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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10/A
Amendment No. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Varian Semiconductor Equipment Associates, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0501994
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3050 Hansen Way
Palo Alto, California 94304-1000
(Address of Principal Executive (Zip Code)
Offices)
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Registrant's telephone number, including area code:
(650) 493-4000
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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Item 1. Business.
The information required by this item is contained under the sections
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Risk Factors" and in the Financial Statements of
Semiconductor Equipment Business of Varian Associates, Inc.
Item 2. Financial Information.
The information required by this item is contained under the sections
"Summary - Summary Financial Data," "Risk Factors," "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Market Risk" and "Pro Forma Condensed Combined Financial
Statements."
Item 3. Properties.
The information required by this item is contained under the section
"Business - Properties."
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained under the section "Ownership
of VSEA Common Stock."
Item 5. Directors and Executive Officers.
The information required by this item is contained under the sections
"Management - Board of Directors" and "- Executive Officers."
Item 6. Executive Compensation.
The information required by this item is contained under the section
"Management - Compensation of Directors," " - Executive Officer Compensation,"
" - Stock Options," and " - Change in Control Agreements."
Item 7. Certain Relationships and Related Transactions.
The information required by this item is contained under the sections "The
Distribution - Relationship Among VMS, IB and VSEA After the Distribution,"
"Management - Change in Control Agreements" and "Certain Relationships and
Related Transactions."
Item 8. Legal Proceedings.
The information required by this item is contained under the section
"Business - Legal Proceedings."
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
The information required by this item is contained under the sections "Risk
Factors - No Dividends Anticipated," "The Distribution - Listing and Trading of
VSEA Common Stock," " - Employee Benefits Allocation Agreement" and
"Description of the Capital Stock."
Item 10. Recent Sales of Unregistered Securities.
On January 7, 1999, as part of its original incorporation, the Registrant
issued one share of its common stock, for a total consideration of $1,000, to
Varian Associates, Inc., which is and will be the Registrant's sole stockholder
until the date of the distribution. This transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, in
that such transaction did not involve a public offering.
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Item 11. Description of Registrant's Securities to be Registered.
The information required by this item is contained under the section
"Description of the Capital Stock - General" and " - Common Stock."
Item 12. Indemnification of Directors and Officers.
The information required by this item is contained under the section
"Limitation of Liability and Indemnification Matters."
Item 13. Financial Statements and Supplementary Data.
The information required by this item is identified in the sections "Index to
Financial Statements - Semiconductor Equipment Business of Varian Associates,
Inc." and "Pro Forma Condensed Combined Financial Statements."
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Matters.
None.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements
(1) Combined Financial Statements: The information required by this item is
contained in the "Index to Financial Statements and Financial Statement
Schedule."
(2) Combined Financial Statement Schedule: The following financial
statement schedule of the Registrant for fiscal years 1998, 1997, and
1996, and the related Report of Independent Accountants are filed as a
part of this Registration Statement and should be read in conjunction
with the Combined Financial Statements of the Registrant.
Schedule
- Report of Independent Accountants on Financial Statement Schedule
- Valuation and Qualifying Accounts
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or the notes thereto.
(b) Exhibits
The following documents are filed as exhibits hereto:
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Exhibit
No. Description
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<C> <S>
2.1 Distribution Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of
January 14, 1999.+
3.1 Form of Restated Certificate of Incorporation of Varian Semiconductor
Equipment Associates, Inc. to be in effect upon the effectiveness of
the Distribution.+
3.2 Form of By-Laws of Varian Semiconductor Equipment Associates, Inc. to
be in effect upon the effectiveness of the Distribution.*
4.1 Specimen Common Stock Certificate.*
4.2 Rights Agreement dated February 19, 1999.*
10.1 Form of Employee Benefits Allocation Agreement among Varian
Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and
Varian, Inc.+
10.2 Form of Intellectual Property Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.3 Form of Tax Sharing Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.4 Form of Transition Services Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
</TABLE>
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<TABLE>
<CAPTION>
Exhibit
No. Description
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<C> <S>
10.5 Form of Change in Control Agreement for CEO.*
10.6 Form of Change in Control Agreement for Chief Financial Officer.*
10.7 Form of Change in Control Agreement for Senior Executives.*
10.8 Form of Indemnity Agreement with Directors and Officers.*
10.9 Varian Semiconductor Equipment Associates, Inc. Omnibus Stock Plan.+
10.10 Varian Semiconductor Equipment Associates, Inc. Management Incentive Plan.+
10.11 Agreement, dated as of July 24, 1998, between Varian Associates, Inc. and
High Voltage Engineering Europa B.V.+
10.12 Supplemental Retirement Plan adopted February 19, 1999.*
21 Subsidiaries of the Registrant.*
27 Financial Data Schedule.*
</TABLE>
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+ Filed by Registrant with its Form 10 Registration Statement filed on February
12, 1999.
* Filed herewith.
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Information Statement
[VARIAN SEMICONDUCTOR EQUIPMENT LOGO]
Common Stock
(par value $0.01 per share)
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by Varian Associates, Inc., a Delaware
corporation ("Varian"), to holders of record of the common stock of Varian, par
value $1 per share ("Varian Common Stock"), at the close of business on March
24, 1999 (the "Distribution Record Date") of one share of common stock, par
value $0.01 per share ("VSEA Common Stock"), of Varian Semiconductor Equipment
Associates, Inc., a Delaware corporation ("VSEA"), for each share of Varian
Common Stock owned on the Distribution Record Date. At the same time, Varian
will distribute to such holders one share of common stock, par value $0.01 per
share ("IB Common Stock"), of Varian, Inc., a Delaware corporation ("IB"), for
each share of Varian Common Stock owned on the Distribution Record Date. See
"The Distribution - Manner of Effecting the Distribution."
VSEA and IB are wholly-owned subsidiaries of Varian. On or prior to the
Distribution, Varian will effectuate certain transactions (the "Internal
Transfers") intended to allocate assets and liabilities relating to (i) the
manufacture and sale of health care systems, including linear accelerators,
simulators, brachytherapy systems and related data management systems and x-ray
components (the "Health Care Systems Business") to Varian; (ii) the manufacture
and sale of ion implantation processing systems used in the manufacture of
integrated circuits (the "Semiconductor Equipment Business") to VSEA and (iii)
the manufacture and sale of analytical and research instruments and vacuum
products (the "Instruments Business") to IB. As of the Distribution, Varian
will change its name to "Varian Medical Systems, Inc." (Varian after the
Distribution being referred to herein as "VMS").
The Distribution is payable April 2, 1999 (the "Distribution Date"). Stock
distribution statements reflecting ownership of VSEA Common Stock and IB Common
Stock will be mailed as soon as practicable after the Distribution. No
consideration will be paid by Varian's stockholders for shares of VSEA Common
Stock and IB Common Stock received by them in the Distribution, nor will they
be requested to surrender or exchange Varian Common Stock in order to receive
VSEA Common Stock and IB Common Stock.
There is currently no public market for the VSEA Common Stock, although it is
expected that a "when issued" trading market will develop after the
Distribution Record Date. Application has been made to quote the VSEA Common
Stock on the Nasdaq National Market under the symbol "VSEA." Each share of VSEA
Common Stock will be accompanied by one right (a "Right") to purchase
participating preferred stock of VSEA.
No proxies are being solicited in connection with this Information Statement
and you are requested not to send us a proxy.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this information. Any representation to the contrary is
a criminal offense.
See "Risk Factors" beginning on page 10 for a discussion of certain factors
that should be considered by recipients of VSEA Common Stock.
This Information Statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities.
Stockholders of Varian with inquiries related to the Distribution should
contact First Chicago Trust Company of New York, the Distribution Agent for the
Distribution, at 1-800-756-8200 or the Secretary of Varian at 650-493-4000.
The date of this Information Statement is March 8, 1999.
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Cautionary Statement for Purposes of "Safe Harbor" Provisions of The Private
Securities Litigation Reform Act of 1995.
This Information Statement contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, VSEA's prospects, developments and business strategies for
its operations, all of which are subject to risks and uncertainties. These
forward-looking statements are identified by their use of such terms and
phrases as "intend," "intends," "intended," "goal," "estimate," "estimates,"
"estimated," "expect," "expects," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipate," "anticipates,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes," "believed" and "scheduled" and in many cases are followed by a
cross reference to "Risk Factors."
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, the management of VSEA cautions
that, while it believes such assumptions or bases to be reasonable and makes
them in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. Where, in any forward-
looking statement, VSEA or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The actual results of VSEA may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include (i) the factors discussed under "Risk Factors" and particularly, in
cases where the forward-looking statement is followed by a cross reference to
"Risk Factors," the factors discussed in the section or sections under "Risk
Factors" that are referred to in the cross reference, (ii) the factors
discussed under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Forecasted Capitalization," and "Business" and
(iii) the following factors: product demand and market acceptance risks; the
effect of general economic conditions and foreign currency fluctuations; the
impact of competitive products and pricing; new product development and
commercialization; the ability to increase operating margins on higher sales;
the impact of economic conditions in Korea and other Asian markets on sales in
those areas; the timing of renewed growth in worldwide semiconductor equipment
demand; successful implementation by VSEA and certain third parties of
corrective actions to address the impact of the Year 2000; completion of the
Distribution on the current schedule within current budgets; the ability to
sell certain surplus assets in connection with the Distribution; the ability of
VSEA to realize anticipated cost savings resulting from the Distribution; and
other risks detailed from time to time in the filings of VSEA with the
Securities and Exchange Commission (the "Commission"). VSEA undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
TABLE OF CONTENTS
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Page
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Summary.................................................................. 4
Introduction............................................................. 9
Risk Factors............................................................. 10
The Distribution......................................................... 21
Selected Financial Data.................................................. 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Market Risk.............................................................. 40
Summary of Significant Capitalization Forecast Assumptions............... 41
Forecasted Capitalization................................................ 42
Pro Forma Condensed Combined Financial Statements........................ 43
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Page
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Business................................................................... 47
Management................................................................. 56
The VSEA Omnibus Stock Plan................................................ 63
The VSEA Management Incentive Plan......................................... 67
Ownership of VSEA Common Stock............................................. 69
Financing.................................................................. 71
Description of the Capital Stock........................................... 72
Limitation of Liability and Indemnification Matters........................ 74
Delaware Law and Certain Charter and By-Law Provisions..................... 74
Available Information...................................................... 79
Index to Financial Statements.............................................. F-1
</TABLE>
3
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, (i)
references in this Information Statement to "VSEA" refer to VSEA and its
subsidiaries after giving effect to the Internal Transfers and the Distribution
and (ii) references in this Information Statement to the "Semiconductor
Equipment Business" refer to the historical business and operations of the
Semiconductor Equipment Business conducted by Varian prior to the Distribution.
VSEA
VSEA designs, manufactures, markets and services semiconductor processing
equipment used in the fabrication of integrated circuits. VSEA is a leading
supplier of ion implantation systems, key pieces of capital equipment used to
manufacture semiconductor chips. VSEA has shipped more than 2,500 systems
worldwide, and more VSEA ion implanters are at work than those from all other
manufacturers combined.
VSEA provides customers with world-class products and support. VSEA achieved
the number one ranking for the second consecutive year in VLSI Research Inc.'s
1998 customer satisfaction survey. The annual study surveys semiconductor
manufacturing customers worldwide. VSEA was ranked as the industry's top large
supplier of wafer processing capital equipment and received the highest overall
point total ever achieved by a large equipment supplier.
VSEA equipment is used by virtually every major semiconductor manufacturer in
the United States, Europe, Japan, Korea and throughout the Asia Pacific region.
Its award-winning support network offers chip producers around-the-clock,
worldwide service, training and process support. VSEA has become an industry
leader in providing after-market products and services that reduce operating
costs and extend the cost-effective life of its products.
VSEA's business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market
demand for integrated circuits and products utilizing integrated circuits. The
semiconductor industry has been experiencing a slowdown resulting from
depressed DRAM pricing, manufacturing over-capacity and the economic
difficulties affecting many Asian countries. This has caused semiconductor
manufacturers to reduce their capital equipment investments, and in certain
cases customers have either rescheduled or canceled capital equipment
purchases.
The principal executive offices of VSEA will be located at 35 Dory Road,
Gloucester, Massachusetts 01930. Its telephone number at that address will be
(978) 282-2000.
THE DISTRIBUTION
Distributing Company...... Varian Associates, Inc., a Delaware corporation.
Concurrently with the Distribution, Varian will
change its name to "Varian Medical Systems, Inc."
(Varian after the Distribution being referred to
herein as "VMS").
Distributed Companies..... Varian Semiconductor Equipment Associates, Inc. and
Varian, Inc., each a Delaware corporation and each
currently a wholly-owned subsidiary of Varian.
Distribution Ratio........ Each stockholder of record of Varian as of the
close of business on the Distribution Record Date
will receive one share of VSEA Common Stock and one
share of IB Common Stock for each share of Varian
Common Stock held on the Distribution Record Date
and will retain the shares of Varian Common Stock
held by such stockholder immediately prior to the
4
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Distribution (Varian Common Stock after the
Distribution being referred to herein as "VMS
Common Stock"). No consideration will be paid by
Varian stockholders for shares of VSEA Common Stock
and IB Common Stock to be received in the
Distribution. See "The Distribution - Manner of
Effecting the Distribution."
Shares to be
Distributed............... Approximately 30 million shares of VSEA Common
Stock and IB Common Stock (based on 29,985,829
shares of Varian Common Stock outstanding on
February 1, 1999. The shares to be distributed will
constitute 100% of the outstanding shares of VSEA
Common Stock and IB Common Stock.
