of credit has a facility fee of 0.20% per annum. Interest on domestic and foreign borrowings is charged at the bank's reference rate and at the bank's offshore reference rate plus 0.75%, respectively. The agreement requires the Company to maintain, among other items, minimum quick ratio, tangible net worth and profitability. The agreement also restricts the amount of dividends that NOTE 7 (CONTINUED) may be declared. As of June 30, 1996, the Company was in compliance with all of these covenants. As of June 30, 1996, approximately $2.8 million had been borrowed at the related offshore interest rate of 7.57% per annum. In August 1995, the Company repaid the $20.0 million mortgage on its principal facility. NOTE 8 RESEARCH AND DEVELOPMENT ARRANGEMENTS The Company has, from time to time, entered into research and development arrangements with certain key customers and other entities to partially finance the development of new technology. In February 1996, the Company entered into such an agreement with SEMATECH. The agreement provides financing up to $27.5 million through fiscal 2000. Payments are subject to the Company reaching predetermined milestones. In fiscal 1996, the Company received $3.1 million related to this agreement, of which $1.2 million was offset against gross engineering, research and development expenses and the remainder deferred. In fiscal 1994, 1995 and 1996, revenues of $5.7, $2.3 and $4.4 million, respectively, have been recognized on all research and development contracts on the percentage of completion basis. These revenues are offset against gross engineering, research and development expenses. NOTE 9 METROLOGIX INC. ACQUISITION In December 1994, the Company acquired Metrologix Inc. (Metrologix), a manufacturer of advanced electron beam measurement equipment for $14.2 million in cash. This acquisition was accounted for as a purchase and the total acquisition cost of $16.1 million has been allocated to assets acquired and liabilities assumed. A significant portion of the acquisition cost was allocated to acquired in-process technology which was written-off at the time of the acquisition, because further substantial research and development investments were necessary to complete the new product development then underway. This resulted in an after-tax charge of $16.2 million ($25.2 million pre-tax). The results of operations for Metrologix from the date of the acquisition to June 30, 1995, were immaterial. NOTE 10 GEOGRAPHIC REPORTING The Company is a leading manufacturer of yield monitoring and process control systems for the semiconductor manufacturing industry. The Company's sales and service operations are the principle revenue producing activities. For geographic reporting, sales are attributed to the geographic location of the sales and service organizations, and costs directly and indirectly incurred in generating sales are similarly assigned. Orders for Japanese sales are taken by a distributor and shipped from the United States. In fiscal years 1994, 1995 and 1996 related sales were $77.8, $148.0 and $232.4 million, and related operating income was $10.9, $43.3 and $72.2 million, repectively. During fiscal 1994, 1995 and 1996, no customer accounted for more than 10% of sales. The following is a summary of operations by geographic territories:
1994 1995 1996 - ---------------------------------------------------------------------------------------- (In thousands) Net sales to unaffiliated customers: United States $ 84,493 $ 138,926 $ 220,607 Western Europe 37,854 47,862 80,220 Japan 79,820 159,253 244,319 Asia Pacific 41,570 96,375 149,721 - ---------------------------------------------------------------------------------------- 243,737 442,416 694,867 - ---------------------------------------------------------------------------------------- Intercompany sales between geographic areas: United States 39,998 60,861 87,693 Western Europe 7,595 12,178 14,950 Asia Pacific 6,832 9,846 17,732 - ---------------------------------------------------------------------------------------- 54,425 82,885 120,375 Consolidation eliminations (54,425) (82,885) (120,375) - ---------------------------------------------------------------------------------------- Net sales $ 243,737 $ 442,416 $ 694,867 ======================================================================================== Operating results: United States $ 15,407 $ 31,777 $ 55,616 Western Europe 9,234 8,567 24,463 Japan 11,166 46,583 75,863 Asia Pacific 14,544 39,463 46,514 - ---------------------------------------------------------------------------------------- 50,351 126,390 202,456 General corporate expenses (10,269) (44,339) (24,952) - ---------------------------------------------------------------------------------------- Operating profit $ 40,082 $ 82,051 $ 177,504 ======================================================================================== Identifiable assets: United States $ 95,041 $ 147,557 $ 227,916 Western Europe 19,853 24,361 36,545 Japan 38,444 71,854 79,206 Asia Pacific 24,264 45,380 78,666 - ---------------------------------------------------------------------------------------- 177,602 289,152 422,333 General corporate assets 143,968 257,144 290,439 - ---------------------------------------------------------------------------------------- Total assets $ 321,570 $ 546,296 $ 712,772 ========================================================================================
