<PAGE> 1
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Amendment No.)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
KLA-TENCOR CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee previously paid.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE> 2
KLA-TENCOR CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 17, 1998
To the Stockholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
KLA-Tencor Corporation (the "Company"), a Delaware corporation, will be held on
Tuesday, November 17, 1998 at 11:00 a.m., local time, at the Company's offices
located at One Technology Drive, Milpitas, California 95035, for the following
purposes:
1. To elect four Class III directors to serve for a three year term
and until their successors are elected.
2. To approve amendments to the 1997 Employee Stock Purchase Plan (the
"1997 Purchase Plan") to increase the number of shares of Common Stock of
the Company (the "Common Stock") reserved for issuance thereunder by
1,000,000 shares.
3. To approve amendments to the 1997 Purchase Plan to increase the
number of shares of Common Stock reserved for issuance thereunder on the
first day of each subsequent fiscal year by the lesser of (a) 2,000,000
shares or (b) the number of shares which the Company estimates (based on
the previous 12-month period) it will be required to issue under the 1997
Purchase Plan during the forthcoming fiscal year.
4. To approve the 1998 Outside Director Option Plan and to reserve for
issuance thereunder 1,000,000 shares of the Common Stock.
5. To ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the fiscal year ending June 30,
1999.
6. To transact such other business as may properly come before the
meeting and any adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on September 18, 1998
are entitled to notice of and to vote at the meeting.
Sincerely,
Larry W. Sonsini
Secretary
San Jose, California
September 30, 1998
YOUR VOTE IS IMPORTANT
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON,
HOWEVER, TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND
RETURN IT IN THE ENCLOSED ENVELOPE. ANY STOCKHOLDER ATTENDING THE MEETING MAY
VOTE IN PERSON EVEN IF HE OR SHE RETURNED A PROXY.
<PAGE> 3
KLA-TENCOR CORPORATION
------------------------
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed Proxy is solicited on behalf of KLA-Tencor Corporation (the
"Company") for use at the Annual Meeting of Stockholders to be held on Tuesday,
November 17, 1998 at 11:00 a.m., local time, or at any adjournment(s) thereof
(the "Annual Meeting"), for the purposes set forth herein and in the
accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will
be held at the Company's offices at One Technology Drive, Milpitas, California
95035. The Company's principal executive offices are located at 160 Rio Robles,
San Jose, California 95134 and its telephone number is (408) 875-4200.
These proxy solicitation materials were mailed on or about September 30,
1998 to all stockholders entitled to vote.
RECORD DATE
Stockholders of record at the close of business on September 18, 1998 are
entitled to notice of and to vote at the Annual Meeting. As of the record date
87,321,556 shares of the Company's Common Stock, $0.001 par value, were issued
and outstanding.
REVOCABILITY OF PROXIES
Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company a written
notice of revocation or a duly executed proxy bearing a later date or by
attending the meeting and voting in person.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting
is a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the record date. Shares that are voted "FOR,"
"AGAINST," "ABSTAIN" or "WITHHELD FROM" a matter are treated as being present at
the Annual Meeting for purposes of establishing a quorum and are also treated as
shares entitled to vote at the Annual Meeting (the "Votes Cast") with respect to
such matter.
Abstentions will be counted for purposes of determining both (i) the
presence or absence of a quorum for the transaction of business and (ii) the
total number of Votes Cast with respect to a proposal (other than the election
of directors). Accordingly, abstentions will have the same effect as a vote
against the proposal.
Broker non-votes will be counted for purposes of determining the presence
or absence of a quorum for the transaction of business, but will not be counted
for purposes of determining the number of Votes Cast with respect to the
particular proposal on which the broker has expressly not voted. Accordingly,
broker non-votes will not affect the outcome of the voting on a proposal that
requires a majority of the Votes Cast (such as the approval of a plan).
VOTING AND SOLICITATION
On all matters other than the election of directors, each share has one
vote. See "PROPOSAL ONE -- REQUIRED VOTE."
The cost of soliciting proxies will be borne by the Company. The Company
has retained the services of Skinner & Co. to aid in the solicitation of proxies
from brokers, bank nominees and other institutional owners. The Company
estimates that it will pay Skinner & Co. a fee not to exceed $5,000 for its
services and will reimburse it for certain out of pocket expenses estimated to
be $45,000. In addition, the Company may
<PAGE> 4
reimburse brokerage firms and other persons representing beneficial owners of
shares for their expenses in forwarding solicitation material to such beneficial
owners. Proxies may be solicited by certain of the Company's directors, officers
and regular employees, without additional compensation, personally or by
telephone or telegram.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's annual meeting in 1999 must be received by
the Company no later than June 2, 1999 and otherwise be in compliance with
applicable laws and regulations in order for such proposals to be considered for
possible inclusion may be included in the Company's proxy statement and form of
proxy relating to that meeting.
The attached proxy card grants the proxy holders discretionary authority to
vote on any matter raised at the Annual Meeting. If a stockholder intends to
submit a proposal at the Company's annual meeting in 1999, which proposal is not
intended to be included in the Company's proxy statement and form of proxy
relating to that meeting, the stockholder should give appropriate notice no
later than August 16, 1999. If such a stockholder fails to submit the proposal
by such date the Company will not be required to provide any information about
the nature of the proposal in its proxy statement and the proxy holders will be
allowed to use their discretionary voting authority if the proposal is raised at
the Company's annual meeting in 1999.
SECURITY OWNERSHIP
PRINCIPAL STOCKHOLDERS
As of June 30, 1998, the following persons were known to the Company to be
beneficial owners of more than 5% of the Company's Common Stock:
<TABLE>
<CAPTION>
NAME AND NUMBER OF PERCENTAGE
ADDRESS SHARES OWNED TOTAL(1)
-------- ------------ ----------
<S> <C> <C>
Capital Guardian Trust Co.(2)....................... 7,726,700 8.8%
333 South Hope Street
Los Angeles, CA 90071
Jennison Associates Capital Corp.(3)................ 5,485,500 6.3%
466 Lexington Ave
New York, NY 10017
FMR Corp.(4)........................................ 6,347,503 7.3%
82 Devonshire Street
Boston, MA 02109
Neuberger & Berman, LLC;
Neuberger & Berman Management Incorporated(5)....... 6,411,113 7.3%
605 Third Ave., New York, NY
10158-3698
The Prudential Insurance Company of America(6)...... 5,685,552 6.5%
Prudential Plaza
Newark, NJ 07102
</TABLE>
- ---------------
(1) Based on 87,443,592 outstanding shares of Common Stock as of June 30, 1998.
(2) Based on information provided pursuant to Schedule 13G filed with the
Securities and Exchange Commission (the "SEC") on July 9, 1998. This share
amount includes 1,037,100 shares held by Capital International Limited;
805,400 shares held by Capital International S.A. and 112,100 shares held by
Capital International, Inc., affiliated entities of Capital Guardian Trust
Co. (the "Reporting Entity"). Previously, The Capital Group Companies, Inc.,
the parent holding company of the Reporting Entity and its listed affiliated
entities, reported the beneficial ownership of all of such shares. On July
9, 1998 it filed a Schedule 13G indicating that it retained no beneficial
ownership of shares held by its independent investment management
affiliates.
2
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(3) Based on information provided pursuant to Schedule 13G/A filed with the SEC
on February 12, 1998. Jennison Associates Capital Corp. ("Jennison") is an
institutional investor and is considered the beneficial owner only as a
result of its position as manager of the funds which own the shares of
Common Stock of the Company. Jennison is an autonomous, wholly-owned
subsidiary of The Prudential Insurance Company of America ("Prudential"). As
such, the shares of Common Stock reported by Jennison are also included in
the shares of Common Stock reported by Prudential in its reporting
obligations with the SEC. (See Note 6 below.)
(4) Based on information provided pursuant to Schedule 13G filed with the SEC on
February 10, 1998. FMR Corp. is a parent holding company and includes shares
held by Fidelity Management & Research Company, Fidelity Management Trust
Company and Fidelity International Limited.
(5) Based on information provided pursuant to Schedule 13G filed with the SEC on
February 12, 1998. This number includes 4,373,850 shares held by Neuberger &
Berman's various mutual funds, for which Neuberger & Berman LLC and
Neuberger & Berman Management Inc. serve as sub-advisor and investment
manager, respectively.
(6) Based on information provided pursuant to Schedule 13G/A filed with the SEC
on February 9, 1998. Prudential presently holds 22,400 shares of Common
Stock of the Company for the benefit of its general account. In addition,
Prudential may have direct or indirect voting and/or investment discretion
over 5,663,152 shares, including 5,485,500 shares held by Jennison, a
wholly-owned subsidiary of Prudential (see Note 3 above).
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of September 18, 1998 (the most recent practicable date) by all
directors and nominees (naming them), each of the named executive officers set
forth in the Summary Compensation Table and by all directors and current
executive officers as a group:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT PERCENTAGE
NAME OWNED OWNED*
---- --------- -----------
<S> <C> <C>
Kenneth Levy(1)...................................... 1,874,170 2.15%
Jon D. Tompkins(2)................................... 160,869 **
Kenneth L. Schroeder(3).............................. 449,729 **
James W. Bagley(4)................................... 20,051 **
Edward W. Barnholt(5)................................ 5,213 **
Leo J. Chamberlain(6)................................ 27,067 **
Richard J. Elkus, Jr.(7)............................. 75,937 **
Dean O. Morton(8).................................... 15,051 **
Yoshio Nishi(9)...................................... 32,956 **
Samuel Rubinovitz(10)................................ 13,623 **
Dag Tellefsen(11).................................... 14,206 **
Lida Urbanek(12)..................................... 818,679 **
Robert J. Boehlke(13)................................ 102,526 **
Gary E. Dickerson(14)................................ 95,190 **
Graham J. Siddall(15)................................ 204,384 **
All directors and executive officers as a group (22
persons)(16)....................................... 4,354,172 4.99%
</TABLE>
- ---------------
* Based on 87,321,556 outstanding shares of the Common Stock of the Company
as of September 18, 1998.