Distribution Record
Date...................... Close of business on March 24, 1999
Distribution Date......... April 2, 1999. On or prior to the Distribution
Date, the shares of VSEA Common Stock and IB Common
Stock to be distributed in the Distribution will be
delivered to First Chicago Trust Company of New
York, as Distribution Agent (the "Distribution
Agent"). The Distribution Agent will mail stock
distribution statements reflecting ownership of
shares of VSEA Common Stock and IB Common Stock as
soon as practicable after the Distribution. See
"The Distribution - Manner of Effecting the
Distribution."
Reasons for the
Distribution.............. The Distribution is designed to separate three
types of businesses that have different dynamics
and business cycles, serve different markets and
customers, are subject to different competitive
forces and must be managed with different long-term
and short-term strategies and goals. The
Distribution will allow the management of VSEA to
focus on its own business, organize its capital
structure, evaluate its growth opportunities,
achieve market recognition, rationalize its
organizational structure and design equity-based
compensation programs targeted to its own
performance.
Internal Transfers........ On or prior to the Distribution Date, Varian
intends to consummate certain internal mergers and
stock and asset transfers intended to allocate
assets and liabilities relating to (i) the Health
Care Systems Business to VMS, (ii) the Instruments
Business to IB and (iii) the Semiconductor
Equipment Business to VSEA (the "Internal
Transfers"). See "The Distribution - Internal
Mergers and Transfers" and "Pro Forma Condensed
Combined Financial Statements."
Relationship Among VMS,
VSEA and IB After the
Distribution.............. For purposes of governing certain ongoing
relationships among VMS, IB and VSEA after the
Distribution and to provide mechanisms for an
orderly transition, Varian, VSEA and IB have
entered into a Distribution Agreement dated as of
January 14, 1999 providing for, among other things,
the Internal Transfers, the Distribution and cross-
indemnification provisions. Before the
Distribution, VMS, IB and VSEA will enter into
additional agreements, including (i) the Tax
Sharing Agreement (as defined), (ii) the Employee
Benefits Allocation Agreement (as defined), (iii)
the Transition Services Agreement (as defined) and
(iv) the Intellectual Property Agreement (as
defined) (such agreements other than the
Distribution Agreement are referred to herein
collectively as the "Ancillary Agreements"). See
"The Distribution - Relationship Among VMS, IB and
VSEA After the Distribution."
5
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Financing................. Certain short-term notes payable of Varian and its
subsidiaries (the "Notes Payable") may, as a result
of the Internal Transfers and debt allocation
provisions of the Distribution Agreement, remain
outstanding as direct and indirect obligations of
VSEA as of the Distribution Date. In connection
with the Distribution, Varian will contribute cash
to VSEA so that at the Distribution Date, VSEA will
have approximately $100 million in cash and cash
equivalents and its consolidated debt, expected to
be comprised of Notes Payable, will not exceed $5
million. Based on the assumptions stated in such
section, the allocation of indebtedness to VSEA at
the Distribution Date should approximate the
amounts reflected in "Forecasted Capitalization."
See "The Distribution" and "Financing."
VSEA may enter into a credit facility for working
capital and other general corporate purposes. The
credit facility may contain certain representations
and warranties; conditions; affirmative, negative
and financial covenants; and events of default
customary for such facilities. It is not expected
that VSEA will have any outstanding borrowings
under its credit facility as of the Distribution.
See "Financing."
Tax Consequences.......... Varian has received a private letter ruling from
the Internal Revenue Service to the effect, among
other things, that receipt of shares of VSEA Common
Stock and IB Common Stock by stockholders of Varian
will be tax-free (the "Tax Ruling"). For a
description of the consequences to VSEA and the
holders of Varian Common Stock if the Distribution
were not to qualify as tax-free, see "Risk Factors
- Federal Income Tax Considerations."
Distribution Agent........ First Chicago Trust Company of New York (the
"Distribution Agent").
6
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VSEA AFTER THE DISTRIBUTION
Board of Directors........ The following five individuals who make up the
current VSEA Board are expected to be the members
of the Board of Directors of VSEA as of the close
of business on the Distribution Date: Richard A.
Aurelio, Ruth M. Davis, Robert W. Dutton, Angus A.
MacNaughton and J. Tracy O'Rourke. Certain of the
foregoing currently also serve as directors of
Varian and will resign from Varian's Board of
Directors effective as of the Distribution Date.
See "Management - Board of Directors."
Trading Market............ There is currently no public market for the VSEA
Common Stock although a "when issued" trading
market is expected to develop after the
Distribution Record Date. VSEA has applied for
quotation of the VSEA Common Stock on the Nasdaq
National Market under the symbol "VSEA." See "Risk
Factors - No Current Public Market for VSEA Common
Stock" and "The Distribution - Listing and Trading
of VSEA Common Stock."
Certain Provisions of
Certificate of
Incorporation, By-Laws
and Rights Plan........... Certain provisions of the Certificate of
Incorporation and By-Laws of VSEA which will be in
effect at the time of the Distribution may have the
effect of making more difficult an acquisition of
control of VSEA in a transaction not approved by
VSEA's Board of Directors. In addition, VSEA has
adopted a stockholder rights plan (the "Rights
Plan"), which, under certain circumstances, would
significantly dilute the interest in VSEA of
persons seeking to acquire control of VSEA without
the prior approval of VSEA's Board of Directors.
See "Risk Factors - Certain Anti-takeover
Features," "Description of the Capital Stock -
Rights Plan" and "Delaware Law and Certain Charter
and By-Law Provisions."
RISK FACTORS
Stockholders should consider carefully the specific investment considerations
set forth under "Risk Factors," as well as the other information set forth in
this Information Statement.
7
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SUMMARY FINANCIAL DATA
The following table presents summary historical financial data of the
Semiconductor Equipment Business. The information set forth below should be
read in conjunction with "Pro Forma Condensed Combined Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto of the
Semiconductor Equipment Business included elsewhere in this Information
Statement. The unaudited pro forma statement of earnings data for the fiscal
year ended October 2, 1998 and the quarter ended January 1, 1999, set forth
below was prepared to give effect to the Distribution as if it had occurred on
September 27, 1997, and the unaudited pro forma balance sheet data was prepared
to give effect to the Distribution as if it had occurred on January 1, 1999,
and does not purport to represent what the Semiconductor Equipment Business'
operating results or financial position would have been or to project its
operating results or financial position for any future date or period. The
statement of earnings data set forth below for the fiscal years ended October
2, 1998, September 26, 1997 and September 27, 1996 and the balance sheet data
at October 2, 1998 and September 26, 1997 are derived from, and are qualified
by reference to, the audited financial statements of the Semiconductor
Equipment Business included elsewhere in this Information Statement. The
statement of earnings data for the quarters ended January 1, 1999 and January
2, 1998 and the balance sheet data at January 1, 1999 are derived from the
Semiconductor Equipment Business' unaudited financial data included elsewhere
in this Information Statement. The statement of earnings data for the fiscal
years 1995 and 1994 and the balance sheet data at fiscal year end 1996, 1995
and 1994 are derived from unaudited financial data of the Semiconductor
Equipment Business not included in this Information Statement.
The historical financial information may not be indicative of the Semiconductor
Equipment Business' future performance and does not necessarily reflect what
the financial position and results of operations of the Semiconductor Equipment
Business would have been had the Semiconductor Equipment Business operated as a
separate, stand-alone entity during the periods presented.
<TABLE>
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Quarters Ended Fiscal Years
---------------------------------- -----------------------------------------------
Pro Forma
January 1, January 1, January 2, Pro Forma
1999 1999 1998 1998 1998 1997(/1/) 1996 1995 1994
---------- ---------- ---------- --------- ------ --------- ------ ------ ------
(Dollars in millions, except per share amounts)
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Statement of Earnings Data
Revenue................... $ 47.4 $ 47.4 $114.3 $342.9 $342.9 $448.3 $667.2 $660.7 $476.6
Operating Earnings (Loss)
before Taxes............. $(10.3) $(10.3) $ 21.3 $ 16.2 $ 16.3 $105.9 $122.3 $ 92.5 $ 39.2
Taxes on (loss) earnings.. $ (3.6) $ (3.6) $ 6.4 $ 4.9 $ 4.9 $ 34.9 $ 43.0 $ 33.8 $ 12.8
Net Earnings (Loss)....... $ (6.7) $ (6.7) $ 14.9 $ 11.3 $ 11.4 $ 71.0 $ 79.3 $ 58.7 $ 26.4
Pro Forma Net Earnings
(Loss) Per Share(/2/).... $(0.22) $(0.22) $ 0.49 $ 0.38 $ 0.38 $ 2.33 $ 2.56 $ 1.74 $ 0.77
</TABLE>
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At January 1, Fiscal Year End
---------------- ----------------------------------
Pro Forma
1999 1999 1998 1997 1996 1995 1994
--------- ------ ------ ------ ------ ------ ------
(Dollars in millions)
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Balance Sheet Data
Total assets................ $316.6 $216.6 $224.6 $233.3 $312.1 $275.8 $242.2
</TABLE>
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(1) Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2
million after-tax or $1.09 pro forma per share) on the sale of the Thin
Film Systems business.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of Varian Common Stock outstanding during
the respective periods, reflecting the ratio of one share of VSEA Common
Stock for each share of Varian Common Stock outstanding at the time of the
Distribution.
8
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INTRODUCTION
On February 19, 1999, the Varian Board of Directors declared a dividend payable
to each stockholder of record at the close of business on the Distribution
Record Date of one share of VSEA Common Stock and one share of IB Common Stock
for each share of Varian Common Stock held by such stockholder at the close of
business on the Distribution Record Date. As a result of the Distribution, 100%
of the outstanding shares of VSEA Common Stock and IB Common Stock will be
distributed to Varian stockholders on a pro rata basis. The Distribution will
be made on April 2, 1999.
Stockholders of Varian with questions concerning the Distribution should
contact the Distribution Agent at 1-800-756-8200 or Varian Associates, Inc.,
Corporate Secretary, 3050 Hansen Way, Palo Alto, California 94304, telephone
number (650) 493-4000. After the Distribution Date, stockholders of VSEA with
inquiries related to their investment in VSEA should contact Varian
Semiconductor Equipment Associates, Inc., 35 Dory Road, Gloucester,
Massachusetts 01930, telephone (978) 282-2000.
No person is authorized by Varian or VSEA to give any information or to make
any representations other than those contained in this Information Statement
and, if given or made, such information or representations must not be relied
upon as having been authorized.
9
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RISK FACTORS
The following factors, in conjunction with the other information included in
this Information Statement, should be carefully considered.
Lack of Recent Operating History as Separate Entities
Upon consummation of the Distribution, VSEA will own and operate the
Semiconductor Equipment Business, which does not have a recent operating
history as a separate entity.
After the Distribution, VSEA will be a smaller and less diversified company
than Varian was prior to the Distribution. The ability of VSEA to satisfy its
obligations and maintain profitability will be solely dependent upon its own
future performance, and VSEA will not be able to rely on the capital resources
and cash flows of the other two businesses. The future performance and cash
flows of VSEA will be subject to prevailing economic conditions and to
financial, business and other factors affecting its business operations,
including factors beyond its control.
The division of Varian may result in some temporary dislocation and
inefficiencies to the business operations, as well as the organization and
personnel structure, of VSEA, and will also result in the duplication of
certain personnel, administrative and other expenses required for the operation
of independent companies. In addition, although after the Distribution VSEA
will continue to be managed primarily by its current operating management, the
management of VSEA has not previously operated its business as a separate
public company. Accordingly, there can be no assurance that the transition will
not alter or disrupt the management and/or operations of VSEA.
Potential Responsibility for Liabilities Not Expressly Assumed
The Distribution Agreement and the Ancillary Agreements allocate among VMS, IB
and VSEA responsibility for various indebtedness, liabilities and obligations.
See "The Distribution - Relationship Among VMS, IB and VSEA After the
Distribution." It is possible that a court would disregard this contractual
allocation of indebtedness, liabilities and obligations among the parties and
require VMS, IB or VSEA or their respective subsidiaries to assume
responsibility for obligations allocated to another party, particularly if such
other party were to refuse or was unable to pay or perform any of its allocated
obligations.
Potential Indemnification Liabilities
Under the terms of the Distribution Agreement and certain of the Ancillary
Agreements, each of VMS, IB and VSEA has agreed to indemnify the other parties
(and certain related persons) from and after consummation of the Distribution
with respect to certain indebtedness, liabilities and obligations, which
indemnification obligations could be significant. The availability of such
indemnities will depend upon the future financial strength of the companies. No
assurance can be given that the relevant company will be in a position to fund
such indemnities. In addition, the Distribution Agreement generally provides
that if a court prohibits a company from satisfying its indemnification
obligations, then such indemnification obligations will be shared equally
between the two other companies. See "The Distribution - Relationship Among
VMS, IB and VSEA After the Distribution."
Debt Leverage After the Distribution
Immediately following the Distribution, VSEA will have significantly less debt
leverage than Varian had prior to the Distribution. As of January 1, 1999,
Varian had total long and short-term debt of approximately $152 million and
total stockholders' equity of approximately $556 million. Based on Varian's
outstanding indebtedness as of January 1, 1999 and projected operating results
and certain other transactions through the anticipated Distribution Date, on a
pro forma basis giving effect to the Distribution, VSEA would have total short-
term debt of approximately $5 million and total stockholders' equity of
approximately $191 million. The allocation of indebtedness to VSEA reflects, in
substantial part, its expected capital requirements and cash flows. See
"Forecasted Capitalization."