Transfers between geographic areas are accounted for at amounts that are generally above cost and consistent with rules and regulations of governing tax authorities. Such transfers are eliminated in the consolidated financial statements. Corporate assets consist primarily of cash and cash equivalents and other investments. Corporate expenses consist primarily of general, administrative and other expenses not attributable to geographic regions. Capital expenditures and depreciation expense have been primarily in the United States. NOTE 11 INCOME TAXES The components of income before income taxes are comprised of the following:
1994 1995 1996 - ---------------------------------------------------------------------------------- (In thousands) Domestic $ 31,515 $ 77,157 $167,105 Foreign 8,736 11,657 21,789 - ---------------------------------------------------------------------------------- 40,251 $ 88,814 $188,894 ==================================================================================
The provisions for income taxes are comprised of the following:
1994 1995 1996 - ---------------------------------------------------------------------------------- (In thousands) Federal: Currently payable $ 7,587 $ 35,390 $ 66,120 Deferred (2,195) (13,414) (12,898) - ---------------------------------------------------------------------------------- 5,392 21,976 53,222 - ---------------------------------------------------------------------------------- State: Currently payable 2,222 6,094 11,080 Deferred -- (1,337) (1,198) - ---------------------------------------------------------------------------------- 2,222 4,757 9,882 - ---------------------------------------------------------------------------------- Foreign: Currently payable 2,307 2,245 2,979 Deferred 142 1,218 1,927 - ---------------------------------------------------------------------------------- 2,449 3,463 4,906 - ---------------------------------------------------------------------------------- Provision for income taxes $ 10,063 $ 30,196 $ 68,010 ==================================================================================
Actual current tax liabilities are lower than reflected above for fiscal years 1994, 1995 and 1996 by $5.2, $15.4 and $5.2 million respectively, due to the stock option deduction benefits recorded as credits to capital in excess of par value. The following is a reconciliation of the effective income tax rates and the United States statutory federal income tax rate:
1994 1995 1996 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 3.6 3.5 3.4 Effect of foreign operations at lower tax rates (1.7) (0.7) (1.0) Non-taxable FSC income (1.5) (2.6) (2.6) Foreign tax credit (4.8) (0.1) -- Realized deferred tax assets previously reserved (5.8) (2.7) (0.6) Other 0.2 1.6 1.8 - -------------------------------------------------------------------------------- Effective tax rate 25.0% 34.0% 36.0% ================================================================================
Deferred tax assets (liabilities) at June 30, 1994, 1995 and 1996 are comprised of the following:
1994 1995 1996 - -------------------------------------------------------------------------------- (In thousands) Deferred tax assets: Federal and state loss and credit carryforwards $ 4,696 $ 2,804 $ 3,034 State tax -- 1,096 2,281 Nondeductible reserves and other 18,651 24,611 36,044 - ------------------------------------------------------------------------------- 23,347 28,511 41,359 - ------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation (5,157) (3,559) (3,125) Unremitted earnings of foreign subsidiaries not permanently reinvested (6,327) (8,319) (10,634) Other (1,896) (2,101) (2,098) - ------------------------------------------------------------------------------- (13,380) (13,979) (15,857) Deferred tax assets valuation allowance (11,078) (5,853) (4,576) - ------------------------------------------------------------------------------- Total net deferred tax assets (liabilities) $ (1,111) $ 8,679 $ 20,926 ================================================================================