** Less than 1%
3
<PAGE> 6
(1) Includes 353,093 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 18, 1998 and 231,000
shares which are held in trust for the benefit of Mr. Levy's children.
(2) Includes 145,072 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 18, 1998.
(3) Includes 325,093 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 18, 1998.
(4) Includes 20,051 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(5) Includes 5,213 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(6) Includes 5,070 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(7) Includes 937 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(8) Includes 10,051 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(9) Includes 32,956 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(10) Includes 9,623 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(11) Includes 13,107 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(12) Includes 3,560 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998 and 151,500 shares
which are held by Mrs. Urbanek's children.
(13) Includes 98,829 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(14) Includes 92,688 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 18, 1998.
(15) Includes 173,966 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 18, 1998.
(16) Includes 1,715,860 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 18, 1998.
PROPOSAL ONE
TO ELECT FOUR CLASS III DIRECTORS TO SERVE FOR A
THREE YEAR TERM AND UNTIL THEIR SUCCESSORS ARE ELECTED.
NOMINEES
The Company has a classified board of twelve directors consisting of four
Class I directors (Kenneth Levy, Samuel Rubinovitz, Jon D. Tompkins and Lida
Urbanek), three Class II directors (Leo J. Chamberlain, Richard J. Elkus, Jr.
and Dag Tellefsen) and five Class III directors (James W. Bagley, Edward W.
Barnholt, Dean O. Morton, Yoshio Nishi and Kenneth L. Schroeder). The Class I
directors and the Class II directors will serve until the annual meetings of
stockholders to be held in 1999 and 2000 respectively, or until their respective
successors are duly elected and qualified. At each annual meeting of
stockholders, directors are elected for a full term of three years to succeed
those directors whose terms expire at the annual meeting.
4
<PAGE> 7
The terms of the Class III directors will expire on the date of the Annual
Meeting. Yoshio Nishi has declined to stand for re-election. Accordingly, four
of the five Class III directors of the Board of Directors are to be elected at
the Annual Meeting. The nominees for election by the stockholders to these four
positions are James W. Bagley, Edward W. Barnholt, Dean O. Morton and Kenneth L.
Schroeder. If elected, the nominees will serve as directors until the Company's
annual meeting of stockholders in 2001, or until their successors are elected
and qualified. If any of the nominees declines to serve or becomes unavailable
for any reason, or if a vacancy occurs before the election, the proxies may be
voted for such substitute nominees as management may designate. The proxy
holders also have been advised that, in the event any of the nominees shall not
be available for election, a circumstance that is not currently expected, they
may vote for the election of substitute nominees in accordance with their
judgment. If additional persons are nominated for election as directors, the
proxy holders intend to vote all proxies received by them in such a manner in
accordance with cumulative voting (if invoked) as will assure the election of as
many of the nominees as possible and, in such event, the specific nominees to be
voted for will be determined by the proxy holders.
If a quorum is present and voting, the four nominees for Class III
directors receiving the highest number of votes will be elected as Class III
directors. Abstentions and shares held by brokers that are not present, but not
voted because the brokers were prohibited from exercising discretionary
authority, i.e., "broker non-votes," will be counted as present in determining
if a quorum is present.
The following table sets forth certain information with respect to the
Company's Board of Directors.
<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE POSITION SINCE
---------------- --- -------- --------
<S> <C> <C> <C>
Jon D. Tompkins................... 58 Chairman of the Board 1997
Kenneth Levy...................... 55 Chief Executive Officer 1975
Kenneth L. Schroeder.............. 52 President and Chief Operating 1991
Officer
James W. Bagley................... 59 Director 1997
Edward W. Barnholt................ 55 Director 1995
Leo J. Chamberlain................ 68 Director 1982
Richard J. Elkus, Jr.............. 63 Director 1997
Dean O. Morton.................... 66 Director 1997
Yoshio Nishi...................... 58 Director 1989
Samuel Rubinovitz................. 68 Director 1990
Dag Tellefsen..................... 56 Director 1978
Lida Urbanek...................... 55 Director 1997
</TABLE>
There are no family relationships between or among any directors or
executive officers of the Company.
JON D. TOMPKINS has been Chairman of the Board since July 1, 1998. From
April 30, 1997 until July 1, 1998 he was Chief Executive Officer and a Director
of the Company. From 1991 until April 30, 1997 he was President and Chief
Executive Officer of Tencor Instruments, a manufacturer of wafer inspection,
film measurement and metrology systems for the semiconductor industry ("Tencor")
prior to its merger with the Company. He was a director of Tencor from 1991
until April 1997 and was appointed chairman of the board of directors of Tencor
in November 1993. He currently serves on the boards of directors of Varian
Corporation and ESI Incorporated as well as chairman of the board of
SEMI/SEMATECH, a private research and development consortium of U.S.
semiconductor equipment and materials companies.
KENNETH LEVY is a founder of the Company and since July 1, 1998 has been
Chief Executive Officer and a Director. From 1975 until April 30, 1997 he was
Chairman of the Board and Chief Executive Officer. From April 30, 1997 until
June 30, 1998 he was Chairman of the Board. He currently serves on the boards of
directors of Ultratech Stepper, Inc. and Integrated Process Equipment
Corporation.
KENNETH L. SCHROEDER has been President, Chief Operating Officer and
Director of the Company since November 1991. He currently serves on the board of
directors of GaSonics International.
5
<PAGE> 8
JAMES W. BAGLEY has been a Director of the Company since April 30, 1997. He
was a director of Tencor from June 1993 until April 30, 1997. He has been chief
executive officer and a director of Lam Research Corporation, a manufacturer of
semiconductor processing equipment, since August 1997. From May 1996 until
August 1997 he was chairman of the board and chief executive officer of OnTrak
Systems, Inc. until its merger with Lam Research Corporation in August 1997.
From December 1987 until December 1993, Mr. Bagley was president and chief
operating officer for Applied Materials, Inc., a manufacturer of wafer
fabrication systems to the semiconductor industry. From January 1994 until
October 1995 he was vice chairman and chief operating officer of Applied
Materials, Inc., and vice chairman from November 1995 until May 1996. Mr. Bagley
currently serves on the boards of directors of Teradyne, Inc., Kulicke & Soffa
Industries, Inc., Micron Technology, Inc., and SEMI/SEMATECH.
EDWARD W. BARNHOLT has been a Director of the Company since 1995. Mr.
Barnholt joined Hewlett-Packard Company, a manufacturer of electronic and
computer equipment in December 1966. From 1988 to 1990 he was general manager of
the Electronics Instruments Group of Hewlett-Packard Company. In July 1988, he
was elected vice president and in November 1993 he was elected senior vice
president of Hewlett-Packard Company. Mr. Barnholt is currently executive vice
president and general manager of the Test and Measurement Organization of
Hewlett Packard Company.
LEO J. CHAMBERLAIN has been a Director of the Company since 1982. He is a
private investor.
RICHARD J. ELKUS, JR. has been a Director of the Company since April 30,
1997. He was executive vice president and vice chairman of the board of
directors of Tencor from February 1994 until April 30, 1997. Previously, he was
with Prometrix Corporation from September 1983 until February 1994 where he held
the positions of chairman and chief executive officer until its merger with
Tencor in February 1994. He currently serves on the boards of directors of Voyan
Technology and Lam Research Corporation.
DEAN O. MORTON has been a Director of the Company since April 30, 1997.
From June 1993 until April 30, 1997 he was a director of Tencor. In October 1992
Mr. Morton retired as executive vice president, chief operating officer and a
director of Hewlett-Packard Company, where he held various positions from 1960
until his retirement. Mr. Morton currently serves as chairman of the board of
Centigram Communications Corporation and as a director of ALZA Corporation, The
Clorox Company, BEA Systems Inc. and Raychem Corporation. Mr. Morton is also a
trustee of the Metropolitan Series Fund and State Street Research Funds Group
and Portfolios Inc.
YOSHIO NISHI has been a Director of the Company since 1989. Since May 1995
he has been director of research and development and senior vice president of
the Semiconductor Group of Texas Instruments Incorporated, a manufacturer of
integrated circuits and electronic equipment. From January 1986 to April 1995 he
was director of the Silicon Process Laboratory for Hewlett-Packard Laboratories,
a semiconductor technology research facility affiliated with Hewlett-Packard
Company.
SAMUEL RUBINOVITZ has been a Director of the Company since 1990. He
previously served as a Director of the Company from October 1979 to January
1989. From April 1989 to January 1994 he was executive vice president of EG&G,
Inc., a diversified manufacturer of scientific instruments and electronic,
optical and mechanical equipment. He currently serves on the boards of directors
of Richardson Electronics, Inc., LTX Corporation and Kronos, Inc.
DAG TELLEFSEN has been a Director of the Company since 1978. He is the
general partner of the Investment Manager of Glenwood Ventures I and II, venture
capital funds. He currently serves on the boards of directors of Iwerks
Entertainment Corporation, Aptix, Metorex International and Aeneid.
LIDA URBANEK has been a Director of the Company since April 30, 1997. She
is a private investor. She was a director of Tencor from August 1991 until April
30, 1997.
6
<PAGE> 9
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of five meetings during
the fiscal year ended June 30, 1998. The Board of Directors has an Audit
Committee, a Compensation Committee and a Nominating Committee.
The Audit Committee, which consists of Mr. Morton, Mr. Rubinovitz and Mr.