The degree to which VSEA is leveraged could have important consequences,
including the following: (i) VSEA's ability to obtain additional financing in
the future for working capital, capital expenditures, product development,
acquisitions,
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general corporate purposes or other purposes may be impaired; (ii) a portion of
VSEA's and its subsidiaries' cash flow from operations must be dedicated to the
payment of the principal of and interest on its indebtedness; (iii) any credit
agreement of VSEA following the Distribution may contain certain restrictive
financial and operating covenants, including, among others, requirements that
VSEA satisfy certain financial ratios; (iv) a portion of VSEA's borrowings may
be at floating rates of interest, causing VSEA to be vulnerable to increases in
interest rates; (v) VSEA's degree of leverage may make it more vulnerable in a
downturn in general economic conditions and (vi) VSEA's degree of leverage may
limit its flexibility in responding to changing business and economic
conditions. In addition, in a lawsuit by an unpaid creditor or representative
of creditors, such as a trustee in bankruptcy, a court may be asked to void the
Distribution (in whole or in part) as a fraudulent conveyance and to require
that the stockholders return some or all of the shares of IB Common Stock
and/or VSEA Common Stock to VMS or require each of the companies to fund
certain liabilities of the other companies for the benefit of creditors. See
" - Fraudulent Transfer Considerations; Legal Dividend Requirements."
Federal Income Tax Considerations
Varian has received the Tax Ruling from the Internal Revenue Service (the
"IRS") to the effect that, among other things, no gain or loss will be
recognized by the holders of Varian Common Stock as a result of the
Distribution and no gain or loss will be recognized by Varian upon the
Distribution. See "The Distribution - Federal Income Tax Aspects of the
Distribution." Such rulings, while generally binding upon the IRS, are subject
to certain factual representations and assumptions. If such factual
representations and assumptions were incorrect in any material respect, such
ruling would be jeopardized. VSEA is not aware of any facts or circumstances
that would cause such representations and assumptions to be untrue. Varian,
VSEA and IB have agreed to certain restrictions on their future actions to
provide further assurances that the Distribution will qualify as tax-free. See
"The Distribution - Relationship Among VMS, IB and VSEA After the
Distribution - Tax Sharing Agreement."
If one or both of the distributions comprising the Distribution fail to qualify
as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986,
as amended (the "Code"), then VMS will recognize gain equal to the difference
between the fair market value of the stock of the nonqualifying company or
companies and Varian's adjusted tax basis in such stock. If VMS were to
recognize gain on one or both of the distributions, such gain and the resulting
tax liability likely would be very substantial.
Furthermore, if either distribution were not to qualify as a tax-free spin-off
under Section 355 of the Code, each holder of Varian Common Stock who receives
shares of VSEA Common Stock and IB Common Stock in the Distribution would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of the VSEA Common Stock or IB Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Varian's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in Varian Common Stock to
the extent the amount received exceeds such stockholder's share of earnings and
profits and (iii) gain from the exchange of Varian Common Stock to the extent
the amount received exceeds both such stockholder's share of earnings and
profits and such stockholder's basis in such common stock.
Section 355(e), which was added to the Code in 1997, generally provides that a
company that distributes shares of a subsidiary in a spin-off that is otherwise
tax-free will incur federal income tax liability if 50% or more, by vote or
value, of the capital stock of either the company making the distribution or
the spun-off subsidiary is acquired (a "50% Ownership Shift") by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. There is a presumption that any acquisition of 50% or
more, by vote or value, of the capital stock of the company or the subsidiary
that occurs within two years before or after the spin-off is pursuant to a plan
that includes the spin-off. However, the presumption may be rebutted by
establishing that the spin-off and the acquisition are not part of a plan or
series of related transactions. Among the factual representations made by
Varian to the IRS in connection with the Tax Ruling is the representation that
each of the distributions is not part of such a plan or series of related
transactions. If VMS, VSEA or IB were to undergo a 50% Ownership Shift,
particularly if such 50% Ownership Shift occurred within two years after the
Distribution Date, there can be no assurance that the IRS will not assert that
such ownership shift occurred pursuant to a plan or series of related
transactions and therefore that the Distribution is taxable under Section
355(e).
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If a distribution is taxable solely under Section 355(e), VMS will recognize
gain equal to the difference between the fair market value of the IB Common
Stock and the VSEA Common Stock and Varian's adjusted tax basis in such stock.
However, holders of Varian Common Stock would not recognize gain or loss as a
result of the Distribution. If VMS were to recognize gain on the distributions,
such gain and the resulting tax liability likely would be very substantial.
The Tax Sharing Agreement will allocate responsibility for the possible
corporate tax burden resulting from the Distribution. Each of VMS, VSEA and IB
will be responsible for any corporate taxes resulting from the Distribution
attributable to action taken or permitted by that entity or its affiliates
after the Distribution. If the Distribution is found to be taxable but none of
VMS, VSEA and IB has done anything to cause the Distribution to be taxable,
each company generally will be liable for one-third of those taxes. See "The
Distribution - Relationship Among VMS, IB and VSEA After the Distribution - Tax
Sharing Agreement."
No Current Public Market for VSEA Common Stock
There is not currently a public market for the VSEA Common Stock, although a
"when-issued" trading market is expected to develop after the Distribution
Record Date. There can be no assurance as to the prices at which trading in
VSEA Common Stock will occur after the Distribution. Until the VSEA Common
Stock is fully distributed and an orderly market develops, the prices at which
trading in such stock occurs may fluctuate significantly. VSEA has applied for
quotation of the VSEA Common Stock on the Nasdaq National Market. Management
expects that the market will characterize VSEA Common Stock as a semiconductor
equipment stock, which category of stock has historically experienced
relatively greater price volatility than broader market indices. See "The
Distribution - Listing and Trading of VSEA Common Stock."
No Dividends Anticipated
Following the Distribution, VSEA does not anticipate paying dividends on the
VSEA Common Stock. Any credit agreement entered into by VSEA may contain
provisions that limit the ability of VSEA (and/or its subsidiaries) to pay cash
dividends. Any determination to pay cash dividends in the future will be at the
discretion of the Board of Directors of VSEA and will be dependent upon VSEA's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant at that time by VSEA's Board of Directors. See
"Financing."
Certain Anti-takeover Features
The Certificate of Incorporation and By-Laws of VSEA that will be in effect at
the time of the Distribution will contain several provisions that may make the
acquisition of control of VSEA more difficult or expensive. The Certificate of
Incorporation and By-Laws, among other things, will (i) classify the Board of
Directors into three classes, with directors of each class serving for a
staggered three-year period, (ii) provide that directors may be removed only
for cause and only upon the affirmative vote of the holders of at least a
majority of the outstanding shares of VSEA Common Stock entitled to vote for
such directors, (iii) permit the remaining directors (but not VSEA's
stockholders) to fill vacancies and newly created directorships on the Board,
(iv) eliminate the ability of stockholders to act by written consent and (v)
require the vote of stockholders holding at least 66 2/3% of the outstanding
shares of VSEA Common Stock to amend, alter or repeal the By-Laws and certain
provisions of the Certificate of Incorporation, including the provisions
described in the foregoing clauses (i) through (iv) and this clause (v). Such
provisions would make the removal of incumbent directors more difficult and
time-consuming and may have the effect of discouraging a tender offer or other
takeover attempt not previously approved by the Board of Directors. Under the
Certificate of Incorporation which will be in effect at the time of the
Distribution, the Board of Directors of VSEA also has the authority to issue
shares of preferred stock in one or more series and to fix the powers,
preferences and rights of any such series without stockholder approval. The
Board of Directors of VSEA could, therefore, issue, without stockholder
approval, preferred stock with voting and other rights that could adversely
affect the voting power of the holders of VSEA Common Stock and could make it
more difficult for a third party to gain control of VSEA. In addition, VSEA has
adopted a stockholder rights plan which, under certain circumstances, would
significantly dilute the equity interest in VSEA of persons seeking to acquire
control of VSEA without the prior approval of VSEA's Board of Directors. See
"Description of the Capital Stock - Rights Plan" and "Delaware Law and Certain
Charter and By-Law Provisions."
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Certain Consent Requirements
Consummation of the Distribution and related transactions could result in a
violation of Varian's existing debt and other contractual arrangements or
require the consent of a third party to effect the necessary transfers of such
arrangements to VSEA and its subsidiaries. In a substantial number of
situations, an amendment, consent or waiver from third parties will be
required. Although Varian believes that no single agreement for which an
amendment, consent or waiver is being sought is material, the failure of Varian
or VSEA to receive a significant number of such amendments, waivers or consents
with respect to contractual arrangements relating to the Semiconductor
Equipment Business could have a material adverse effect on the ability of VSEA
to continue to conduct its business as currently being conducted.
Fraudulent Transfer Considerations; Legal Dividend Requirements
If a court in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, were to find that at the time Varian effected
the Distribution, Varian, VMS, IB or VSEA, as the case may be, (i) was
insolvent, (ii) was rendered insolvent by reason of the Distribution, (iii) was
engaged in a business or transaction for which Varian's, VMS's, IB's or VSEA's,
as the case may be, remaining assets constituted unreasonably small capital or
(iv) intended to incur, or believed it would incur, debts beyond its ability to
pay such debts as they matured, such court may be asked to void the
Distribution (in whole or in part) as a fraudulent conveyance and require that
the stockholders return some or all of the shares of IB Common Stock and VSEA
Common Stock to VMS, or require VMS, IB or VSEA, as the case may be, to fund
certain liabilities of the other companies for the benefit of creditors. The
measure of insolvency for purposes of the foregoing will vary depending upon
the jurisdiction whose law is being applied. Generally, however, each of
Varian, VMS, IB and VSEA, as the case may be, would be considered insolvent if
the fair value of its assets were less than the amount of its liabilities or if
it incurred debt beyond its ability to repay such debt as it matures. In
addition, under Section 170 of the Delaware General Corporation Law (the
"DGCL") (which is applicable to Varian in the Distribution), a corporation
generally may make distributions to its stockholders only out of its surplus
(net assets minus capital) and not out of capital.
Varian's Board of Directors and management believe that (i) Varian, and each of
VMS, IB and VSEA, will be solvent before and after the Distribution (in
accordance with the foregoing definitions), will be able to repay its debts as
they mature following the Distribution and will have sufficient capital to
carry on its businesses and (ii) the Distribution will be made entirely out of
surplus, as provided under Section 170 of the DGCL.
Transitioning to New Information Technology Infrastructure
VMS, VSEA and IB currently share a common information technology ("IT")
infrastructure. This IT infrastructure is essential to the daily operation of
the companies' marketing, manufacturing, distribution, billing and collections
and financial reporting processes.
After the Distribution, VSEA will establish a separate IT infrastructure as
appropriate for its separate business and will transition to this new IT
infrastructure from the currently shared IT infrastructure. During this
transition, certain IT services will be provided by Varian pursuant to the
Transition Services Agreement described herein. This transition is not unlike
transitions carried out previously by Varian in the process of divesting
discontinued operations and/or integrating the operations of newly acquired
companies. Consequently, management of VSEA believes that Varian possesses the
skills and resources to design and implement and assist VSEA in transitioning
to the new IT infrastructure. However, these activities are inherently complex
and because of their significance to VSEA's business, unforeseen problems or
errors in the transition to this new IT infrastructure could adversely affect
the business and results of operations of VSEA. Assessment and correction of
Year 2000 problems could complicate transition to this new infrastructure. See
"Risk Factors - Potential Impact of the Year 2000 Issue."
Volatility in the Semiconductor Equipment Industry
The business of VSEA depends on the capital equipment expenditures of
semiconductor manufacturers, which in turn depend on the current and
anticipated market demand for integrated circuits and products utilizing
integrated circuits. The semiconductor industry has been cyclical in nature and
has historically experienced periodic downturns. The semiconductor industry has
been experiencing a slowdown of product demand and extreme volatility in
product pricing.
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This slowdown and volatility have caused the semiconductor industry to reduce
significantly or delay purchases of semiconductor manufacturing equipment and
construction of new fabrication facilities. This slowdown and volatility are
expected to continue throughout fiscal year 1999 and will continue to adversely
affect VSEA's results of operations. Even during periods of reduced revenues,
in order to remain competitive, VSEA intends to continue to invest in research
and development and to maintain extensive ongoing worldwide customer service
and support capability, which could adversely affect its financial results. See
"Business - Background - The Industry."
Variability of Operating Results
VSEA has experienced and expects to continue to experience significant
fluctuations in its quarterly operating results. The timing and amount of
revenues are subject to a number of factors that make estimation of revenues
and operating results prior to the end of any quarter very uncertain. During
each quarter, VSEA customarily sells a relatively small number of ion
implantation systems that typically sell for prices ranging from approximately
$1.8 million to $4 million. VSEA's backlog at the beginning of each quarter
does not necessarily include all systems needed to achieve expected revenue for
that quarter. Consequently, VSEA will often be dependent on obtaining orders
for shipment in the same quarter that the order is shipped. Because VSEA builds
its systems according to forecast, the absence of significant backlog for an
extended period of time could hinder VSEA's ability to plan production and
inventory levels, which could adversely affect operating results. VSEA's
revenue and operating results could also be adversely affected for a particular
quarter if anticipated orders from even a few customers are not received in
time to permit shipment during that quarter. Moreover, customers may reschedule
or cancel shipments, with, in the case of cancellations, little or no
penalties, and production difficulties could delay shipments. A delay in a
shipment in any quarter due, for example, to an unanticipated shipment
rescheduling, to cancellations by customers or to unexpected manufacturing
difficulties experienced by VSEA, may cause revenue in such quarter to fall
significantly below VSEA's expectations and may have a material adverse effect
on VSEA's operating results for such quarter.
The timing of new product announcements and releases by VSEA may also
contribute to fluctuations in quarterly operating results, particularly in
cases where new product offerings cause customers to defer ordering products
from VSEA's existing product lines. VSEA's results of operations also could be
affected by new product announcements and releases by VSEA's competitors, the
volume, mix and timing of orders received during a period, availability and
pricing of key components, fluctuations in foreign exchange rates and
conditions in the semiconductor equipment industry. VSEA's operating results
also fluctuate based on gross profits realized on system sales. Gross profit as
a percentage of revenue may vary based on a variety of factors, including the
mix and average selling prices of products sold and costs to manufacture
upgrades and to customize systems. Because VSEA's operating expenses are based
on anticipated capacity levels, and a high percentage of VSEA's expenses are
relatively fixed, a variation in the timing of recognition of revenue and the
level of gross profit from a single transaction can cause material variations
in operating results from quarter to quarter.