The Company's subsidiary, Metrologix, has a federal net operating loss carryforward of approximately $6.8 million as of June 30, 1996. It also has research and development tax credit carryovers of approximately $0.5 million that will expire primarily in fiscal 2005 through 2008. These tax assets are subject to limitation as to their utilization under Internal Revenue Code Section 382 and other provisions. The deferred tax assets valuation allowance at June 30, 1994, 1995 and 1996 is attributed to U.S. federal and state deferred tax assets. Management believes sufficient uncertainty exists with regards to the realizability of Metrologix's tax assets such that a valuation allowance of $4.6 million has been retained at June 30, 1996. During fiscal 1994, 1995 and 1996, the Company realized $2.3, $7.5 and $1.3 million, respectively, of deferred tax assets previously reserved, reducing the valuation allowance by corresponding amounts. In fiscal 1995, $5.1 of the $7.5 million that was realized was related to stock option deductions and accordingly was credited to capital in excess of par value. The IRS is currently auditing the Company's federal income tax returns for fiscal years 1985 to 1992. The Company has received a notice of proposed tax deficiency for such years. The Company filed a tax protest letter with the IRS on June 10, 1996, in response to the IRS notice. Management believes sufficient taxes have been provided in prior years and that the ultimate outcome of the IRS audit will not have a material adverse impact on the Company's financial position or results of operations. REPORT OF INDEPENDENT ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF KLA INSTRUMENTS CORPORATION In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of KLA Instruments Corporation and its subsidiaries at June 30, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse San Jose, California August 7, 1996 COMMON STOCK
1995 1996 High Low High Low - ------------------------------------------------------------------------------------------------------------------- First Quarter 25 7/8 18 5/8 47 1/8 38 1/2 Second Quarter 26 1/2 22 3/8 46 3/4 26 1/8 Third Quarter 32 1/2 23 1/4 35 1/4 21 3/4 Fourth Quarter 39 5/8 30 31 1/4 21 1/4 - -------------------------------------------------------------------------------------------------------------------
The Company's common stock is traded on the NASDAQ National Market System under the symbol "KLAC." The Company has not paid cash dividends on its common stock and does not plan to pay cash dividends to its stockholders in the near future. The Company presently intends to retain its earnings to finance further growth of its business. As of June 30, 1996, the Company had approximately 1,167 stockholders of record. CORPORATE DIRECTORY OFFICERS Kenneth Levy Chairman of the Board Chief Executive Officer Kenneth L. Schroeder President Chief Operating Officer Robert J. Boehlke Vice President, Finance and Administration Chief Financial Officer Frank L. Brienzo Vice President Virginia J. DeMars Vice President, Human Resources Gary E. Dickerson Group Vice President Samuel A. Harrell, Ph.D. Senior Vice President Michael W. Morrissey Group Vice President Neil Richardson, Ph.D. Vice President Magnus O.W. Ryde Vice President Arthur P. Schnitzer Group Vice President Christopher Stoddart Treasurer Bin-Ming Ben Tsai, Ph.D. Vice President, Chief Technical Officer William Turner Vice President, Corporate Finance Paul E. Kreutz, Esq. Secretary DIRECTORS Kenneth Levy Chairman of the Board Chief Executive Officer Kenneth L. Schroeder President Chief Operating Officer Edward W. Barnholt Senior Vice President Hewlett-Packard Leo J. Chamberlain Private Investor Robert E. Lorenzini Chairman SunPower Corporation Yoshio Nishi, Ph.D. Senior Vice President Texas Instruments Samuel Rubinovitz Retired Executive Vice President EG&G, Inc. Dag Tellefsen General Partner Glenwood Venture Management CORPORATE OFFICE KLA Instruments Corporation 160 Rio Robles P.O. Box 49055 San Jose, California 95161-9055 (408) 434-4200 INTERNATIONAL OFFICES KLA Instruments Ltd. ROSA, 19 Mulberry Business Park Fishponds Road Wokingham, Berkshire RG41 2GY, United Kingdom 44(0)118-9365-700 KLA Instruments GmbH Leonrodstrasse 58 80636 Muenchen, Germany 49-89-121561-0 KLA Instruments France S.A. 25 Rue Michael Faraday 78180 Montigny-le-Bretonneux France 33.1.30.14.90.30 KLA Instruments Israel 4 Science Avenue North Industrial Center P.O. Box 143 Migdal Ha'Emek 23100, Israel 972-6-449555 KLA Instruments Malaysia, Sdn Bhd 6, Jalan Timah 2 Taman Sri Putri 81000 Skudai Johor, Malaysia 607-557-1946 KLA Instruments Singapore, Pte Ltd BLK 3A Woodlands Centre Road B1-166, Singapore 731003 65-368-0677 KLA Japan, Ltd. YBP Hi-Tech Center 134 Godo-Cho Hodogaya-ku Yokohama-City Kanagawa 240, Japan 81-453-35-8200 KLA Instruments Korea 3rd Floor, LG Security Building 184-1, Bangy-dong, Songpa-ku Seoul, Korea 138-150 Republic of Korea 822-415-0552 KLA Instruments, Taiwan Branch 251 Chung-Yang Road Sinchu, Taiwan Republic of China 886-35-335163 INDEPENDENT ACCOUNTANTS Price Waterhouse LLP San Jose, California GENERAL LEGAL COUNSEL Gray Cary Ware & Freidenrich Palo Alto, California REGISTRAR AND TRANSFER AGENT First National Bank of Boston Boston, Massachusetts Additional copies of this report, as well as copies of SEC Form 10K, for the year ended June 30, 1996, may be obtained from the Company without charge by writing to: KLA Instruments Corporation Attn: Investor Relations P.O. Box 49055 San Jose, CA 95161-9055