Tellefsen, held three meetings during the last fiscal year. The Audit Committee
recommends engagement of the Company's independent accountants, and is primarily
responsible for approving the services performed by the Company's independent
accountants and for reviewing and evaluating the Company's accounting principles
and its system of internal accounting controls. The Compensation Committee,
which consists of Mr. Bagley, Mr. Chamberlain and Mrs. Urbanek, held three
meetings during the last fiscal year. The Compensation Committee reviews and
approves the Company's executive compensation policy and makes recommendations
concerning the Company's employee benefit plans. The Nominating Committee, which
consists of Mr. Barnholt, Mr. Levy and Mr. Tompkins did not hold a meeting
during the last fiscal year. A unanimous group of the disinterested members of
the board of directors nominated the four Class III directors for election, with
Mr. Nishi declining to stand for reelection. The Nominating Committee is
primarily responsible for identifying and evaluating the qualifications of all
candidates for election to the Board of Directors. The Nominating Committee will
consider nominations recommended by stockholders. Stockholders wishing to submit
nominations must notify the Company of their intent to do so and provide the
Company with certain information set forth in the Company's bylaws on or before
the date on which stockholder proposals to be included in the proxy statement
for the stockholder meeting must be received by the Company.
During the fiscal year ended June 30, 1998, all incumbent Directors
attended at least 75% of the aggregate number of meetings of the Board of
Directors and meetings of the committees of the Board on which they served.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not employees of the Company
receive an annual fee of $15,000 and $1,000 for each meeting they attend ($500
if participation is by telephone), plus expenses. Committee members receive $500
per committee meeting they attend ($250 if participation is by telephone). The
Company's Outside Directors Stock Option Plan (the "Director Plan") as adopted
by the Board of Directors and approved by the stockholders, provides for the
grant of an option to purchase 2,500 shares of Common Stock of the Company to
each of the Company's non-employee directors on the date on which such person is
elected a director. Thereafter, each non-employee director is automatically
granted an option to purchase 2,500 shares of Common Stock of the Company on the
anniversary of such date. The Director Plan provides that the exercise price
shall be equal to the fair market value of the Common Stock on the date of grant
of the option. Options granted pursuant to the Director Plan have a term of ten
years with 25% vesting after 12 months and the remainder vesting monthly over
the following 36 months, but only while the optionee is a director of the
Company, within six months after death or within 30 days after the optionee
ceases to serve as a director of the Company. The Company plans to terminate the
Director Plan if the stockholders approve Proposal Four hereunder.
If the stockholders approve Proposal Four hereunder, the non-employee
Directors shall receive benefits under the 1998 Outside Director Plan ("1998
Director Plan") and no additional options will be granted under the Director
Plan and it will be terminated. Under the 1998 Director Plan, each non-employee
Director ("Outside Director") shall receive a nonstatutory option to purchase
10,000 shares of Common Stock as of the date on which such director first
becomes an Outside Director (the "First Option"). Accordingly, none of the
existing directors will be granted a First Option. In addition, each Outside
Director shall automatically be granted a nonstatutory option to purchase an
additional 5,000 shares of Common Stock on the date of the subsequent annual
meetings on which he or she remains an Outside Director (the "Subsequent
Option"). The term of options granted under the 1998 Director Plan may not
exceed 10 years. The 1998 Director Plan provides that the exercise price shall
be equal to the fair market value of the Common Stock on the date of
7
<PAGE> 10
grant of the option. Options granted under the 1998 Director Plan shall become
exercisable immediately upon the date of grant.
REQUIRED VOTE
Directors shall be elected by a plurality of the votes of the shares of the
Company's Common Stock entitled to vote and represented in person or by proxy at
the Annual Meeting. Votes against, votes withheld and broker non-votes have no
legal effect on the election of directors due to the fact that such elections
are by a plurality. Every stockholder voting for the election of directors may
cumulate such stockholder's votes and give one candidate a number of votes equal
to the number of directors to be elected multiplied by the number of votes to
which the stockholder's shares are entitled, or may distribute the stockholder's
votes on the same principle among as many candidates as the stockholder thinks
fit, provided that votes cannot be cast for more than the number of directors to
be elected. However, no stockholder shall be entitled to cumulate votes unless
the candidate's name has been placed in nomination prior to the voting and the
stockholder, or any other stockholder, has given notice at the Annual Meeting
prior to the voting of the intention to cumulate the stockholder's votes. The
proxy holders will exercise discretionary authority to cumulate votes in the
event that additional persons are nominated at the Annual Meeting for election
of directors.
MANAGEMENT RECOMMENDS A VOTE FOR EACH OF THE CLASS III
NOMINEES LISTED ABOVE.
PROPOSAL TWO
APPROVAL OF AMENDMENT TO THE 1997 EMPLOYEE STOCK PURCHASE PLAN TO INCREASE THE
NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER BY 1,000,000
SHARES.
GENERAL
As of the date hereof 200,000 shares of the Company's Common Stock have
been reserved for issuance under the Company's 1997 Employee Stock Purchase Plan
(the "1997 Purchase Plan"). In August 1998, the Board of Directors adopted an
amendment to the 1997 Purchase Plan, subject to stockholder approval, to
increase the number of shares reserved for issuance thereunder by 1,000,000
shares in fiscal 1999, to a total of 1,200,000 reserved shares. As of June 30,
1998, 195,598 shares of Common Stock had been issued under the 1997 Purchase
Plan at an average price of $23.5344 per share and 4,402 shares remained
available for purchase.
The 1997 Purchase Plan was adopted in 1997 and stockholder approval was
obtained at the 1997 annual meeting of stockholders with the intention of
phasing out the Company's 1981 Employee Stock Purchase Plan (the "1981 Purchase
Plan") over the two year period ending June 30, 1999. The Company estimates that
it will utilize the remaining available shares under the 1997 Purchase Plan
leaving an insufficient number of shares for issuance in the exercise periods
throughout the phase out of the 1981 Purchase Plan in fiscal 1999.
The Board of Directors believes that it is in the best interests of the
Company to provide employees with an opportunity to purchase Common Stock of the
Company through payroll deductions. In addition, the Board of Directors believes
that the shares remaining available for issuance pursuant to the 1997 Purchase
Plan are insufficient for such purpose. Accordingly, at the Annual Meeting, the
stockholders are being requested to consider and to approve an amendment of the
1997 Purchase Plan to increase the number of shares reserved for issuance
thereunder by 1,000,000 shares which the Company believes is a sufficient number
of shares to allow the Company to continue to phase out the 1981 Purchase Plan
through the next fiscal year.
8
<PAGE> 11
The description of the 1997 Purchase Plan that follows Proposal Three is
incorporated herein by this reference.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO
THE 1997 EMPLOYEE STOCK PURCHASE PLAN TO INCREASE THE NUMBER OF SHARES RESERVED
FOR ISSUANCE THEREUNDER BY 1,000,000 SHARES.
PROPOSAL THREE
APPROVAL OF AMENDMENTS TO THE 1997 PURCHASE PLAN TO PROVIDE FOR AN AUTOMATIC
INCREASE TO THE SHARES FOR ISSUANCE THEREUNDER ON THE FIRST DAY OF EACH NEW
FISCAL YEAR
GENERAL
As of the date hereof 200,000 shares of the Company's Common Stock have
been reserved for issuance under the 1997 Purchase Plan. In August 1998, in
addition to the amendment described in Proposal Two above, the Board of
Directors adopted an amendment to the 1997 Purchase Plan, subject to stockholder
approval, to increase the number of shares reserved for issuance thereunder on
the first day of each subsequent fiscal year (beginning on July 1, 1999) by the
lesser of (a) 2,000,000 shares or (b) the number of shares which the Company
estimates (based on the previous 12-month period) it will be required to issue
under the 1997 Purchase Plan during the forthcoming fiscal year. As of June 30,
1998, 195,598 shares of Common Stock had been issued under the 1997 Purchase
Plan at an average price of $23.5344 per share and 4,402 shares remained
available for purchase.
The Company sought stockholder approval of the 1997 Purchase Plan at the
1997 annual meeting of stockholders with the intention of phasing out the
Company's 1981 Purchase Plan over the two year period ending June 30, 1999.
Following the phase out of the 1981 Purchase Plan, the 1997 Purchase Plan will
need additional shares to replace the shares issued thereunder.
As described in Proposal Two above, the Company will have phased out the
1982 Purchase Plan by June 30, 1999. Thereafter, the 1997 Purchase Plan will be
the Company's sole employee stock purchase plan. The Board of Directors believes
that it is in the best interests to provide employees with an opportunity to
purchase Common Stock of the Company through payroll deductions. The Board
believes that the 1,000,000 shares of Common Stock being added to the 1997
Purchase Plan pursuant to Proposal Two will be sufficient to cover the
requirements of this plan through June 30, 1999. To simplify the administration
of the 1997 Purchase Plan thereafter, the Board has approved the proposed
amendment which provides for automatic periodic additions of a specified number
of shares of Common Stock to the plan without the need for additional
stockholder approval. This amendment is intended to ensure that the 1997
Purchase Plan will continue to have a reasonable number of shares available to
meet its requirements for the remainder of its term.
The description of the 1997 Purchase Plan that follows Proposal Three is
incorporated herein by this reference.
REQUIRED VOTE -- PROPOSALS TWO AND THREE
The affirmative vote of a majority of the Votes Cast will be required to
approve the amendments to the 1997 Purchase Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENTS TO
THE 1997 PURCHASE PLAN TO PROVIDE FOR AN AUTOMATIC INCREASE TO THE SHARES
RESERVED FOR ISSUANCE THEREUNDER ON THE FIRST DAY OF EACH NEW FISCAL YEAR.
9
<PAGE> 12
SUMMARY OF THE 1997 PURCHASE PLAN, AS AMENDED
The essential features of the 1997 Purchase Plan, as amended, are outlined
below; provided however, that the following summary is qualified in its entirety
by the specific language of the 1997 Purchase Plan, as amended, a copy of which
is available at no charge to any stockholder upon request.
Purpose
The purpose of the 1997 Purchase Plan is to provide employees of the
Company and its foreign subsidiaries designated by the Board of Directors of the
Company with an opportunity to purchase Common Stock of the Company through
payroll deductions.