Technological Change and Dependence on New Products
Rapid technological changes in semiconductor manufacturing processes subject
the semiconductor equipment industry to increased pressure to maintain
technological parity with deep submicron process technology. VSEA believes that
its future success will depend in part upon its ability to develop, manufacture
and successfully introduce new systems and product lines with improved
capabilities and to continue to enhance existing products, in particular,
products that respond to the anticipated trend toward single wafer processing
and 300mm wafer processing. The success of VSEA in developing, introducing and
selling new and enhanced systems depends upon a variety of factors, including
new product selection, timely and efficient completion of product design and
development, timely and efficient implementation of manufacturing and assembly
processes, product performance in the field and effective sales and marketing.
There can be no assurance that VSEA will be successful in selecting,
developing, manufacturing and marketing new products or in enhancing its
existing products. Due to the risks inherent in transitioning to new products,
VSEA will be required to accurately forecast demand for new products while
managing the transition from older products. VSEA's inability to complete the
development or meet the technical specifications of any of its new systems or
enhancements or to manufacture and ship these systems or enhancements in volume
in a timely manner would materially and adversely affect VSEA's business,
financial condition and results of operations. If new products have reliability
or quality problems, reduced orders, higher manufacturing costs, delays in
acceptance of and payment for new products, and additional
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service and warranty expenses may result. In the past, VSEA has experienced
some delays as well as reliability and quality problems in connection with
product introductions, resulting in some of these consequences. There can be no
assurance that VSEA will successfully develop and manufacture new products, or
that new products introduced by it will be accepted in the marketplace. If VSEA
does not successfully introduce new products, VSEA's results of operations will
be materially adversely affected. See "Business - Competition."
VSEA expects to continue to make significant investments in research and
development. VSEA must manage product transitions successfully, as introduction
of new products could adversely affect sales of existing products. There can be
no assurance that future technologies, processes or product developments (in
particular, alternative doping methods) will not render VSEA's current product
offerings obsolete or that VSEA will be able to develop and introduce new
products or enhancements to existing products which satisfy customer needs in a
timely manner or achieve market acceptance. The failure to do so could
adversely affect VSEA's business. In particular, the inability of VSEA's next
generation VIISta(TM) ion implant system, which relies on single wafer
processing for 300mm wafers, to achieve market acceptance could have an adverse
effect on VSEA's financial results. If VSEA is not successful in the marketing
and selling of advanced processes or equipment to customers with whom it has
formed long-term relationships, selling of its products to those customers
could be adversely affected. In addition, in connection with the development of
VSEA's new products, VSEA will invest in high levels of pre-production
inventory, and the failure to complete development and commercialization of
these new products in a timely manner could result in inventory obsolescence,
which could have an adverse effect on its financial results. See "Business -
Research and Development."
Product Concentration
VSEA derives virtually all of its revenue from sales of its ion implantation
systems and related products, and such systems are expected to continue to
account for a substantial percentage of VSEA's revenues. Continued market
acceptance of its systems is therefore critical to the future success of VSEA.
Any decline in demand for, or failure to achieve continued market acceptance
of, such systems or any new version of these systems, if any, as a result of
competition, technological change, failure of VSEA to release new versions of
these products on time or otherwise, could have a material adverse effect on
the business, operating results, financial condition and cash flows of VSEA.
Customer Concentration and Lengthy Sales Cycles
Historically, VSEA has sold close to half of its systems in any particular
period to its ten largest customers. Sales to VSEA's ten largest customers in
fiscal years 1998, 1997 and 1996 accounted for approximately 47%, 46% and 52%
of revenue, respectively. VSEA expects that sales to relatively few customers
will continue to account for a high percentage of its revenue in the
foreseeable future. During fiscal year 1998, revenue from Intel Corporation
accounted for 14% of VSEA's revenue. None of VSEA's customers has entered into
a long-term agreement requiring it to purchase VSEA's equipment and other
services. VSEA believes that sales to certain of its customers will decrease in
the near future as those customers complete current purchasing requirements for
new or expanded fabrication facilities. Although the composition of the group
comprising VSEA's largest customers has varied from year to year, the loss of a
significant customer or any reduction in orders from any significant customer,
including reductions due to customer departures from recent buying patterns,
market, economic or competitive conditions in the semiconductor industry or in
the industries that manufacture products utilizing integrated circuits, could
adversely affect VSEA's business, financial condition and results of
operations. The ongoing consolidation of semiconductor manufacturers may
increase the adverse affect of losing a significant customer.
Sales of VSEA's systems depend, in significant part, upon the decision of a
prospective customer to increase manufacturing capacity in an existing
fabrication facility or to transfer a manufacturing process to a new
fabrication facility, both of which typically involve a significant capital
commitment. In addition, VSEA has from time to time experienced delays in
finalizing system sales following the initial system's qualifications. Due to
these and other factors, VSEA's systems typically have a lengthy sales cycle
during which VSEA may expend substantial funds and management effort. VSEA
believes that as a result, once a semiconductor manufacturer has selected a
particular supplier's capital equipment, the manufacturer generally relies upon
that equipment for the specific production line application and frequently will
attempt to consolidate its other capital equipment requirements with the same
supplier. Accordingly, VSEA would expect to experience difficulty in selling to
a given customer if that customer had initially selected or selects
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a competitor's capital equipment. VSEA believes that to remain competitive,
significant financial resources are required in order to offer a broad range of
products, to maintain customer service and support centers worldwide and to
invest in product and process research and development. See "Business -
Marketing and Sales."
Legal Proceedings
In June 1997, Applied Materials Inc. ("Applied Materials") filed a civil action
against Varian in the U.S. District Court for the Northern District of
California alleging infringement of four Applied Materials patents relating to
sputter coating systems (the "Applied Litigation"). Applied Materials contends
that these patents are infringed by the M2i, MB/2/ and Inova systems that were
made and sold by Varian's Thin Film Systems ("TFS") business prior to Varian's
sale of its TFS business to Novellus Systems, Inc. ("Novellus") effective as of
June 13, 1997. The complaint requests unspecified money damages and an
injunction preventing further alleged infringement and requests that any
damages awarded be increased up to three-fold for Varian's and Novellus'
alleged willful infringement. Novellus was subsequently added as a defendant in
this action and, as part of the sale of the TFS business, Varian agreed to
indemnify Novellus for certain damages it may suffer as a result of such
litigation and to reimburse Novellus for up to $7.5 million of its litigation
expenses (of which $2.1 million had been reimbursed as of January 1, 1999).
Varian's answer denied infringement and asserted that the Applied Materials
patents that are the subject of the claims are invalid and that one of the
asserted patents is unenforceable. Varian also filed a separate suit seeking
damages and injunctive relief against Applied Materials contending that certain
of Applied Materials' business practices violated antitrust laws. That action
has been procedurally related to the infringement case and is pending before
the same judge. Novellus has asserted three of its patents, obtained as part of
its purchase of the TFS business, against Applied Materials. Discovery has
begun, but no date has been set for completion of discovery. During the fourth
quarter of fiscal year 1998, Varian and Applied Materials began informal
discussions concerning the possibility of resolving some or all of the issues
raised by the Applied Litigation and Varian's antitrust suit through settlement
or mediation. Discussions regarding a proposed procedure for non-binding
mediation are continuing but have not yet resulted in a definitive mediation
arrangement. On December 9 and 10, 1998, Varian held a "Markman" hearing for
the purpose of determining how the various claims of the four Applied Materials
and three Novellus patents should be interpreted. The parties are awaiting this
decision. VSEA has agreed to indemnify VMS and IB for any costs, liabilities or
expenses relating to the Semiconductor Equipment Business, including the
Applied Litigation. In the event of an outcome unfavorable to VSEA, VSEA might
be liable for damages for past sales up to the June 1997 closing date of the
sale of the TFS business to Novellus and may have to pay Novellus under the
indemnification obligations described above. In connection with the sale of the
TFS business, Novellus has submitted to arbitration a claim against Varian
arising out of a dispute over the closing date balance sheet, for which VSEA
has also agreed to indemnify VMS and IB. See "Business - Legal Proceedings" and
Note 10 to the Notes to Combined Financial Statements of the Semiconductor
Equipment Business of Varian Associates, Inc.
Competition
The semiconductor equipment manufacturing market is highly competitive.
Significant competitive factors in the ion implantation equipment market
include customer relationships, pricing, technological performance and timing,
distribution capabilities and financial viability. VSEA's management believes
that, to remain competitive, VSEA will require significant financial resources
in order to offer a broad range of products, to maintain customer service and
support centers worldwide and to invest in product and process research and
development. The semiconductor equipment industry is becoming increasingly
dominated by large manufacturers who have the resources to support customers on
a worldwide basis, and certain of VSEA's competitors have substantially greater
financial resources and more extensive engineering, manufacturing, marketing
and customer service and support. In addition, there are smaller, emerging
semiconductor equipment companies that provide innovative technology which may
have performance advantages over systems offered by VSEA. Competitors are
expected to continue to improve the design and performance of their current
products and processes and to introduce new products and processes with
improved price and performance characteristics. If competitors enter into
strategic relationships with leading semiconductor manufacturers covering
products similar to those sold or being developed by VSEA, its ability to sell
products to those adversely affected. There can be no assurance that VSEA will
continue to compete successfully with its existing competitors or that it will
be able to compete successfully with new competitors. See "Business -
Competition."
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International Sales and Manufacturing
International sales accounted for 70%, 52% and 64%, respectively, of VSEA's
revenue in fiscal years 1998, 1997 and 1996. Historically, sales to Asia have
accounted for a substantial portion of international sales. Sales to Asia
accounted for 45%, 39% and 50%, respectively, of VSEA's revenue in fiscal years
1998, 1997 and 1996. In the first quarter of fiscal year 1999, international
sales accounted for 57% of revenue as compared to 70% in the first quarter of
fiscal year 1998, with Asian sales representing 36% and 53% of total revenue,
respectively. Recent banking and currency problems in certain Asian countries
have had, and will continue to have, a significant adverse impact on VSEA's
revenues and operations. Specifically, the decline in value of the Korean won,
together with Korean customers' difficulties obtaining credit, have resulted,
and may continue to result, in a decline in the purchasing power of VSEA's
Korean customers. This in turn has resulted, and may continue to result, in the
cancellation or delay of orders for VSEA's products from Korean customers,
further adversely affecting VSEA's results of operations. In addition, if
Japan's economy weakens further, investments by Japanese customers may be
negatively affected, and it is possible that economic conditions in certain
Pacific Rim countries, such as Taiwan, may deteriorate and economic recovery in
other Pacific Rim countries could be delayed. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations."
A portion of VSEA's products are manufactured or assembled in Korea and Japan.
These foreign operations are subject to the usual risks inherent in situating
operations abroad, including risks with respect to currency exchange rates,
economic and political destabilization, restrictive actions by foreign
governments, nationalizations, the laws and policies of the United States
affecting trade, foreign investment and loans and foreign tax laws.
The impact of these and other factors on VSEA's revenues and operating results
in any future period is difficult to forecast. There can be no assurance that
these and other factors relating to international sales and operations by VSEA
will not have a material adverse effect on future business and financial
results, or affect future business and financial results in ways not readily
foreseeable.
On January 1, 1999, the Euro was adopted as the national currency of certain
members of the European Monetary Union. The existing national currencies of the
participating countries will continue to be acceptable until January 1, 2002,
after which the Euro will be the sole legal tender for the participating
countries. Because VSEA sells its products in Europe, the Euro conversion
raises several economic and operational issues, such as the modification of
information systems to accommodate Euro-denominated transactions, the
recalculation of currency risk, the competitive impact of cross-border price
transparency, the continuity of material contracts and potential tax and
accounting consequences. VSEA has made changes in its information systems to be
able to conduct Euro-denominated transactions (although full information system
capability for financial reporting in Euro will not be accomplished until
October 2001). VSEA does not expect any change in currency risk due to its
existing hedging practices. VSEA does not expect any significant competitive
impact of price transparency with respect to its systems, due to the fact that
most of those systems are sold in customized configurations. Based on its
evaluation to date, VSEA does not expect the Euro conversion to have a material
adverse effect on its business, results of operations or financial condition.
Foreign Currency Risks
Varian has historically entered into forward exchange contracts in respect of
the Semiconductor Equipment Business to mitigate the effects of operational
(sales orders and purchase commitments) and balance sheet exposures to
fluctuations in foreign currency exchange rates. VSEA's forward exchange
contracts generally range from one to three months in original maturity, and no
forward exchange contract has an original maturity greater than one year. At
October 2, 1998, VSEA had forward exchange contracts to sell foreign currencies
totaling $13.8 million and to buy foreign currencies totaling $0.1 million. See
"Market Risk."
Uncertain Protection of Patent and Other Proprietary Rights
VSEA places considerable importance on obtaining and maintaining patent,
copyright and trade secret protection for significant new technologies,
products and processes because of the length of time and expense associated
with bringing new products through the development process and to the
marketplace.
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VSEA intends to continue to file applications as appropriate for patents
covering new products and manufacturing processes. No assurance can be given
that patents now owned or that will issue from any pending or future patent
applications owned by, or licensed to, VSEA or that the claims allowed under
any issued patents, will be sufficiently broad to protect its technology
position against competitors. In addition, no assurance can be given that any
issued patents owned by, or licensed to, VSEA will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to it. VSEA could incur substantial costs and diversion
of management resources in defending itself in suits brought against it or in
suits in which it may assert its patent rights against others. If the outcome
of any such litigation is unfavorable to VSEA, its business and results of
operations could be materially adversely affected. In addition, the laws of
some foreign countries do not protect proprietary rights to the same extent as
do the laws of the United States.