Administration
The 1997 Purchase Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors. The Board of Directors has the
discretion to delegate routine matters to management. All questions of
interpretation or application of the 1997 Purchase Plan are determined in the
sole discretion of the Board of Directors, and its decisions are final and
binding upon all participants. The Board of Directors may determine, in its sole
discretion, the requirements and conditions of participation, if any, by
employees of foreign subsidiaries. In the event that the Board of Directors
determines that the ongoing operation of the 1997 Purchase Plan may result in
unfavorable financial accounting consequences, the Board of Directors may in any
manner it determines, in its sole discretion, and, to the extent necessary or
desirable, modify or amend the 1997 Purchase Plan, including, but not limited to
altering the purchase price for any offering period including an offering period
underway at the time of the change in purchase price. Such modifications or
amendments shall not require stockholder approval or the consent of any
participants in the 1997 Purchase Plan. Members of the Board of Directors who
are eligible employees of the Company are permitted to participate in the 1997
Purchase Plan. Members of the Board of Directors will receive no additional
compensation for their services in connection with the administration of the
1997 Purchase Plan. All payroll deductions received or held by the Company may
be used by the Company for any corporate purpose.
Eligibility
Any person who is employed by the Company or its subsidiaries for at least
20 hours per week and more than five months in a calendar year is eligible to
participate in the 1997 Purchase Plan.
Employees of foreign subsidiaries may be subject to additional requirements
and restrictions depending upon applicable local law. As of June 30, 1998,
approximately 3,300 employees were participating in the 1997 Purchase Plan.
Offering Dates
The 1997 Purchase Plan is implemented by 24-month offering periods (each an
"Offering Period"), commencing on January 1 and July 1 of each year. Each
Offering Period is composed of four consecutive six-month purchase periods (each
a "Purchase Period"). The Board of Directors has the power to alter the duration
of the Offering Periods without stockholder approval.
Eligible employees become participants in the 1997 Purchase Plan by
delivering to the Company a subscription agreement authorizing payroll
deductions. An eligible employee may participate in an Offering Period only if,
as of the enrollment date of such Offering Period, such employee is not
participating in the 1981 Purchase Plan or in any prior Offering Period under
the 1997 Purchase Plan which is continuing at the time of such proposed
enrollment. An employee who becomes eligible to participate in the 1997 Purchase
Plan after the commencement of an Offering Period may not participate until the
commencement of the next Offering Period.
10
<PAGE> 13
Purchase Price
The purchase price per share at which shares are sold under the 1997
Purchase Plan shall be 85% of the lesser of (a) the fair market value of the
shares of Common Stock on the first day of such Offering Period, and (b) the
fair market value of the shares of Common Stock at the time of exercise of a
participant's purchase option. The fair market value of the Common Stock on a
given date shall be determined by the Board of Directors based on the closing
price of the Company's Common Stock on such date as reported on the Nasdaq
National Market.
Payment of Purchase Price; Payroll Deductions
The purchase price for the shares is accumulated by payroll deductions
during the Offering Period. The deductions may not exceed 10% of a participant's
eligible compensation. A participant may institute decreases in the rate of
payroll deductions at any time and such decreases are immediately effective.
Increases in the rate of payroll deductions are effective as of the commencement
of the next Offering Period.
All payroll deductions are credited to the participant's account under the
1997 Purchase Plan; no interest accrues on the payroll deductions. All payroll
deductions received or held by the Company may be used by the Company for any
corporate purpose and such payroll deductions need not be segregated.
Purchase of Stock; Exercise of Option
At the beginning of each Offering Period, by executing a subscription
agreement to participate in the 1997 Purchase Plan, each employee is in effect
granted an option to purchase shares of Common Stock. The maximum number of
shares placed under option to a participant in an Offering Period is determined
by dividing $20,000 by 85% of the fair market value of the Common Stock at the
beginning of the Offering Period. Notwithstanding the foregoing, no employee may
make aggregate purchases of stock of the Company and its subsidiaries under the
1997 Purchase Plan and any other employee stock purchase plans qualified as such
under Section 423(b) of the Internal Revenue Code of 1986, as amended (the
"Code") in excess of $25,000 (determined using the fair market value of the
shares at the time the option is granted) during any calendar year.
Withdrawal
While each employee in the 1997 Purchase Plan is required to sign a
subscription agreement authorizing payroll deductions to participate, a
participant may terminate his or her participation in the 1997 Purchase Plan at
any time by signing and delivering to the Company a notice of withdrawal from
the 1997 Purchase Plan. All of the participant's accumulated payroll deductions
will be paid to the participant promptly after receipt of his or her notice of
withdrawal and his or her participation in the current Offering Period will be
automatically terminated, and no further payroll deductions for the purchase of
shares will be made during the Offering Period. No resumption of payroll
deductions will occur on behalf of such participant unless such participant
re-enrolls in the 1997 Purchase Plan by delivering a new subscription agreement
to the Company during the applicable open enrollment period preceding the
commencement of a subsequent Offering Period. A participant's withdrawal from
the 1997 Purchase Plan during an Offering Period does not have any effect upon
such participant's eligibility to participate in subsequent Offering Periods
under the 1997 Purchase Plan.
Termination of Employment
Termination of a participant's employment for any reason, including
retirement or death, cancels his or her participation in the 1997 Purchase Plan
immediately. In such event, the payroll deductions credited to the participant's
account will be returned to such participant or, in the case of death, to the
participant's legal representative.
11
<PAGE> 14
Capital Changes
If any change is made in the capitalization of the Company, such as stock
splits or stock dividends, which results in an increase or decrease in the
number of shares of Common Stock outstanding or in the event of any merger, sale
or other reorganization, appropriate adjustments shall be made by the Company in
the 1997 Purchase Plan's reserve and the number and class of shares subject to
outstanding purchase options and in the purchase price per share.
Notwithstanding such adjustment, if in a transaction the stockholders of the
Company no longer retain at least a majority of the beneficial interest in the
voting stock of the Company following such transaction ("Transfer of Control"),
the Board of Directors may, in its sole discretion (a) provide that the purchase
options become fully exercisable prior to the date of the Transfer of Control,
(b) provide that such successor entity assume the Company's obligations under
the 1997 Purchase Plan, or (c) terminate the 1997 Purchase Plan. The Board of
Directors may also make provisions for adjusting the number of shares subject to
the 1997 Purchase Plan and the purchase price per share if the Company effects
one or more reorganizations, recapitalizations, rights offerings or other
increases or decreases in the number of shares of the Company's outstanding
Common Stock.
Amendment and Termination of the 1997 Purchase Plan
The Board of Directors may at any time amend or terminate the 1997 Purchase
Plan; provided, however, amendments that would increase the number of shares
reserved for purchase or would otherwise require stockholder approval in order
to comply with other regulatory requirements, require stockholder approval.
CERTAIN UNITED STATES FEDERAL INCOME TAX INFORMATION
The 1997 Purchase Plan is intended to qualify under the provisions of
Sections 421 and 423 of the Code with respect to participants who are citizens
of the United States ("U.S. Participants"). Under these provisions, no income
will be taxable to a U.S. Participant at the time of grant of the option or
purchase of shares. Upon disposition of the shares, the U.S. Participant will
generally be subject to tax, the amount of which will depend upon the holding
period. If the shares have been held by the U.S. Participant for more than two
years after the offering date and more than one year after the exercise date,
the lesser of: (a) the excess of the fair market value of the shares at the time
of such disposition over the option price, or (b) the excess of the fair market
value of the shares at the time the option was granted over the option price
(which option price will be computed as of the grant date) will be treated as
ordinary income, and any further gain will be treated as long-term capital gain.
If the shares are disposed of before the expiration of these holding periods,
the excess of the fair market value of the shares on the exercise date over the
option price will be treated as ordinary income, and any further gain or any
loss on such disposition will be long-term or short-term capital gain or loss,
depending on the holding period. Special rules may apply with respect to U.S.
Participants subject to Section 16(b) of the Securities Exchange Act of 1934, as
amended. The Company is not entitled to a deduction for amounts taxed as
ordinary income or capital gain to a U.S. Participant except to the extent of
ordinary income reported by U.S. Participants upon disposition of shares prior
to the expiration of the two holding periods described above. The consequences
to non-U.S. Participants are governed by foreign laws, which typically do not
offer the same tax advantages as U.S. laws.
The foregoing is only a summary of the effect of federal income taxation
upon the participant and the Company with respect to the grant and exercise of
options under the 1997 Purchase Plan, does not purport to be complete, and does
not discuss the income tax laws of any municipality, state or foreign country in
which a participant may reside. It is advisable that a participant contact his
or her own tax advisor concerning the application of all of these tax laws.
STOCK PRICE
The closing price of a share of the Company's Common Stock on the Nasdaq
National Market on September 18, 1998 was $22.375.
12
<PAGE> 15
PLAN BENEFITS
The Company cannot now determine the number of shares to be purchased in
the future by the named executive officers, all current executive officers as a
group or all employees (excluding executive officers) as a group. In the fiscal
year ended June 30, 1998, however, the following shares of Common Stock were
purchased by such persons pursuant to the 1997 Purchase Plan and the 1981
Purchase Plan:
<TABLE>
<CAPTION>
NAME OR GROUP NUMBER OF SHARES
------------- ----------------
<S> <C>
Kenneth Levy......................................... 1,122
Jon D. Tompkins...................................... 617
Kenneth L. Schroeder................................. 937
Robert J. Boehlke.................................... 760
Gary E. Dickerson.................................... 1,173
Graham J. Siddall.................................... 617
All current executive officers (13 persons-as a
group)............................................. 12,254
All employees (including current officers who are not
executive officers)................................ 802,737
</TABLE>
PROPOSAL FOUR
APPROVAL OF THE 1998 OUTSIDE DIRECTOR OPTION PLAN AND RESERVATION OF 1,000,000
SHARES OF COMMON STOCK OF THE COMPANY FOR ISSUANCE THEREUNDER.
GENERAL
The Company's 1998 Outside Director Option Plan (the "1998 Director Plan")
was adopted by the Board of Directors in August 1998 and is intended to allow
the Company to attract and retain the best available individuals for service as
non-employee members of the Board of Directors ("Outside Directors") and to
encourage their continued service on the Board. The Company has initially
reserved 1,000,000 shares of Common Stock for issuance under the 1998 Director
Plan. At the Annual Meeting, the stockholders are being asked to approve the
1998 Director Plan and to approve the reservation of 1,000,000 shares for
issuance thereunder. Upon approval by the stockholders of the Company, the
Company will no longer grant any options under the current Outside Directors
Stock Option Plan and will terminate that plan.
SUMMARY OF THE 1998 DIRECTOR PLAN
The essential features of the 1998 Director Plan are outlined below;
provided however, that the following summary is qualified in its entirety by the
specific language of the 1998 Director Plan, a copy of which is available at no
charge to any stockholder upon request.
Purpose
The 1998 Director Plan provides for the grant of nonstatutory stock options
to Outside Directors to allow the Company to attract and retain the best
available individuals for service as Outside Directors.
Administration
The 1998 Director Plan may be administered by the Board of Directors or a
committee of the Board (as applicable, the "Administrator"). The Administrator
has the power to determine the terms of the options granted, including the
exercise price of the option, the number of shares subject to each option, the
exercisability thereof, and the form of consideration payable upon such
exercise. In addition, the Administra-
13
<PAGE> 16
tor has the authority to amend, suspend or terminate the 1998 Director Plan,
provided that no such action may affect any share of Common Stock previously
issued and sold or any option previously granted under the 1998 Director Plan.
Eligibility
Options under the 1998 Director Plan may be granted only to Outside
Directors. No person has any discretion to select which Outside Directors shall
be granted options. In addition to discretionary grants by the Board of
Directors, the Director Plan provides for automatic grants of options to be made
in the following ways: (a) each Outside Director as of the date on which such
director first becomes an Outside Director receives a nonstatutory option to
purchase 10,000 shares of Common Stock (the "First Option"); and (b) each
Outside Director shall automatically be granted a nonstatutory option to
purchase an additional 5,000 shares of Common Stock on the date of the
subsequent annual meetings on which he or she remains an Outside Director (the
"Subsequent Option").
Terms of Options
Options granted under the 1998 Director Plan are generally not transferable
by the optionee, and each option is exercisable during the lifetime of the
optionee only by such optionee. Options granted under the 1998 Director Plan
must generally be exercised within 30 days after the end of optionee's status as
an Outside Director of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term.
The exercise price of nonstatutory stock options granted under the 1998
Director Plan shall be at least equal to the fair market value of the Common
Stock on the date of grant. The term of all options granted under the 1998
Director Plan may not exceed ten years. Both the First Option and the Subsequent
Option shall become 100% exercisable on their respective dates of grant.
Amendment or Termination
The Administrator may amend or terminate the 1998 Director Plan at any
time. However, no amendment or termination may adversely affect any stock
options then outstanding under the 1998 Director Plan without the optionee's
consent.
The 1998 Director Plan provides that in the event of a merger of the
Company with or into another corporation, or a sale of substantially all of the
Company's assets, each option shall be assumed or an equivalent option
substituted for by the successor corporation. If the outstanding options are not
assumed or substituted for by the successor corporation, the Administrator shall
provide for the optionee to have the right to exercise the option as to all of
the optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option exercisable in full in the
event of a merger or sale of substantially all of the Company's assets, the
Administrator shall notify the optionee that the option shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the option will terminate upon the expiration of such period.
CERTAIN UNITED STATES FEDERAL INCOME TAX INFORMATION
The following is only a summary of the effect of federal income taxation
upon the Outside Director and the Company with respect to the grant and exercise
of options under the 1998 Director Option Plan. This summary does not purport to
be complete and does not discuss the income tax laws of any municipality, state
or foreign country in which an Outside Director may reside.
Options granted under the 1998 Director Plan are nonstatutory options
("NSO"). An Outside Director will not recognize any taxable income at the time
he or she is granted an NSO. However, upon the exercise of an NSO, the optionee
will recognize ordinary income measured by the excess of the then fair market
value of the shares over the option price. Upon resale of such shares by the
Outside Director, any difference between the sale price and the exercise price,
to the extent not recognized as ordinary income as provided above, will be
14
<PAGE> 17
treated as long-term or short-term capital gain or loss, depending on the
holding period. The Company will be entitled to a tax deduction in the same
amount as the ordinary income recognized by the Outside Director with respect to
shares acquired upon exercise of an NSO.
PLAN BENEFITS
If the 1998 Director Plan is approved at the Annual Meeting, each Outside
Director serving on the Board of Directors shall be entitled to each receive a
Subsequent Option. If Proposals One and Four are approved by the stockholders,
there will be eight Outside Directors on the Board of Directors immediately
following the Annual Meeting and options to purchase an aggregate of 40,000
shares of Common Stock will therefore be outstanding under the 1998 Director
Plan immediately following the Annual Meeting.
REQUIRED VOTE
The affirmative vote of a majority of the Votes Cast will be required to
approve the adoption of the 1998 Director Plan and for the reservation of
1,000,000 shares of Common Stock of the Company for issuance thereunder.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE 1998
DIRECTOR PLAN AND FOR THE RESERVATION OF 1,000,000 SHARES OF COMMON STOCK OF THE
COMPANY FOR ISSUANCE THEREUNDER.
PROPOSAL FIVE
TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT
ACCOUNTANTS OF THE COMPANY FOR THE FISCAL YEAR ENDING JUNE 30, 1999.
The Board of Directors has selected PricewaterhouseCoopers LLP, independent
accountants, to audit the consolidated financial statements of the Company for
its 1999 fiscal year and recommends that the stockholders vote for ratification
of such appointment. If there is a negative vote on such ratification, the Board
of Directors will reconsider its selection. Representatives of
PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting with
the opportunity to make a statement if they desire to do so, and are expected to
be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT ACCOUNTANTS OF THE
COMPANY FOR THE FISCAL YEAR ENDING JUNE 30, 1999.
15
<PAGE> 18
EXECUTIVE COMPENSATION
The following table shows, as to the person who served as Chief Executive
Officer during the fiscal year ended June 30, 1998 and each of the five other
most highly compensated executive officers whose salary plus bonus exceeded
$100,000, information concerning all reportable compensation awarded to, earned
by or paid to each for services to the Company in all capacities during the
fiscal year ended June 30, 1998, as well as such compensation for each such
individual for the Company's previous two fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- ---------------------------------
AWARDS
OTHER ---------- PAYOUTS
NAME ANNUAL RESTRICTED SECURITIES -------
AND COMPEN- STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL SALARY SATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($) BONUS ($)(1) ($)(2) SARS(#)(3) ($)(4) ($)(5)
--------- ---- -------- -------- ------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth Levy(6)...................... 1998 $467,769 $262,314 $N/A -0- 62,500 -0- $ 44,430
Chief Executive Officer 1997 $402,122 $334,277 $N/A -0- 162,500 -0- $ 72,158
Chairman of the Board 1996 $350,289 $413,070 $N/A -0- -0- -0- $111,023
Jon D. Tompkins(7)................... 1998 $467,769 $262,314 $N/A -0- -0- -0- $ 44,430
Chairman of the Board 1997 $389,589 $396,462 $N/A -0- 100,000 -0- $ 1,500
Chief Executive Officer 1996(8) $352,067 $381,562 $N/A -0- 71,999 -0- $ 12,291
Kenneth L. Schroeder................. 1998 $455,992 $256,757 $N/A -0- 62,500 -0- $ 43,545
President and Chief Operating Officer 1997 $384,231 $332,800 $N/A -0- 162,500 -0- $ 71,452
1996 $330,777 $396,095 $N/A -0- -0- -0- $106,810
Robert J. Boehlke.................... 1998 $297,115 $116,708 $N/A -0- 33,500 -0- $ 28,604
Executive Vice President 1997 $257,908 $143,587 $N/A -0- 73,500 -0- $ 49,911
and Chief Financial Officer 1996 $248,185 $186,008 $N/A -0- -0- -0- $ 79,526
Gary E. Dickerson.................... 1998 $312,115 $161,364 $N/A -0- 42,500 -0- $ 29,984
Executive Vice President, 1997 $260,631 $129,441 $N/A -0- 82,500 -0- $ 50,197
Yield Management Solutions 1996 $221,346 $172,500 $N/A -0- 20,000 -0- $ 73,104
Graham J. Siddall(8)................. 1998 $312,115 $ 64,717 $N/A -0- -0- -0- $ 29,984
Executive Vice President, 1997 $261,062 $217,661 $N/A -0- 40,000 -0- $ 1,500
Wafer Inspection Group 1996(8) $242,062 $214,132 $N/A -0- 87,999 -0- $ 1,500
</TABLE>
- ---------------
(1) The amounts paid during the fiscal year to the named executive officers were
less than the lesser of (a) $50,000 or (b) 10% of the executive officers
total reported salary and bonus.
(2) The Company has not granted any restricted stock rights.
(3) The Company has not granted any stock appreciation rights.
(4) The Company does not have any Long Term Incentive Plans as that term is
defined in the regulations.
(5) "All Other Compensation" is itemized as follows:
- In 1998, Mr. Levy received $25,496 in cash profit sharing; $9,246 in
profit sharing was contributed by the Company to the 401(k) Plan; $8,688
was contributed by the Company to the Excess Profit Stock Plan; $1,000
was contributed by the Company as a matching contribution to the 401(k)
Plan.
- In 1998, Mr. Tompkins received $25,496 in cash profit sharing; $9,246 in
profit sharing was contributed by the Company to the 401(k) Plan; $8,688
was contributed by the Company to the Excess Profit Stock Plan; $1,000
was contributed by the Company as a matching contribution to the 401(k)
Plan.
- In 1998, Mr. Schroeder received $25,001 in cash profit sharing; $9,230 in
profit sharing was contributed by the Company to the 401(k) Plan; $8,314
was contributed by the Company to the Excess Profit Stock Plan; $1,000
was contributed by the Company as a matching contribution to the 401(k)
Plan.