There may also be pending or issued patents of which VSEA is not aware held by
parties not affiliated with VSEA that relate to its products or technologies.
In the event that a claim relating to proprietary technology or information is
asserted against VSEA, it may need to acquire licenses to, or contest the
validity of, a competitor's proprietary technology. There can be no assurance
that any license required under any such competitor's proprietary technology
would be made available on acceptable terms or that VSEA would prevail in any
such contest. If the outcome of any such contest is unfavorable to VSEA, its
business and results of operations could be materially adversely affected. From
time to time, VSEA has received notices from, and has issued notices to, third
parties alleging infringement of patent or other intellectual property rights
relating to its products. Such claims are often, but not always, settled by
mutual agreement on a satisfactory basis without litigation. In June 1997,
Applied Materials filed suit against Varian alleging that several products from
its former TFS business infringed upon four of Applied Materials' patents. See
"Business - Legal Proceedings." There can be no assurance that VSEA or its
licensors or suppliers will not be subject to additional claims of patent
infringement or that any such claims will not require that VSEA pay substantial
damages or delete certain features from its products or both.
VSEA relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title,
including confidentiality agreements with its vendors, strategic partners, co-
developers, employees, consultants and other third parties, to protect its
proprietary rights. There can be no assurance that such protections will prove
adequate and that contractual agreements will not be breached, that VSEA will
have adequate remedies for any such breaches, or that its trade secrets will
not otherwise become known to or independently developed by others. VSEA has
trademarks, both registered and unregistered, that are maintained and enforced
to provide customer recognition for its products in the marketplace. There can
be no assurance that VSEA's trademarks will not be used by unauthorized third
parties. VSEA also have agreements with third parties that provide for
licensing of patented or proprietary technology. These agreements include
royalty-bearing licenses and technology cross-licenses. The loss by VSEA of its
license agreements with Applied Materials and Tokyo Electron Limited ("TEL")
could have a material adverse effect on VSEA's business. See "Business - Patent
and Other Proprietary Rights."
Environmental Liabilities
VSEA's operations are subject to various foreign, federal, state and/or local
laws regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment. This includes discharges into
soil, water and air, and the generation, handling, storage, transportation and
disposal of waste and hazardous substances. In addition, several countries are
reviewing proposed regulations that would require manufacturers to dispose of
their products at the end of a product's useful life. These laws have the
effect of increasing costs and potential liabilities associated with the
conduct of such operations.
Varian has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended
("CERCLA"), at eight sites where Varian is alleged to have shipped
manufacturing waste for recycling or disposal. Varian is also involved in
various stages of environmental investigation and/or remediation under the
direction of, or in consultation with, foreign, federal, state and/or local
agencies at certain current or former Varian facilities (including facilities
disposed of in connection with Varian's sale of its Electron Devices business
during fiscal year 1995, and the
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sale of its TFS business during fiscal year 1997). Expenditures by Varian for
environmental investigation and remediation amounted to $5 million in fiscal
year 1998, compared with $2 million in fiscal year 1997 and $5 million in
fiscal year 1996.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of January 1, 1999, Varian nonetheless estimated that the future
exposure for environmental investigation and remediation costs for these sites
and facilities ranged in the aggregate from $21 million to $48 million. The
time frame over which these costs are expected to be incurred varies with each
site or facility, ranging up to approximately 30 years as of January 1, 1999.
Management of Varian believes that no amount in the foregoing range of
estimated future costs is more probable of being incurred than any other amount
in such range and therefore Varian accrued $21 million in estimated
environmental costs as of January 1, 1999. The amount accrued has not been
discounted to present value.
As to other sites and facilities, Varian has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of January 1, 1999, Varian estimated that the future exposure for
environmental investigation and remediation costs for these sites and
facilities ranged in the aggregate from $40 million to $74 million. The time
frame over which Varian expects to incur these costs varies with each site and
facility, ranging up to approximately 30 years as of January 1, 1999. As to
each of these sites and facilities, management of Varian determined that a
particular amount within the range of estimated costs was a better estimate of
the future environmental liability than any other amount within the range, and
that the amount and timing of these future costs were reliably determinable.
Together, these amounts totaled $51 million at January 1, 1999. Varian
accordingly accrued $22 million, which represents its best estimate of the
future costs discounted at 4%, net of inflation. This reserve is in addition to
the $21 million described in the preceding paragraph.
The Distribution Agreement provides that each of VMS, VSEA and IB will
indemnify the others for one-third of these environmental investigation and
remediation costs, as adjusted for any insurance proceeds and tax benefits
expected to be realized upon payment of these costs. For a discussion of VSEA's
environmental liabilities, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Environmental Matters."
The foregoing amounts are only estimates of anticipated future environmental
related costs, and the amounts actually spent may be greater or less than such
estimates. The aggregate range of cost estimates reflects various uncertainties
inherent in many environmental investigation and remediation activities and the
large number of sites and facilities involved. VSEA believes that most of these
cost ranges will narrow as investigation and remediation activities progress.
VSEA's present and past facilities have been in operation for many years, and
over that time in the course of those operations, such facilities have used
substances which are or might be considered hazardous, and VSEA has generated
and disposed of wastes which are or might be considered hazardous. Therefore,
it is possible that additional environmental issues may arise in the future
that VSEA cannot now predict.
Reliance on Suppliers
Certain of the components and subassemblies included in VSEA's products are
obtained from a limited group of suppliers, or in some cases a single-source
supplier, including magnets and high-voltage power supplies/accelerators. The
loss of any of these suppliers, including any single-source supplier, would
require obtaining one or more replacement suppliers as well as potentially
requiring a significant level of product development to incorporate new parts
into VSEA's products. VSEA believes that alternative sources for such
components may generally be obtained when necessary, although the need to
change suppliers or to alternate between suppliers might cause material delays
in delivery or significantly increase its costs. Although Varian has
historically obtained and VSEA expects to obtain limited insurance to protect
against loss due to business interruption from these and other sources, there
can be no assurance that such coverage will be adequate or that such coverage
will continue to remain available on acceptable terms, if at all. Although VSEA
seeks to reduce its dependence on these limited source suppliers, disruptions
or loss of certain of these sources, including the ones referenced above, could
have a material adverse effect on VSEA's business and results of operations and
could result in damage to customer relationships. See "Business -
Manufacturing."
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Dependence on Key Personnel
VSEA's future success depends to a significant extent on the continued service
of certain of its key managerial, technical and engineering personnel, and its
continuing ability to attract, train and retain highly qualified engineering,
technical and managerial personnel. Competition for such personnel is intense,
particularly in the labor markets around the VSEA facilities near the Boston,
Massachusetts area. The available pool of qualified candidates is limited and
there can be no assurance that VSEA can retain its key engineering, technical
and managerial personnel or that it can attract, train, assimilate or retain
other highly qualified engineering, technical and managerial personnel in the
future. The loss of any of VSEA's key personnel or the inability of VSEA to
hire, train or retain qualified personnel could have a material adverse effect
on VSEA's business, results of operations and financial condition.
Potential Impact of the Year 2000 Issue
The "Year 2000" problem refers to computer programs and other equipment with
embedded microprocessors ("non-IT systems") which use only the last two digits
to refer to a year, and which therefore might not properly recognize a year
that begins with "20" instead of the familiar "19." As a result, those computer
programs and non-IT systems might be unable to operate or process accurately
certain date-sensitive data before or after January 1, 2000. Because VSEA
relies heavily on computer programs and non-IT systems, and on third parties
which themselves rely on computer programs and non-IT systems, the Year 2000
problem if not addressed could adversely affect VSEA's business, results of
operations and financial condition.
Failure to accurately assess and correct VSEA's Year 2000 problems and/or those
of its key suppliers would likely result in interruption of certain of VSEA's
normal business operations, which could have a material adverse effect on
VSEA's business, results of operations and financial condition. If VSEA does
not adequately identify and correct Year 2000 problems in its information
systems it could experience interruptions in its operations, including
manufacturing, order processing, receivables collection and accounting, such
that there would be delays in product shipments, lost data and a consequential
impact on revenues, expenditures and financial reporting. If VSEA does not
adequately identify and correct Year 2000 problems in its non-IT systems it
could experience interruptions in its manufacturing and related operations,
such that there would be delays in product shipments and a consequential impact
on revenues. If VSEA does not adequately identify and correct Year 2000
problems in its previously-sold products it could experience warranty or
product liability claims by users of products which do not function correctly.
If VSEA does not adequately identify and correct Year 2000 problems of the
significant third parties with which it does business it could experience
interruptions in the supply of key components or services from those parties,
such that there would be delays in product shipments or service and a
consequential impact on revenues. VSEA does not expect to be 100% Year 2000
compliant by the end of 1999 and given the inherent complexity of the Year 2000
problem, there can be no assurance that actual costs will not be higher than
currently anticipated or that corrective actions will not take longer than
currently anticipated to complete. Risk factors which might result in higher
costs or delays include the ability to identify and correct in a timely fashion
Year 2000 problems; regulatory or legal obligations to correct Year 2000
problems in previously-sold products; possible liability for personal injury if
a safety hazard relating to Year 2000 problems is not identified and corrected;
ability to retain and hire qualified personnel to perform assessments and
corrective actions; the willingness and ability of critical suppliers to assess
and correct their own Year 2000 problems, including the products they supply to
VSEA; and the additional complexity which will likely be caused by undertaking
during fiscal year 1999 and fiscal year 2000 the separation of currently shared
enterprise information systems as a result of the Distribution.
Because of uncertainties as to the extent of Year 2000 problems with VSEA's
previously-sold products and the extent of any legal obligation of VSEA to
correct Year 2000 problems in those products, VSEA cannot yet assess its risks
with respect to those products. Because its assessments are not yet complete,
VSEA cannot yet conclude that the failure of critical suppliers to assess and
correct Year 2000 problems is not reasonably likely to have a material adverse
effect on its results of operations. For a discussion regarding VSEA's state of
readiness, costs associated with becoming Year 2000 compliant and contingency
plans relating to Year 2000, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000."
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THE DISTRIBUTION
General
The Board of Directors of Varian declared a special dividend, payable on the
Distribution Date, of one share of VSEA Common Stock and one share of IB Common
Stock for each share of Varian Common Stock held on the Distribution Record
Date. Each holder also would retain the shares of Varian Common Stock held by
such holder immediately prior to the Distribution.
Reasons for the Distribution
The Board of Directors of Varian approved the Distribution for the following
principal reasons:
Management Focus. Varian's three businesses have different dynamics and
business cycles, serve different marketplaces and customer bases, are
subject to different competitive forces and must be managed with different
long-term and short-term strategies and goals. Varian believes that
separating its businesses into independent public companies, each with its
own management team and board of directors, is necessary to address current
and future management issues and considerations that result from operating
these diverse businesses within a single company. The separation will
enable the management of each business to manage that business, and to
adopt and implement strategies for that business, solely with regard to the
needs and objectives of that business. In addition, as a result of the
separation, the management of each business will be able to devote its full
attention to managing that business.
Capital Structure. Varian believes that the Distribution will allow each of
the companies to organize its capital structure and allocate its resources
to support the very different needs and goals of the particular business.
The stock buy-back program can be discontinued, or dividends eliminated,
freeing cash for acquisition and growth opportunities for IB and VMS and
permitting VSEA conserve cash for use in the cyclical downturns in its
industry. Capital borrowings can be tailored to the specific needs of the
various business units. Each business will be able to allocate its
resources without considering the needs of the other businesses.
Attracting and Retaining Key Employees. Varian's management believes that
the ability to attract and retain key personnel is fundamental to its
ability to further the technology required to maintain a leadership
position in its business. In particular, under the existing corporate
structure, Varian has been unable to offer equity-based compensation linked
specifically to the performance of each separate business. The Distribution
would enable each company to establish focused equity-based compensation
programs that should enable each of them to better attract and retain key
personnel.
Acquisition Activities. Varian believes that growth through acquisition is
an important ingredient of the future success of IB and VMS. Such
acquisitions and growth would be financed in part through the issuance of
capital stock. It is expected that the Distribution will increase the
availability and decrease the cost of raising equity capital. Varian's
management believes that, as a result of the Distribution, each company
will have a more attractive currency, its stock, through which to make
acquisitions.
Investor Understanding. Debt and equity investors and securities analysts
should be able to better evaluate the financial performance of each company
and their respective strategies, thereby enhancing the likelihood that each
will achieve appropriate market recognition. The stock of each of the three
companies will also appeal to investors with differing investment
objectives and risk tolerance, and will allow potential investors to focus
their investments more directly to the areas of their primary interest.
Cost Savings. Each company should be able to rationalize better its
organizational structure after the Distribution. Accordingly, the
administrative and organizational costs of each company, taken together,
should be reduced from the aggregate levels experienced by Varian prior to
the Distribution.
Manner of Effecting the Distribution
The distribution of VSEA Common Stock and IB Common Stock will be made on the
Distribution Date to stockholders of record as of the Distribution Record Date.
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On or prior to the Distribution Date, all outstanding shares of VSEA Common
Stock and IB Common Stock will be delivered to the Distribution Agent. As soon
as practicable after the VSEA Common Stock and IB Common Stock have been
distributed, stock distribution statements reflecting ownership of shares of
VSEA Common Stock and IB Common Stock will be mailed by the Distribution Agent
to holders of record as of the Distribution Record Date to reflect the
distribution of one share of VSEA Common Stock and one share of IB Common Stock
for each share of Varian Common Stock held on the Distribution Record Date. All
such shares will be fully paid and nonassessable and the holders thereof will
not be entitled to preemptive rights. The shares of VSEA Common Stock and IB
Common Stock to be transferred to Varian's stockholders in the Distribution
will be initially issued to Varian as consideration for the transfer of the
Semiconductor Equipment Business and the Instruments Business, respectively.