- In 1998, Mr. Boehlke received $16,205 in cash profit sharing; $8,681 in
profit sharing was contributed by the Company to the 401(k) Plan; $2,718
was contributed by the Company to the Excess Profit Stock Plan; $1,000
was contributed by the Company as a matching contribution to the 401(k)
Plan.
- In 1998, Mr. Dickerson received $17,016 in cash profit sharing; $9,032 in
profit sharing was contributed by the Company to the 401(k) Plan; $2,936
was contributed by the Company to the Excess Profit Stock Plan; $1,000
was contributed by the Company as a matching contribution to the 401(k)
Plan.
16
<PAGE> 19
- In 1998, Mr. Siddall received $17,016 in cash profit sharing; $9,032 in
profit sharing was contributed by the Company to the 401(k) Plan; $2,936
was contributed by the Company to the Excess Profit Stock Plan; $1,000
was contributed by the Company as a matching contribution to the 401(k)
Plan.
(6) Mr. Levy was named Chief Executive Officer effective July 1, 1998. During
fiscal 1997, Mr. Levy was Chief Executive Officer until April 30, 1997 when,
as a result of the merger of Tencor Instruments ("Tencor") into a
wholly-owned subsidiary of the Company (the "Merger"), he became Chairman of
the Board of Directors and remained in that position until July 1, 1998.
(7) Mr. Tompkins was named Chairman of the Board effective July 1, 1998. He was
previously President and Chief Executive Officer of Tencor until April 1997.
As a result of the Merger he became Chief Executive Officer of the Company
effective April 30, 1997 and remained in that position until July 1, 1998.
The compensation described in this Summary Compensation Table reflects
certain amounts which were paid during the period prior to the Merger when
Tencor was an independent, publicly traded company. Tencor reported its
results on a calendar year basis, while the Company reports its results
based on a June 30 year end.
(8) The amounts reported for 1996 for Mr. Tompkins and Mr. Siddall are those
amounts reported by Tencor in its proxy statements filed with the Securities
and Exchange Commission for the year ended December 31, 1996.
STOCK OPTION GRANTS AND EXERCISES
The following tables set forth the stock options granted to the named
executive officers under the Company's stock option plans and the options
exercised by such named executive officers during the fiscal year ended June 30,
1998.
The Option/SAR Grant Table sets forth hypothetical gains or "option
spreads" for the options at the end of their respective ten-year terms, as
calculated in accordance with the rules of the Securities and Exchange
Commission. Each gain is based on an arbitrarily assumed annualized rate of
compound appreciation of the market price at the date of grant of 5% and 10%
from the date the option was granted to the end of the option term. Actual
gains, if any, on option exercises are dependent on the future performance of
the Company's Common Stock and overall market conditions.
OPTION/SAR(1) GRANTS IN LAST FISCAL YEAR
KLA-TENCOR CORPORATION 1982 STOCK OPTION PLAN(2)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL OPTIONS/ ASSUMED ANNUAL RATES OF STOCK
SARS GRANTED EXERCISE OR PRICE APPRECIATION FOR OPTION TERM
OPTIONS/SARS TO EMPLOYEES BASE PRICE EXPIRATION ----------------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ------------ -------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Levy............ 62,500 1.73% $60.5625 07/31/07 $2,380,464 $6,032,564
Jon D. Tompkins......... -0- -0- -0- N/A -0- -0-
Kenneth L. Schroeder.... 62,500 1.73% $60.5625 07/31/07 $2,380,464 $6,032,564
Robert J. Boehlke....... 33,500 .93% $60.5625 07/31/07 $1,275,929 $3,233,454
Gary E. Dickerson....... 42,500 1.18% $60.5625 07/31/07 $1,618,716 $4,102,144
Graham J. Siddall....... -0- -0- -0- N/A -0- -0-
</TABLE>
- ---------------
(1) The Company has not granted any stock appreciation rights.
(2) The material terms of the grants (other than those set forth in the table)
are: (a) The exercise price of the options is the fair market value of
Common Stock as of the date of grant; (b) The options vest on a four year
schedule with 25% after one year and the remaining option shares vesting
1/36th per month for the remainder of the vesting term; (c) To the extent
unexercised, the options lapse after ten years; (d) The options are
non-transferrable and are only exercisable during the period of employment
of the
17
<PAGE> 20
optionee and for 30 days following termination of employment, subject to limited
exceptions in the cases of certain terminations, death or permanent disability
of the optionee.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUE(1)
KLA-TENCOR CORPORATION 1982 STOCK OPTION PLAN
<TABLE>
<CAPTION>
TOTAL NUMBER OF TOTAL VALUE(2) OF
NUMBER OF UNEXERCISED OPTIONS HELD UNEXERCISED, IN-THE-MONEY
SHARES AT FISCAL YEAR END OPTIONS HELD AT FISCAL YEAR END
ACQUIRED ON VALUE --------------------------- ---------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Levy.............. -0- -0- 326,901 226,099 $5,673,025 $800,006
Jon D. Tompkins........... -0- -0- 15,000 85,000 -0- -0-
Kenneth L. Schroeder...... 20,000 $1,283,750 298,901 226,099 $4,958,276 $800,006
Robert J. Boehlke......... 35,000 $1,965,880 80,604 104,208 $ 524,526 $495,548
Gary E. Dickerson......... 26,500 $1,379,228 71,815 128,885 $ 316,089 $446,517
Graham J. Siddall(3)...... -0- -0- 18,437 21,563 -0- -0-
</TABLE>
- ---------------
(1) The Company has not granted any stock appreciation rights.
(2) Total value of vested options based on fair market value of Company's Common
Stock of $27.6875 per share as of June 30, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUE(1)
TENCOR INSTRUMENTS 1993 EQUITY INCENTIVE PLAN
<TABLE>
<CAPTION>
TOTAL VALUE(2) OF
TOTAL NUMBER OF UNEXERCISED, IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS HELD OPTIONS HELD AT
SHARES AT FISCAL YEAR END FISCAL YEAR END
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Levy(3)........ -0- -0- -0- -0- -0- -0-
Jon D. Tompkins........ 103,172 $5,753,834 70,947 61,003 $ 870,737 $721,660
Kenneth L.
Schroeder(3)......... -0- -0- -0- -0- -0- -0-
Robert J. Boehlke(3)... -0- -0- -0- -0- -0- -0-
Gary E. Dickerson(3)... -0- -0- -0- -0- -0- -0-
Graham J. Siddall...... 17,050 $ 922,255 105,447 49,625 $1,619,674 $523,601
</TABLE>
- ---------------
(1) The Company has not granted any stock appreciation rights.
(2) Total value of vested options based on fair market value of Company's Common
Stock of $27.6875 per share as of June 30, 1998.
(3) Messrs. Levy, Schroeder, Boehlke and Dickerson have been executive officers
of the Company and accordingly have never received options under the Tencor
Instruments 1993 Equity Incentive Plan. Accordingly, the information under
this table is inapplicable to them.
18
<PAGE> 21
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Compensation Committee
The Committee is comprised of three of the independent, non-employee
members of the Board of Directors, none of whom have interlocking relationships
as defined by the Securities and Exchange Commission. The Committee is
responsible for setting and administering the policies governing annual
compensation of executive officers, considers their performance and makes
recommendations regarding their cash compensation and stock options to the full
Board of Directors. The Committee periodically reviews its approach to executive
compensation and makes changes as appropriate.
Compensation Philosophy
The Committee of the Board of Directors establishes the overall executive
compensation strategies of the Company and approves compensation elements for
the chairman of the board, the chief executive officer and other executive
officers. The goals of the Company's compensation policy are to attract, retain
and reward executive officers who contribute to the overall success of the
Company by offering compensation that is competitive in the industry, to
motivate executive officers to achieve the Company's business objectives and to
align the interests of executive officers with the long term interests of
stockholders. The Company currently uses salary, a management incentive plan and
stock options to meet these goals.
The compensation philosophy of the Committee is to provide a comprehensive
compensation package for each executive officer that is well suited to support
accomplishment of the Company's business strategies, objectives and initiatives.
For incentive-based compensation, the Committee considers the desirability of
structuring such compensation arrangements so as to qualify for deductibility
under Section 162(m) of the Internal Revenue Code. As the Committee applies this
compensation philosophy in determining appropriate executive compensation levels
and other compensation factors, the Committee reaches its decisions with a view
towards the Company's overall financial performance.
Executive Officer Compensation
The Committee's approach is based upon a belief that a substantial portion
of aggregate annual compensation for executive officers should be contingent
upon the Company's performance and an individual's contribution to the Company's
success. In addition, the Committee strives to align the interests of the
Company's executive officers with the long-term interests of stockholders
through stock option grants that can result in ownership of the Company's Common
Stock. The Committee endeavors to structure each executive officer's overall
compensation package to be consistent with this approach and to enable the
Company to attract, retain and reward personnel who contribute to the success of
the Company.
The Company provides its executive officers with a compensation package
consisting of base salary, variable incentive pay and participation in benefit
plans generally available to other employees. The Committee considers market
information from published survey data provided to the Committee by the
Company's human resources staff. The market data consists primarily of base
salary and total cash compensation rates, as well as incentive bonus and stock
programs of other companies considered by the Committee to be peers in the
Company's industry.
For the Company's previous fiscal year, the Committee reviewed and
recommended a compensation structure which had as an important component, the
successful integration of KLA Instruments Corporation and Tencor Instruments.
The merger was completed April 30, 1997 with the Company's fiscal 1998 year
focused on integrating the two companies as well as substantial economic and
business challenges in the semiconductor and semiconductor capital equipment
industries worldwide.
Base Salary. Salaries for executive officers are set with reference to
salaries for comparable positions among other companies in the Company's
industry or in industries that employ individuals of similar education and
background to the executive officer based on data provided by the Company's
human resources staff.
19
<PAGE> 22
Management Incentive Plan. Each year since fiscal 1979, the Company has
adopted a management incentive plan (the "Incentive Plan") which provides for
payments to officers and key employees based on the financial performance of the
Company or the relevant business unit, and on the achievement of the person's
individual performance objectives. The Incentive Plan is approved by the
Committee and submitted to the Board of Directors for ratification. For fiscal
1999 the Incentive Plan sets goals for profitability, achievement of measurable
objectives aimed at strategic corporate goals and achievement of objectives
relating to managing the ratio of assets to sales.
Outstanding Corporate Performance Executive Bonus Plan. The Company adopted
an additional incentive plan (the "Outstanding Corporate Performance Plan")
which allows for an additional bonus in years when the Company achieves certain
levels of profitability and growth. For those executive officers that do not
have operating divisions reporting to them, the matrix is based on the Company's
pre-tax margin and the growth of the Company compared to a peer group. The
target percentage for the Outstanding Corporate Performance Plan is the same
target percentage as utilized in determining the Incentive Plan bonus. For those
executive officers who do have operating divisions reporting to them, the matrix
is based on certain specified growth objectives for that division and the
Company's net operating margin. The target percentage for the Outstanding
Corporate Performance Plan is also the same as that utilized in determining the
Incentive Plan bonus. Any amounts to be paid under the Outstanding Corporate
Performance Plan will be in the form of a contribution by the Company to the
Executive Deferred Savings Plan (the "EDSP") and will vest over a one year
period. At the end of such one year period, the executive officer will have the
choice of taking a cash payment or leaving it in the EDSP. If the executive
officer should leave during that one year period, the contribution by the
Company shall be forfeited. The executive officer will be eligible to
participate in the Company's profit sharing plan while eligible for Company
contributions under the Outstanding Corporate Performance Plan but any amounts
contributed by the Company pursuant to the Outstanding Corporate Performance
Plan will be offset by profit sharing paid during the year.
Long-term Incentives. Longer term incentives are provided through the Stock
Option Plan and the Excess Profit Stock Plan, each of which reward executive
officers through the growth in value of the Company's Common Stock. The
Committee believes that employee equity ownership is highly motivating, provides
a major incentive for employees to build stockholder value and serves to align
the interests of employees with those of stockholders.
Grants of stock options to executive officers are based upon each executive
officer's relative position, responsibilities, historical and expected
contributions to the Company, and the executive officer's existing stock
ownership and previous option grants, with primary weight given to the executive
officer's relative rank and responsibilities. Stock options are granted at
market price on the date of grant and will provide value to the executive
officers only when the price of the Company's Common Stock increases over the
exercise price.
Approval of Fiscal Year 1999 Bonus Plan and Outstanding Corporate Performance
Plan
The Committee approved the fiscal year 1999 bonus plan incentive formula
which is based on two components of equal weight. The first is performance
against certain financial objectives and the second is achievement of certain
non-financial strategic objectives. The bonuses for the Chairman of the Board,
the Chief Executive Officer, the President/Chief Operating Officer and the Chief
Financial Officer are based on an average of the performance of those managers
reporting to the executive officers utilizing a combination of the weighted
average contribution made by each manager and a simple average of those
contributions. The Committee also approved the fiscal year Outstanding Corporate
Performance Plan which is based on a matrix of the Company's net operating
margin and certain growth objectives. The Outstanding Corporate Performance Plan
does not require any contributions by the Company until the Company achieves a
Pre-Tax Margin Factor of 14%. The Pre-Tax Margin Factor is calculated by taking
the pre-tax, pre-profit sharing income, excluding non-recurring charges, and
dividing it by total revenue.
20
<PAGE> 23
Chief Executive Officer Compensation
For fiscal year 1998, Jon D. Tompkins served as Chief Executive Officer and
Kenneth Levy served as Chairman of the Board. Effective July 1, 1998 Mr.
Tompkins assumed the role of Chairman of the Board and Mr. Levy assumed the role
of Chief Executive Officer. Base salary for Mr. Tompkins for fiscal 1999 has
been set at $245,440, and the base salary for Mr. Levy has been set at $490,880
based on the recommendations provided by the Company's Human Resources
Compensation staff. Options to purchase 50,809 shares of the Common Stock of the
Company were granted to Mr. Tompkins and options to purchase 102,136 shares of
the Common Stock of the Company were granted to Mr. Levy, each with standard
four year vesting terms. For fiscal 1998 a bonus of $262,314 was paid to Mr.
Levy and a bonus of $262,314 was paid to Mr. Tompkins. These payments were based
on the formula approved by the Compensation Committee and the Board of Directors
last year. In a year in which the Company faced many challenges, including the
integration of two companies and severe economic downturn in the semiconductor
and semiconductor capital equipment industries worldwide, the Company
successfully integrated two companies and continued its profitability with
revenues of $1.2 billion and earnings per share of $1.76.
MEMBERS OF THE COMPENSATION COMMITTEE
James W. Bagley
Leo J. Chamberlain
Lida Urbanek
21
<PAGE> 24
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are set forth in the preceding
section. There are no members of the Compensation Committee who were officers or
employees of the Company or any of its subsidiaries during the fiscal year,
formerly officers of the Company, or had any relationship otherwise requiring
disclosure hereunder.
PERFORMANCE GRAPH
The stock price performance shown on the graph following is not necessarily
indicative of future price performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG KLA-TENCOR
CORPORATION, THE NASDAQ -- US INDEX AND THE HAMBRECHT & QUIST
TECHNOLOGY INDEX*
<TABLE>
<CAPTION>
HAMBRECHT &
KLA-TENCOR NASDAQ - US QUIST TECHNOLOGY
CORPORATION INDEX INDEX
<S> <C> <C> <C>
6/30/93 100.00 100.00 100.00
6/30/94 217.39 100.96 102.21
6/30/95 447.83 134.77 180.82
6/30/96 269.57 173.03 211.32
6/30/97 565.22 210.38 275.98
6/30/98 321.01 277.69 349.59
</TABLE>
- ---------------
* Assumes $100 invested on June 30, 1993. The Company's fiscal year end is June
30.
22
<PAGE> 25
CERTAIN TRANSACTIONS
In connection with the merger between KLA Instruments Corporation and
Tencor Instruments (effective April 30, 1997) the Company entered into identical
employment arrangements, subsequently amended, with Kenneth Levy, Jon D.
Tompkins and Kenneth L. Schroeder, all executive officers of the Company. The
arrangements, as amended, provide that certain benefits would be paid if certain
events took place after April 30, 1997. The purpose of these arrangements is to
retain the services of Messrs. Levy, Tompkins and Schroeder to ensure the
continued smooth transition associated with the Merger. The terms of those
arrangements provide that if an individual were to leave the Company after April
30, 1998, subject to releasing the Company from all claims, and in connection
with working part-time for 36 months, he will receive (i) his base salary for
the first 24 months of part-time employment, (ii) a mutually agreeable level of
compensation per month for the final 12 months of part-time employment, (iii) an
annual bonus (based on an achievement of 100% of bonus objectives) in the fiscal
year of his transition to part-time employment, (iv) a bonus paid in the fiscal
year following the payment of the annual bonus above, (based on achievement of
100% of his individual bonus objectives) and (v) a pro-rated bonus for the
fiscal year in which part-time employment ended. During the periods of part-time
employment, all options to exercise stock of the Company which were granted more
than 12 months prior to the termination of full-time employment will continue to
vest. The same benefits shall be payable in the event the Company terminates his
employment without cause. If he is terminated for cause (defined as (i) gross
negligence or willful misconduct in connection with the performance of duties,
(ii) conviction of or plea of nolo contendere to any felony, or (iii) the
embezzlement or misappropriation of Company property) then he will receive a
lump-sum payment equal to 25% of his base salary.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors, and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than ten percent stockholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Kenneth Levy, an
executive officer and director of the Company filed an amendment to his Form 4
for the month ending August 30, 1997 in order to reflect transactions by a
family member and a family trust, which had inadvertently been left off of the
original Form 4. Mr. Levy filed the amendment when he discovered the error. Jon
D. Tompkins, an executive officer and director of the Company filed an amendment
to his Form 4 for the month ending July 31, 1997 to reflect ownership of an
additional 1,500 shares of the Company's Common Stock owned by Mr. Tompkins.
These shares were inadvertently not reported on the original Form 4 because they
were held by Mr. Tompkins under the Tencor Instruments employee stock purchase
plan prior to the Merger. Mr. Tompkins filed an amendment when he discovered the
error. Dean O. Morton, a director of the Company, filed an amended Form 4 for
the month ending August 30, 1997 to reflect an exercise of a stock option
inadvertently not reported on the original Form 4. Mr. Morton filed an amendment
when he discovered the error. Graham J. Siddall, an executive officer of the
Company filed an amendment to his Form 4 for the month ending August 30, 1997 in
order to reflect exercises of stock options which had inadvertently been left
off the original Form 4. Mr. Siddall filed the amendment when he discovered the
error.
OTHER MATTERS
The Company knows of no other matters to be submitted to the stockholders
at the Annual Meeting. If any other matters properly come before the Annual
Meeting, it is the intention of the persons named in the enclosed form of Proxy
to vote the shares they represent as the Board of Directors may recommend.
THE BOARD OF DIRECTORS
September 30, 1998
23
<PAGE> 26
KLA-TENCOR CORPORATION
1998 OUTSIDE DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Outside Director
Option Plan are to attract and retain the best available personnel for service
as Outside Directors (as defined herein) of the Company, to provide additional
incentive to the Outside Directors of the Company to serve as Directors, and to
encourage their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" means the common stock of the Company.
(d) "Company" means KLA-Tencor Corporation.
(e) "Director" means a member of the Board.
(f) "Disability" means total and permanent disability as
defined in section 22(e)(3) of the Code.
(g) "Employee" means any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(h) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(i) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The
Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system on the date of determination as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
<PAGE> 27
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the date of determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Board.
(j) "Inside Director" means a Director who is an Employee.
(k) "Option" means a stock option granted pursuant to the
Plan.