No holder of Varian Common Stock will be required to pay any cash or other
consideration for the shares of VSEA Common Stock and IB Common Stock received
in the Distribution or to surrender or exchange shares of Varian Common Stock
in order to receive shares of VSEA Common Stock or IB Common Stock.
The Board of Directors of VSEA has adopted the Rights Plan. Stock distribution
statements evidencing shares of the VSEA Common Stock issued in the
Distribution will therefore include the same number of Rights issued under the
Rights Plan. See "Description of the Capital Stock - Rights Plan."
Federal Income Tax Aspects of the Distribution
Varian has received the Tax Ruling from the IRS substantially to the following
effect:
(1) No gain or loss will be recognized by (and no amount will otherwise be
included in the income of) any holder of Varian Common Stock as a
result of the Distribution.
(2) The aggregate basis of the Varian Common Stock, VSEA Common Stock and
IB Common Stock in the hands of each holder of Varian Common Stock
will be the same as the basis of Varian Common Stock held by the
holder immediately before the Distribution, allocated in proportion to
the fair market value of each.
(3) The holding period of the IB Common Stock and VSEA Common Stock
received in the Distribution by each holder of Varian Common Stock
will include the period during which such holder held Varian Common
Stock with respect to which the Distribution is made, provided that
such common stock is held as a capital asset by such holder on the
Distribution Date.
(4) No gain or loss will be recognized by Varian upon the Distribution.
The Tax Ruling, while generally binding upon the IRS, is based on certain
factual representations and assumptions. If such factual representations and
assumptions were incorrect in any material respect, the holdings of such ruling
would be jeopardized. Varian is not aware of any facts or circumstances that
would cause such representations and assumptions to be incorrect in any
material respect. Each of Varian, VSEA and IB has agreed to certain
restrictions on their future actions to provide further assurances that Section
355 of the Code will apply to the Distribution. See " - Relationship Among VMS,
IB and VSEA After the Distribution - Tax Sharing Agreement."
If one or both of the distributions comprising the Distribution fail to qualify
as a tax-free spin-off under Section 355 of the Code, then VMS will recognize
gain equal to the difference between the fair market value of the stock of the
nonqualifying company or companies and Varian's adjusted tax basis in such
stock. If VMS were to recognize gain on one or more of the distributions, such
gain and the resulting tax liability likely would be very substantial.
Furthermore, if either distribution were not to qualify as a tax-free spin-off
under Section 355 of the Code, each holder of Varian Common Stock who receives
shares of VSEA Common Stock and IB Common Stock in the Distribution would be
treated as if such stockholder received a taxable distribution in an amount
equal to the fair market value of the VSEA Common Stock or IB Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of Varian's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in Varian Common Stock to
the extent the amount received exceeds such stockholder's share of
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earnings and profits and (iii) gain from the exchange of Varian Common Stock to
the extent the amount received exceeds both such stockholder's share of
earnings and profits and such stockholder's basis in such common stock.
Section 355(e), which was added to the Code in 1997, generally provides that a
company that distributes shares of a subsidiary in a spin-off that is otherwise
tax-free will incur federal income tax liability if 50% or more, by vote or
value, of the capital stock of either the company making the distribution or
the spun-off subsidiary is acquired (a "50% Ownership Shift") by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether the 50% test is met. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary that occurs within two years before or after the
spin-off is pursuant to a plan that includes the spin-off. However, the
presumption may be rebutted by establishing that the spin-off and the
acquisition are not part of a plan or series of related transactions. Among the
factual representations made by Varian to the IRS in connection with the Tax
Ruling is the representation that each of the distributions is not part of such
a plan or series of related transactions. If VMS, VSEA or IB were to undergo a
50% Ownership Shift, particularly if such 50% Ownership Shift occurred within
two years after the Distribution Date, there can be no assurance that the IRS
will not assert that such ownership shift occurred pursuant to a plan or series
of related transactions and therefore that the Distribution is taxable under
Section 355(e).
If a distribution is taxable solely under Section 355(e), VMS will recognize
gain equal to the difference between the fair market value of the IB Common
Stock and the VSEA Common Stock and Varian's adjusted tax basis in such stock.
However, holders of Varian Common Stock would not recognize gain or loss as a
result of the distributions. If VMS were to recognize gain on the
distributions, such gain and the resulting tax liability likely would be very
substantial.
VMS, VSEA and IB will enter into the Tax Sharing Agreement to allocate
responsibility for the possible corporate tax burden resulting from the
Distribution. Neither VMS, VSEA, nor IB has agreed to indemnify holders of
Varian Common Stock for any taxes or other losses should either or both of the
distributions fail to qualify under Section 355 of the Code. The Tax Sharing
Agreement will provide that each of VMS, VSEA and IB will be responsible for
any such corporate taxes to the extent that such taxes are attributable to
action taken or permitted by that entity or its affiliates after the
Distribution that is inconsistent with the tax treatment contemplated in the
Tax Ruling. Under the Tax Sharing Agreement, if either distribution is found to
be taxable but none of VMS, VSEA and IB has done anything to cause the
distribution to be taxable, each company generally will be liable for one-third
of those taxes. See " - Relationship Among VMS, IB and VSEA After the
Distribution - Tax Sharing Agreement."
Current Treasury regulations require each holder of Varian Common Stock who
receives VSEA Common Stock or IB Common Stock pursuant to the Distribution to
attach to his or her federal income tax return for the year in which the
Distribution occurs a detailed statement setting forth such data as may be
appropriate in order to show the applicability of Section 355 of the Code to
the Distribution. Varian will convey the appropriate information to each holder
of record of Varian Common Stock as of the Distribution Record Date.
The foregoing summary of federal income tax consequences does not purport to
cover all federal income tax consequences of the Distribution. The tax
consequences may differ for stockholders that are not U.S. citizens or
residents or that are otherwise subject to special treatment under the Code.
Each stockholder should consult its own tax advisor regarding the federal,
foreign, state and local tax consequences of the Distribution in its particular
circumstances, including the application of state, local and foreign tax laws.
Listing and Trading of VSEA Common Stock
There is not currently a public market for VSEA Common Stock. It is presently
anticipated that VSEA Common Stock may commence trading on a "when-issued"
basis after the Distribution Record Date. The term "when-issued" means that
shares can be traded by Varian stockholders prior to the time that they receive
the shares of IB Common Stock and VSEA Common Stock in the Distribution. Prices
at which VSEA Common Stock may trade prior to the Distribution on a "when-
issued" basis or after the Distribution cannot be predicted. Until the VSEA
Common Stock is fully distributed and an orderly market develops, the prices at
which trading in such stock occurs may fluctuate significantly. The prices at
which VSEA Common Stock trades will be determined by the marketplace and may be
influenced by many factors, including, among others, the depth and liquidity of
the market for such stock, investor perception of VSEA and the
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industry in which it participates, VSEA's dividend policy and general economic
and market conditions. Such prices may also be affected by certain provisions
of the Certificate of Incorporation and By-Laws of VSEA in effect at the time
of the Distribution, which will have an anti-takeover effect. See "Delaware Law
and Certain Charter and By-Law Provisions."
Shares of VSEA Common Stock distributed to Varian's stockholders will be freely
transferable, except for shares of VSEA Common Stock received by persons who
may be deemed to be "affiliates" of VSEA under the Securities Act of 1933 (the
"Securities Act"). Persons who may be deemed to be affiliates of VSEA after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, VSEA and may include certain
officers and directors of VSEA, as well as principal stockholders of VSEA.
Persons who are affiliates of VSEA will be permitted to sell their shares of
VSEA Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act.
VSEA has applied for quotation of the VSEA Common Stock on the Nasdaq National
Market. VSEA initially will have approximately 4,556 stockholders of record
based upon the number of stockholders of record of Varian as of February 1,
1999. For certain information regarding options to purchase VSEA Common Stock
that will be outstanding after the Distribution, see "Management," and "The
VSEA Omnibus Stock Plan."
Future Management
Following the Distribution it is intended that VSEA will continue to conduct
the Semiconductor Equipment Business in substantially the same manner in which
it is currently operated. Richard A. Aurelio, who is currently Executive Vice
President of Varian, will serve as President and Chief Executive Officer of
VSEA following the Distribution. The other executive officers of VSEA following
the Distribution will be primarily drawn from the current management of Varian.
See "Management - Executive Officers."
Internal Mergers and Transfers
On or prior to the Distribution Date, Varian will effectuate certain
transactions intended to allocate assets and liabilities relating to the Health
Care Systems Business to VMS, assets and liabilities relating to the
Semiconductor Equipment Business to VSEA and assets and liabilities relating to
the Instruments Business to IB. See " - Distribution Agreement." On the
Distribution Date, following the completion of the foregoing transactions,
Varian will distribute the VSEA Common Stock and IB Common Stock to the holders
of Varian Common Stock on the Distribution Record Date.
Relationship Among VMS, IB and VSEA After the Distribution
For the purpose of governing certain of the ongoing relationships among VMS, IB
and VSEA after the Distribution and to provide mechanisms for an orderly
transition, Varian, VSEA and IB have entered or will enter into various
agreements, and will adopt policies, as described in this section. Varian, VSEA
and IB believe that the agreements are fair to each of the parties. The
services to be provided by each of the companies pursuant to the various
agreements described below will be billed at their fully burdened cost to the
provider and in each case the terms of these agreements have been reviewed by
individuals who will have senior management positions at VSEA, VMS or IB after
the Distribution.
The Distribution Agreement and the forms of the Ancillary Agreements have been
filed as exhibits to the Registration Statement in respect of the registration
of the VSEA Common Stock under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") of which this Information Statement is a part. See
"Available Information." The following descriptions include a summary of all
material terms of these agreements, but do not purport to be complete and are
qualified by reference to the texts of such agreements, which are incorporated
herein by reference.
Distribution Agreement
The Distribution Agreement provides for the terms and conditions of the
Distribution, the various actions to be taken prior to the Distribution (see
" - Internal Mergers and Transfers") and the relationships among the parties
subsequent to
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the Distribution. The Distribution Agreement provides that, from and after the
Distribution Date, (i) IB shall assume, pay, perform and discharge all
Instruments Liabilities (as defined in the Distribution Agreement) in
accordance with their terms, (ii) VMS shall assume, pay, perform and discharge
all Health Care Systems Liabilities (as defined in the Distribution Agreement)
in accordance with their terms and (iii) VSEA shall assume, pay, perform and
discharge all Semiconductor Equipment Liabilities (as defined in the
Distribution Agreement) in accordance with their terms.
In addition, the Distribution Agreement provides for cross-indemnities that
require (i) IB to indemnify VMS and VSEA (and their respective subsidiaries,
directors, officers, employees and agents and certain other related parties)
against all losses arising out of or in connection with Instruments Liabilities
or the breach of the Distribution Agreement or any Ancillary Agreement by IB,
(ii) VMS to indemnify VSEA and IB (and their respective subsidiaries,
directors, officers, employees and agents and certain other related parties)
against all losses arising out of or in connection with the Health Care Systems
Liabilities or the breach of the Distribution Agreement or any Ancillary
Agreement by VMS and (iii) VSEA to indemnify IB and VMS (and their respective
subsidiaries, directors, officers, employees and agents and certain other
related parties) against all losses arising out of or in connection with the
Semiconductor Equipment Liabilities or the breach of the Distribution Agreement
or any Ancillary Agreement by VSEA, and, in each case, for contribution in
certain circumstances. Each of VSEA, VMS and IB also agrees to indemnify each
other for one-third of the costs and expenses associated with liabilities that
are unrelated to their businesses, including certain discontinued operations
and environmental liabilities associated with Varian's Palo Alto facilities.
Pursuant to the Distribution Agreement, each of the parties has agreed to use
commercially reasonable efforts to take or cause to be taken all action, and do
or cause to be done all things, reasonably necessary or appropriate to
consummate the transactions contemplated by the Distribution Agreement. As
such, the Distribution Agreement provides that if any contemplated pre-
Distribution transfers have not been effected on or prior to the Distribution
Date, the parties will cooperate to effect such transfers as promptly
thereafter as practicable. The entity retaining any asset or liability which
should have been transferred prior to the Distribution Date will continue to
hold that asset for the benefit of the party entitled thereto or that liability
for the account of the party required to assume it, and must take such other
action as may be reasonably requested by the party to whom such asset was to be
transferred or by whom such liability was to be assumed in order to place such
party, insofar as reasonably possible, in the same position as would have
existed had such asset or liability been transferred or assumed as contemplated
by the Distribution Agreement.
The Distribution Agreement (i) requires that Varian contribute cash to VSEA so
that at the time of the Distribution VSEA will have $100 million in cash and
cash equivalents and a Net Worth (as defined in the Distribution Agreement) of
at least $150 million, and its Consolidated Debt (as defined in the
Distribution Agreement) will not exceed $5 million, (ii) governs the conduct of
the post-Distribution audit to be undertaken to ascertain the Net Worth of VSEA
upon consummation of the Distribution, and (iii) requires that post-
Distribution payments be made between the parties if, and to the extent that,
as of the time of the Distribution (a) VSEA has Consolidated Debt exceeding $5
million, or less than $100 million of cash and cash equivalents or a Net Worth
of less than $150 million or (b) VSEA has more than $100 million of cash and
cash equivalents and a Net Worth of at least $150 million or VSEA has a Net
Worth in excess of $225 million.
The Distribution Agreement also provides for the execution and delivery of
certain other agreements governing the relationship among VSEA, VMS and IB at
and following the Distribution. See " - Employee Benefits Allocation
Agreement," " - Tax Sharing Agreement," " - Transition Services Agreement," and
" - Intellectual Property Agreement."
Employee Benefits Allocation Agreement
On or prior to the Distribution Date, Varian, VSEA and IB will enter into an
employee benefits allocation agreement (the "Employee Benefits Allocation
Agreement") providing for the allocation of certain liabilities and
responsibilities with respect to employee compensation, benefits and labor
matters. The allocation of responsibility and adjustments to be made pursuant
to the Employee Benefits Allocation Agreement are substantially consistent with
the existing rights of Varian's employees under Varian's various compensation
plans, with the understanding that each party will have sole responsibility for
determining the benefits it will provide its employees following the
Distribution. The Employee Benefits Allocation Agreement will generally provide
that, effective as of the Distribution Date, each of VSEA and IB will, or will
cause one or more of its subsidiaries to, assume or retain, as the case may be,
all liabilities of Varian, to the extent
25
<PAGE>
unpaid as of the Distribution Date, under Varian's employee benefit plans,
policies, arrangements, contracts and agreements, including collective
bargaining agreements, with respect to employees who on or after the
Distribution Date will be employees of VSEA or its subsidiaries or IB or its
subsidiaries. The Employee Benefits Allocation Agreement will also provide that
VMS generally will, or will cause one of its subsidiaries to, assume or retain,
as the case may be, all liabilities under Varian's employee benefit plans,
policies, arrangements, contracts and agreements, including collective
bargaining agreements, with respect to employees who on or after the
Distribution Date will be employees of VMS or its subsidiaries. The Employee
Benefits Allocation Agreement will also provide that each of VSEA, IB and VMS
will generally indemnify the others for one-third of the administrative costs
associated with liabilities to individuals who were former Varian employees as
of the Distribution Date.
Defined Contribution Plans
Active participation in the Varian Associates, Inc. Retirement and Profit-
Sharing Program (the "Varian Profit-Sharing Plan") by VSEA and IB employees
will terminate on the Distribution Date.
Effective as of the Distribution Date, VSEA will establish a defined
contribution plan for the benefit of its employees. As promptly as practicable
after the Distribution, VMS will cause to be transferred to the VSEA defined
contribution plan the account balances in, and the liabilities of, the Varian
Profit-Sharing Plan to each employee of VSEA who elects to so transfer. VSEA
will assume the administrative costs associated with the Varian Profit-Sharing
Plan accounts of VSEA employees who do not elect a transfer. VSEA, IB and VMS
will also each indemnify the others for one-third of the administrative costs
associated with the accounts of individuals who were former Varian employees as
of the Distribution Date or whose employment will terminate pursuant to
severance agreements in connection with the Distribution.
Non-U.S. Employee Benefits
Non-U.S. employee benefits will be subject to the general principles of the
Employee Benefits Allocation Agreement. To the extent practicable, VSEA or its
subsidiaries will each assume or retain, as the case may be, any and all
pension liabilities and attendant plans and their assets related to the
employees of VSEA or its subsidiaries post-Distribution. If a person is
employed by a non-U.S. subsidiary of VSEA but the associated liabilities are
held by VMS or IB, VSEA will indemnify the entity holding the liabilities.
VSEA, IB and VMS will also each indemnify the others for one-third of the
employee benefit liabilities associated with former employees of non-U.S.
subsidiaries.
Stock Options and Other Awards
Stock options and restricted stock awards (collectively, "stock awards") of
Varian are currently outstanding under Varian's 1982 Non-Qualified Stock Option
Plan and the Varian Omnibus Stock Plan (collectively, the "Plans"). The
treatment after the Distribution of stock awards that are outstanding prior to
the Distribution is designed to preserve, as a general matter, the economic
value of each stock award. In addition, the treatment of outstanding stock
awards of individuals who will continue their employment with VSEA is designed
to provide an incentive for such employees to remain employed with VSEA and to
benefit by their efforts to increase the market value of the VSEA Common Stock.
Treatment of Awards Held by Employees of VSEA
It is expected that the Varian stock options held by those individuals who will
become employees of VSEA will be replaced with substitute stock options to
purchase VSEA Common Stock under the VSEA Omnibus Stock Plan discussed below
under "The VSEA Omnibus Stock Plan." Although such individuals are not
contractually required to surrender their Varian stock options, it is expected
that such individuals will do so in order to have their stock options relate to
shares of the company with which they are employed after the Distribution, to
preserve unvested options and to maintain the ability to exercise stock options
that would otherwise expire due to termination of their employment with Varian.
The surrender of such stock options will be encouraged by Varian and VSEA
because Varian's and VSEA's management believe the efforts of key employees
should be directed toward enhancing the value of their employer's stock.
26
<PAGE>
Such substitute options will be designed to preserve the economic value of the
related Varian stock options, and the vesting and expiration dates and other
terms of the related awards will remain in effect under the VSEA substitute
stock options. In order to obtain such substitute stock options, the employees
will be required to surrender their unexercised Varian stock options.
Replacement of surrendered Varian stock options is believed to be beneficial to
VSEA and its stockholders because it will allow VSEA to provide meaningful
compensation incentives to its key employees. Since, except for option price
and number of shares, all terms and conditions of Varian stock options will
apply to the substitute stock options, the vesting provisions of the substitute
options are expected to provide a continuing incentive for key employees to
remain in the employ of VSEA after the Distribution. If an VSEA employee does
not elect to receive a substitute option, the unvested portion of the
employee's Varian option will expire upon the Distribution Date and the
employee will generally have three months to exercise the vested portion for
VMS Common Stock.
The option exercise price of substitute VSEA stock options will be determined
by multiplying the exercise price of the Varian stock option by a fraction, the
numerator of which will be the closing price of VSEA Common Stock on the
Distribution Date and the denominator of which will be the closing price of
Varian Common Stock on the Distribution Date. The number of shares of VSEA
Common Stock subject to substitute options will be determined by multiplying
the number of shares of Varian Common Stock covered by the Varian stock option
by a fraction, the numerator of which will be the closing price of Varian
Common Stock on the Distribution Date and the denominator of which will be the
closing price of VSEA Common Stock on the Distribution Date. If the
Distribution Date is not a trading day for the New York Stock Exchange or the
Nasdaq National Market, the foregoing prices will be calculated based on the
closing price for the trading day immediately preceding the Distribution Date.
Unvested Varian restricted stock held by continuing employees of VSEA will vest
prior to the Distribution.
As of February 1, 1999, there were approximately 898,392 shares of Varian
Common Stock subject to outstanding stock options held by individuals who will
be employees of VSEA. It is impossible to predict with certainty how many
shares of VSEA Common Stock will be subject to substitute VSEA stock options
after the Distribution Date, since it is expected that some Varian stock
options held by individuals who will become employees of VSEA will be exercised
prior to the Distribution Date. The balance of unexercised Varian stock options
will be adjusted according to the formula described above, but the stock prices
upon which the adjustment will be based will not be known until the
Distribution Date. Stockholders of VSEA are, however, likely to experience some
dilutive impact from the above-described adjustments.
Treatment of Awards Held by Employees Whose Employment will Terminate in
Connection with the Distribution
Employees of Varian whose employment will terminate in connection with the
Distribution (other than seven employees whose employment will terminate
pursuant to severance agreements) will be permitted to elect to exchange their
Varian stock options for stock options with respect to VMS Common Stock, IB
Common Stock and VSEA Common Stock. Individuals who so elect will have one-
third of the unexercised portion of their Varian stock options exchanged for
each of VMS stock options, IB stock options and VSEA stock options. The seven
employees whose employment will terminate pursuant to severance agreements will
receive this exchange on a mandatory basis. Employees whose options are
exchanged in this manner will have the unvested portion of their Varian options
as of the Distribution Date vested immediately prior to the Distribution or, if
later, immediately prior to termination of the employment of such employees.
As of February 1, 1999, there were approximately 570,596 shares of Varian
Common Stock subject to outstanding stock options held by employees whose
employment will terminate in connection with the Distribution (excluding stock
options held by Mr. O'Rourke, a current director of Varian who is expected to
serve as a director of VSEA following the Distribution). It is impossible to
predict with certainty how many shares of VSEA Common Stock will be subject to
these stock options after the Distribution Date, since it is expected that some
Varian stock options held by these individuals will be exercised prior to the
Distribution Date. In addition, the balance of unexercised Varian stock options
will be adjusted according to the formula described above, but the stock prices
upon which the adjustment will be based will not be known until the
Distribution Date. Stockholders of VSEA are, however, likely to experience some
dilutive impact from the above-described adjustments.
27
<PAGE>
Treatment of Awards Held by Directors
Varian stock options held by directors of Varian will be adjusted in the same
manner as Varian stock options held by employees whose employment will
terminate in connection with the Distribution; provided that the unvested
portion of their Varian options will not vest immediately prior to the
Distribution. Accordingly, these individuals will exchange their Varian stock
options for stock options with respect to VMS Common Stock, IB Common Stock and
VSEA Common Stock.
As of February 1, 1999, there were approximately 791,000 shares of Varian
Common Stock subject to outstanding stock options held by current directors
(including Mr. O'Rourke). It is impossible to predict with certainty how many
shares of VSEA Common Stock will be subject to these stock options after the
Distribution Date, since it is expected that some Varian stock options held by
these individuals will be exercised prior to the Distribution Date. In
addition, the balance of unexercised Varian stock options will be adjusted
pursuant to the formula described above, but the stock prices upon which the
adjustment will be based will not be known until the Distribution Date.
Stockholders of VSEA are, however, likely to experience some dilutive impact
from the above-described adjustments.
Tax Sharing Agreement
Varian, VSEA and IB will enter into a tax sharing agreement (the "Tax Sharing
Agreement") that defines the parties' rights and obligations with respect to
federal, state, foreign and other income or franchise taxes relating to
Varian's businesses for tax periods prior to, including and following the
Distribution and with respect to certain other tax matters. In general, VMS
will be responsible for consolidated federal income taxes, consolidated or
combined state income taxes and separate state income taxes of Varian and its
subsidiaries through the Distribution Date. Liability through the Distribution
Date will be determined based on a closing of the books. Liability for foreign
income taxes and non-income taxes will generally be allocated to the legal
entity on which such taxes are imposed, except for taxes transferred on the
closing balance sheets. Adjustments to the reported tax liability for tax
periods through the Distribution Date will be shared equally by the three
companies.
In general, and except as provided below, taxes resulting from the Distribution
will be the responsibility of the legal entity on which such taxes are imposed.
However, each of IB and VSEA will be responsible for any such taxes resulting
from income or gain from the Distribution to the extent that such taxes are
attributable to action taken or permitted by that entity or its affiliates
after the Distribution that is inconsistent with the tax treatment contemplated
in the Tax Ruling requested from the IRS. Each of VMS, VSEA and IB will
covenant and agree not to take or permit certain actions inconsistent or
potentially inconsistent with the Tax Ruling before January 1, 2002, unless
such action has been consented to by the other companies or approved by a
supplemental ruling from the IRS or an unqualified opinion of independent
nationally recognized tax counsel acceptable to each of the companies. These
agreements could restrict the ability of VMS, VSEA or IB to engage in certain
corporate transactions, redeem stock, dispose of assets except in the ordinary
course of business, or be the target of an acquisition transaction, during that
period. Adjustments to the anticipated income taxes resulting from the
Distribution that are not attributable to action inconsistent with the Tax
Ruling will be shared equally by the three companies. Furthermore, if with
respect to VMS, VSEA or IB, the aggregate taxes shown on the initial tax
returns filed after the Distribution (or the amounts paid with respect to such
taxes) relating to periods prior to the Distribution Date exceed the aggregate
amounts accrued with respect thereto on the closing balance sheets, by more
than $1,000,000, the company with the unanticipated tax burden may propose a
sharing of such amounts among the three companies. If the three companies
cannot agree to a fair and equitable sharing of the excess taxes, the matter
will be submitted to a mutually acceptable nationally recognized accounting
firm for resolution. See " - Federal Income Tax Aspects of the Distribution."
Transition Services Agreement
On or prior to the Distribution Date, Varian, VSEA and IB will enter into a
Transition Services Agreement providing for (i) the sharing of facilities and
equipment for a temporary period not to exceed one year, (ii) the provision of
employees and sharing of certain third-party services to provide treasury, tax,
accounting, payroll, human resources and similar and related functions for a
temporary period not to exceed one year and (iii) the provision of information
services
28
<PAGE>
personnel for a period extending until June 30, 2000. Compensation for all
services and facilities provided under the Transition Services Agreement will
be on a fully burdened cost reimbursement basis. The management of each of VMS,
IB and VSEA presently expects that its company will be able to provide these
services for itself after the applicable transition period without additional
material expense, although no assurance can be given that this will be the
case. Each party has the right to terminate certain transition services
arrangements upon a material breach by the other party thereto.
Intellectual Property Agreement
On or prior to the Distribution Date, Varian, VSEA and IB will enter into an
Intellectual Property Agreement providing for allocation among these companies
and their respective subsidiaries and associated companies of rights in the
Intellectual Property (as defined in the Distribution Agreement), including
patents, copyrights, trademarks, software and trade secrets, owned by Varian
prior to the Distribution and for the licensing of certain of such Intellectual
Property thereafter. The Intellectual Property Agreement is to provide VMS,
VSEA and IB, and their respective subsidiaries and associated companies, with
those continuing rights and licenses in such Intellectual Property following
the Distribution Date necessary for the continued conduct of their respective
businesses.