(l) "Optioned Stock" means the Common Stock subject to an
Option.
(m) "Optionee" means a Director who holds an Option.
(n) "Outside Director" means a Director who is not an
Employee.
(o) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(p) "Plan" means this 1998 Director Option Plan.
(q) "Share" means a share of the Common Stock, as adjusted
in accordance with Section 10 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is one million Shares (the "Pool"). The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without
having been exercised in full, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated). Shares that have actually been issued under the Plan shall not
be returned to the Plan and shall not become available for future distribution
under the Plan.
2
<PAGE> 28
4. Administration and Grants of Options under the Plan.
(a) Discretionary Grants. The Board (or its committee)
shall have the authority, in its discretion, to make discretionary grants of
Options hereunder to Outside Directors and to specify the terms and conditions
of such discretionary Option grants.
(b) Automatic Grants. Outside Directors under this Plan
shall receive automatic Option grants as follows:
(i) Each Outside Director shall be automatically
granted an Option to purchase ten thousand (10,000) Shares (the "First Option")
on the date on which such person first becomes an Outside Director, whether
through election by the shareholders of the Company or appointment by the Board
to fill a vacancy; provided, however, that an Inside Director who ceases to be
an Inside Director but who remains a Director shall not receive a First Option.
(ii) Each Outside Director shall be automatically
granted an Option to purchase five thousand (5,000) Shares (a "Subsequent
Option") on the day of the Company's annual meeting of shareholders of each year
provided he or she is then an Outside Director, and if as of such date, he or
she shall have served on the Board for at least the preceding six (6) months.
(iii) The terms of a First Option granted
hereunder shall be as follows:
(A) the term of the First Option shall
be ten (10) years.
(B) the First Option shall be
exercisable only while the Outside Director remains a Director of the Company,
except as set forth in Sections 8 and 10 hereof.
(C) the exercise price per Share shall
be 100% of the Fair Market Value per Share on the date of grant of the First
Option.
(D) subject to Section 10 hereof, the
First Option shall become exercisable as to twenty-five percent of the Shares
subject to the First Option on the first anniversary of its date of grant and as
to 1/48th of the Shares initially subject to the First Option each month
thereafter, so as to be 100% vested on the fourth anniversary of the date of
grant, provided that the Optionee continues to serve as a Director on such
dates.
(iv) The terms of a Subsequent Option granted
hereunder shall be as follows:
(A) the term of the Subsequent Option
shall be ten (10) years.
(B) the Subsequent Option shall be
exercisable only while the Outside Director remains a Director of the Company,
except as set forth in Sections 8 and 10 hereof.
3
<PAGE> 29
(C) the exercise price per Share shall
be 100% of the Fair Market Value per Share on the date of grant of the
Subsequent Option.
(D) subject to Section 10 hereof, the
Subsequent Option shall become exercisable as to 100% percent of the Shares
subject to the Subsequent Option on the fourth anniversary of its date of grant,
provided that the Optionee continues to serve as a Director on such date.
(c) Powers of the Board. Subject to the provisions of the
Plan and, in the case of a committee, the specific duties delegated by the Board
to such committee, and subject to the approval of any relevant authorities, the
Board (or its committee) shall have the authority, in its discretion:
(i) to modify or amend each Option, including the
discretionary authority to change prospectively the vesting schedules of
options, to extend the post-termination exercisability period of outstanding
Options longer than is otherwise provided for and/or to accelerate the vesting
of any outstanding Option;
(ii) to construe and interpret the terms of the
Plan and awards granted pursuant to the Plan.
(d) Share Shortfalls. In the event that any Option granted
under the Plan would cause the number of Shares subject to outstanding Options
plus the number of Shares previously purchased under Options to exceed the Pool,
then the remaining Shares available for Option grant shall be granted under
Options to the Outside Directors on a pro rata basis. No further grants shall be
made until such time, if any, as additional Shares become available for grant
under the Plan through action of the Board or the shareholders to increase the
number of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. The
Plan shall not confer upon any Optionee any right with respect to continuation
of service as a Director or nomination to serve as a Director, nor shall it
interfere in any way with any rights which the Director or the Company may have
to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the date upon
which it is approved by the Company's stockholders. It shall continue in effect
until it is terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares
to be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair
4
<PAGE> 30
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised, (iv) consideration
received by the Company under a cashless exercise program implemented by the
Company in connection with the Plan, or (v) any combination of the foregoing
methods of payment.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable at such times as are set forth in
Section 4 hereof.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may consist of any consideration and
method of payment allowable under Section 7 of the Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. A share certificate for the number of Shares so acquired
shall be issued to the Optionee as soon as practicable after exercise of the
Option. No adjustment shall be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 10 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) Termination of Continuous Status as a Director. Subject
to Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or Disability), the Optionee may exercise
his or her Option, but only within thirty days (30) following the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration of
its ten (10) year term). To the extent that the Optionee was not entitled to
exercise an Option on the date of such termination, and to the extent that the
Optionee does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status
as a Director terminates as a result of Disability, the Optionee may exercise
his or her Option, but only within twelve (12) months following the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration of
its ten (10) year term). To the extent that the Optionee was not entitled to
exercise an Option on the date of termination, or if he or she does not exercise
such Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.
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(d) Death of Optionee. In the event of an Optionee's death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of Shares covered by each
outstanding Option, the number of Shares which have been authorized for issuance
under the Plan but as to which no Options have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option, as well
as the price per Share covered by each such outstanding Option, (but not the
number of Shares issuable pursuant to the automatic grant provisions of Section
4 hereof) shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, to the extent that an Option
has not been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation or the sale of substantially all of the
assets of the Company, outstanding Options may be assumed or equivalent options
may be substituted by the successor corporation or a Parent or Subsidiary
thereof (the "Successor Corporation"). If an Option is assumed or substituted
for, the Option or equivalent option shall continue to be exercisable as
provided in Section 4 hereof for so long as the Optionee serves as a Director or
a director of the Successor Corporation. Following such assumption or
substitution, if the Optionee's status as a Director or director of the
Successor Corporation, as applicable, is terminated other than upon a voluntary
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<PAGE> 32
resignation by the Optionee, the Option or option shall become fully
exercisable, including as to Shares for which it would not otherwise be
exercisable. Thereafter, the Option or option shall remain exercisable in
accordance with Sections 8(b) through (d) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment
or termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall,
for all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon
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<PAGE> 33
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company
may require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares,
if, in the opinion of counsel for the Company, such a representation is required
by any of the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. Shareholder Approval. The Plan shall be subject to approval by
the shareholders of the Company within twelve (12) months after the date the
Plan is adopted. Such shareholder approval shall be obtained in the degree and
manner required under applicable state and federal law and any stock exchange
rules.
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<PAGE> 34
KLA-TENCOR CORPORATION
Proxy for 1998 Annual Meeting of Stockholders
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints Kenneth Levy and
Lisa C. Berry, and each of them, as Proxies with full power of substitution, to
represent and vote as designated in this proxy any and all shares of the common
stock of KLA-Tencor Corporation (the "Company"), held or owned by or standing in
the name of the undersigned on the Company's books on September 18, 1998, at the
Annual Meeting of Stockholders of the Company to be held at the Company's
offices at One Technology Drive, Milpitas, California 95035, at 11:00 a.m. local
time on Tuesday, November 17, 1998 and any continuation or adjournment thereof,
with all powers the undersigned would possess if personally present at the
meeting.
The undersigned hereby directs and authorizes said Proxies and each of them, or
their substitute or substitutes, to vote as specified with respect to the
proposals listed on the reverse side or, if no specification is made, to vote in
favor thereof.
The undersigned hereby further confers upon said Proxies, and each of them, or
their substitute or substitutes, discretionary authority to vote with respect to
all other matters that may properly come before the meeting or any continuation
or adjournment thereof.
The undersigned hereby acknowledges receipt of: (a) Notice of Annual Meeting of
Stockholders of the Company, (b) accompanying Proxy Statement, and (c) Annual
Report to Stockholders for the year ending June 30, 1998.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE SIDE
<PAGE> 35
/ X / Please mark votes as in this example.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY. THE
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR AND FOR
PROPOSALS 2, 3, 4 AND 5.
1. To elect Class III directors to serve for a three year term and until their
successors are elected. Nominees: James W. Bagley, Edward W. Barnholt, Dean O.
Morton and Kenneth L. Schroeder.
FOR WITHHELD
/ / / /
/ /
--------------------------------------------------
For all nominees, except as noted above.
2. To approve amendments to the 1997 Employee Stock Purchase Plan to increase
the number of shares of Common Stock of the Company reserved for issuance
thereunder by 1,000,000 shares.
FOR AGAINST ABSTAIN
/ / / / / /
3. To approve amendments to the 1997 Employee Stock Purchase Plan to increase
the number of shares of Common Stock of the Company reserved for issuance
thereunder on the first day of each subsequent fiscal year by the lesser of (a)
2,000,000 shares or (b) the number of shares which the Company estimates (based
on the previous 12-month period) it will be required to issue under the 1997
Employee Stock Purchase Plan during the forthcoming fiscal year.
FOR AGAINST ABSTAIN
/ / / / / /
4. To approve the 1998 Outside Director Option Plan and to reserve for
issuance thereunder 1,000,000 shares of the Common Stock of the Company.
FOR AGAINST ABSTAIN
/ / / / / /
5. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal year ending June 30, 1999.
FOR AGAINST ABSTAIN
/ / / / / /
In their discretion, the proxy holders are authorized to vote on all such other
matters as may properly come before the meeting or any adjournment thereof.
/ / Mark here if you plan to attend the meeting
/ / Mark here for address change and note below
Please sign exactly as your name appears on your stock certificate(s), date and
return this Proxy promptly in the reply envelope provided. Please correct your
address before returning this Proxy. Persons signing in a fiduciary capacity
should so indicate. If shares are held by joint tenants or as community
property, both should sign.
Signature: Date:
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Signature: Date:
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[DETACH HERE]