Under the terms of the Intellectual Property Agreement, the Intellectual
Property that relates primarily to the Semiconductor Equipment Business and the
Instruments Business will be transferred to VSEA and IB, respectively, with VMS
retaining the Intellectual Property that relates primarily to the Health Care
Systems Business. Each company will grant a non-exclusive, perpetual, royalty-
free license under the Intellectual Property that it owns to the other two
companies for use in their respective fields. More specifically, as of the
Distribution Date, each of VMS, VSEA and IB will hold certain rights in the
mark "VARIAN," the "VA" logo and other rights to various trademarks, service
marks, and trade names containing the word "VARIAN."
29
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Semiconductor Equipment Business. The information set forth below should be
read in conjunction with "Pro Forma Condensed Combined Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto of the
Semiconductor Equipment Business included elsewhere in this Information
Statement. The statement of earnings data set forth below for the fiscal years
ended October 2, 1998, September 26, 1997 and September 27, 1996 and the
balance sheet data at October 2, 1998 and September 26, 1997 are derived from,
and are qualified by reference to, the audited financial statements of the
Semiconductor Equipment Business included elsewhere in this Information
Statement. The statement of earnings data for the quarters ended January 1,
1999 and January 2, 1998 and the balance sheet data at January 1, 1999 are
derived from the Semiconductor Equipment Business' unaudited financial data
included elsewhere in this Information Statement. The statement of earnings
data for the fiscal years 1995 and 1994 and the balance sheet data at fiscal
year end 1996, 1995 and 1994 are derived from unaudited financial data of the
Semiconductor Equipment Business not included in this Information Statement.
The historical financial information may not be indicative of the Semiconductor
Equipment Business' future performance and does not necessarily reflect what
the financial position and results of operations of the Semiconductor Equipment
Business would have been had the Semiconductor Equipment Business operated as a
separate, stand-alone entity during the periods presented.
<TABLE>
<CAPTION>
Quarters Ended Fiscal Years
---------------------- -------------------------------------
January 1, January 2,
1999 1998 1998 1997(/1/) 1996 1995 1994
---------- ---------- ------ --------- ------ ------ ------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings
Data
Revenue................. $ 47.4 $114.3 $342.9 $448.3 $667.2 $660.7 $476.6
Operating Earnings
(Loss) before Taxes.... $(10.3) $ 21.3 $ 16.3 $105.9 $122.3 $ 92.5 $ 39.2
Taxes on (loss)
earnings............... $ (3.6) $ 6.4 $ 4.9 $ 34.9 $ 43.0 $ 33.8 $ 12.8
Net Earnings (Loss)..... $ (6.7) $ 14.9 $ 11.4 $ 71.0 $ 79.3 $ 58.7 $ 26.4
Pro Forma Net Earnings
(Loss) Per Share(/2/).. $(0.22) $ 0.49 $ 0.38 $ 2.33 $ 2.56 $ 1.74 $ 0.77
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year End
At January 1, ----------------------------------
1999 1998 1997 1996 1995 1994
------------- ------ ------ ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets................... $216.6 $224.6 $233.3 $312.1 $275.8 $242.2
</TABLE>
- -------
(1) Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2
million after-tax or $1.09 pro forma per share) on the sale of the Thin
Film Systems business.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of Varian Common Stock outstanding during
the respective periods, reflecting the ratio of one share of VSEA Common
Stock for each share of Varian Common Stock outstanding at the time of the
Distribution.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations
is based upon and should be read in conjunction with the combined financial
statements of the Semiconductor Equipment Business and notes thereto included
elsewhere in this Information Statement, as well as the information contained
under "Business" and "Risk Factors." The combined financial statements of the
Semiconductor Equipment Business generally reflect the results of operations,
financial position and cash flows of the operations expected to be transferred
to VSEA in connection with the Internal Transfers and Distribution.
Accordingly, the Semiconductor Equipment Business' combined financial
statements have been carved out from the consolidated financial statements of
Varian using the historical results of operations and historical basis of the
assets and liabilities of the Semiconductor Equipment Business. The combined
financial statements include, among other things, allocations of certain Varian
corporate assets (including pension assets), liabilities (including profit-
sharing and pension benefits) and expenses (including legal, accounting,
employee benefits, insurance services, information technology services,
treasury and other Varian corporate overhead) to the Semiconductor Equipment
Business using the allocation methodology described in Note 1 of the Notes to
the Semiconductor Equipment Business Combined Financial Statements. The
combined financial statements do not reflect any changes that may occur in the
financing and operations of VSEA as a result of the Distribution.
Results of Operations
Fiscal Year
VSEA's fiscal years reported are the 52- or 53-week periods which ended on the
Friday nearest September 30. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week
periods ended on September 26, 1997 and September 27, 1996, respectively.
First Quarter Fiscal Year 1999 Compared to First Quarter Fiscal Year 1998
Revenue. VSEA's revenue of $47 million in the first quarter of fiscal year 1999
was 59% lower than its revenue of $114 million in the first quarter of fiscal
year 1998. The worldwide slowdown in the semiconductor industry that started in
the first half of fiscal year 1998, accelerated in the fourth quarter of fiscal
year 1998, and into the first quarter of fiscal year 1999. The decrease in
semiconductor manufacturing capacity utilization resulted in reduced
semiconductor equipment demand and these conditions have adversely affected
VSEA's results of operations. While excess capacity in the semiconductor
manufacturing industry remained relatively stable between the fourth quarter of
fiscal year 1998 and the first quarter of fiscal year 1999 and certain market
segments for fabrication equipment have stabilized or modestly improved, the
low demand for semiconductor equipment will continue to influence VSEA's
results through the end of fiscal year 1999. Royalty income decreased by $6
million or 86% to $1 million in the first quarter of fiscal year 1999, compared
to the first quarter of fiscal year 1998, in which quarter VSEA received its
final royalty payment from TEL in connection with the termination of the
distribution agreement between TEL and Varian.
International revenue was $27 million, or 56% of VSEA's revenue, in the first
quarter of fiscal year 1999, compared to $80 million, or 70% of revenue, in the
first quarter of fiscal year 1998. VSEA's North American (primarily U.S.)
revenue rose from 30% of revenue in the first quarter of fiscal year 1998 to
44% of revenue in the first quarter of fiscal year 1999, while its European
region revenue increased from 16% of revenue in the first quarter of fiscal
year 1998 to 20% of revenue in the first quarter of fiscal year 1999. The
aggregate of Taiwan, Japan and Korea revenue decreased as a percentage of
revenue, representing 53% of revenue in the first quarter of fiscal year 1998
and 36% of revenue in the first quarter of fiscal year 1999.
Gross Profit. VSEA's gross profit of $12 million in the first quarter of fiscal
year 1999 was 26% of revenue, compared to $50 million, or 44% of revenue, in
the first quarter of fiscal year 1998. The decrease in gross profit as a
percentage of revenue from the first quarter of fiscal year 1998 to the first
quarter of fiscal year 1999 was attributable to the slowdown in product demand
and costs associated with excess capacity in VSEA's operations.
31
<PAGE>
Research and Development. Research and development expenses of $8 million in
the first quarter of fiscal year 1999 were 17% of revenue, a 20% decrease from
the $10 million of research and development expenses (9% of revenue), in the
first quarter of fiscal year 1998. While VSEA's research and development
expense represented a higher relative percentage of revenues, it declined in
absolute terms because operations shutdowns reduced the first quarter worktime
in fiscal year 1999 to 11 weeks from 14 weeks in fiscal year 1998.
Marketing. Marketing expenses of $7 million (or 15% of revenue) in the first
quarter of fiscal year 1999 were down 42% from the $12 million (or 11% of
revenue) in the first quarter of fiscal year 1998, reflecting lower sales and,
to a lesser extent, reduced staffing.
General and Administrative. General and administrative expenses were $7 million
in both the first quarter of fiscal year 1998 and 1999, representing 15% and 6%
of revenues, respectively.
Sale of Business. In June 1997, SEB completed the sale of its TFS business. A
$52 million reserve was recorded to cover, among other items, purchase price
disputes, retained liabilities, transaction costs, employee terminations,
facilities separation costs, indemnification obligations, litigation expense
and other contingencies (See "Fiscal Year 1998 Compared to Fiscal Year 1997"
below and Note 5 of the Notes to the Semiconductor Equipment Business Combined
Financial Statements). The reserve as of January 1, 1999 was $37 million and
related to costs associated with pending litigation and indemnity obligations
relating to certain patent infringement claims by Applied Materials as well as
purchase price disputes with Novellus arising out of the sale of the TFS
business. See "Business--Legal Proceedings."
Other Charges. In the fourth quarter of fiscal year 1998, VSEA recorded a
charge relating primarily to inventory write-downs and termination benefits for
employees at its Massachusetts facilities. During the first quarter of fiscal
year 1999, VSEA paid the remaining $1 million of these termination benefits.
Taxes on Earnings. VSEA recorded a tax benefit of $4 million in the first
quarter of fiscal year 1999, compared to $6 million of expense in the first
quarter of fiscal year 1998. The effective income tax rate was 35.2% in the
first quarter of fiscal year 1999, compared to 30.1% in the first quarter of
fiscal year 1998. The fiscal year 1999 rate is higher than the fiscal year 1998
rate due to a lower benefit arising from the use of a foreign sales corporation
and lower anticipated foreign tax credits in fiscal year 1999. Following the
Distribution, VSEA will be taxed as an independent entity in the jurisdictions
in which it operates. As a result, it will be subject to tax in jurisdictions
in which it has profits that cannot be offset by losses in other jurisdictions,
which could result in an effective income tax higher than that which it
experienced historically.
Net Loss. Net loss was $7 million ($0.22 pro forma per share) in the first
quarter of fiscal year 1999. This compares to $15 million of net earnings
($0.49 pro forma per share) in the first quarter of fiscal year 1998.
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenue. VSEA's revenue of $343 million in fiscal year 1998 was 24% lower than
its revenue of $448 million in fiscal year 1997. Adjusted for revenue
attributable to the former Thin Films Systems ("TFS") business sold in June
1997, VSEA's revenue was 10% lower in fiscal year 1998 than in fiscal year
1997. Starting in the first half of fiscal year 1998, the semiconductor
industry began to experience a significant worldwide slowdown in equipment
demand, brought about by depressed device pricing, excess capacity in the
semiconductor manufacturing industry and the Asian financial crisis, all of
which contributed to the lower revenue. Fourth quarter revenue of $42 million
in fiscal year 1998 was 63% lower than the $115 million of fourth quarter
revenue in fiscal year 1997.
International revenue was $239 million, or 70% of VSEA's revenue, in fiscal
year 1998, compared to $231 million, or 52% of revenue, in fiscal year 1997.
When adjusted for revenue attributable to the TFS business, international
revenue was $208 million, or 55% of revenue, in fiscal year 1997. VSEA's North
American (primarily U.S.) revenue dropped from 45% of revenue in fiscal year
1997 to 30% of revenue in fiscal year 1998, while its Europe region revenue
rose from 11% of revenue in fiscal year 1997 to 19% of revenue in fiscal year
1998. The aggregate of Taiwan, Japan and
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<PAGE>
Korea revenue increased as a percentage of revenue, representing 39% of revenue
in fiscal year 1997 and 45% of revenue in fiscal year 1998, with Taiwan
accounting for most of the percentage increase in revenue.
Fiscal year 1998 revenues reflect the slowdown of product demand and extreme
volatility in product pricing in the semiconductor industry. This slowdown and
volatility have caused the semiconductor industry to reduce significantly or
delay purchases of semiconductor manufacturing equipment and construction of
new fabrication facilities.
Royalty income decreased by $20 million or 65% in fiscal year 1998, compared to
fiscal year 1997. Royalty income in fiscal year 1998 was primarily attributable
to royalty bearing license agreements with Applied Materials and TEL for gas-
assisted wafer heat transfer patents, and a royalty bearing license agreement
with TEL for the use of MB/2/ technology, co-developed by Varian and TEL. The
decrease in royalty income between 1997 and 1998 resulted primarily from the
cessation of contractual obligations for TEL to pay royalties in connection
with termination of a distribution agreement between TEL and Varian in the
first quarter of fiscal year 1998, with the effect that royalties therefrom
amounted to $3 million in fiscal year 1998 compared to $19 million in fiscal
year 1997. Fiscal year 1999 royalty income is also anticipated to be lower than
fiscal year 1998 royalty income.
Gross Profit. VSEA's gross profit of $118 million in fiscal year 1998 was 34%
of revenue, compared to $185 million, or 41% of revenue, in fiscal year 1997.
Adjusted for the gross profit attributable to the TFS business, VSEA's gross
profit in fiscal year 1997 was 43% of TFS-adjusted revenue. The decrease in
gross profit as a percentage of revenue from fiscal year 1997 to fiscal year
1998 was primarily attributable to competitive pricing pressures encountered
during the industry slowdown in the second half of fiscal year 1998, costs
associated with excess capacity and the 65% decrease in royalty income.
Research and Development. Research and development expenses of $41 million in
fiscal year 1998 were 12% of revenue compared to $47 million, or 11% of
revenue, in fiscal year 1997. After adjusting for research and development
expenses attributable to the TFS business in fiscal year 1997, research and
development expenses were $30 million, or 8% of TFS-adjusted revenue, in fiscal
year 1997. The increase in research and development expense, on a TFS-adjusted
basis, reflects VSEA's increasing commitment to the development of new systems
and processes and improving existing system capabilities. VSEA's future
operating results depend on its ability to maintain a competitive advantage in
the products and services it provides.
Marketing. Marketing expenses of $35 million in fiscal year 1998, down from $51
million in fiscal year 1997, were 10% of revenue in fiscal year 1998 and 11% in
fiscal year 1997. Adjusted for marketing expenses attributable to the TFS
business, VSEA's marketing expenses were $40 million or 11% of TFS-adjusted
revenue in fiscal year 1997. The balance of the decrease was attributable to
decreased volume-related expenses.
General and Administrative. General and administrative expenses of $25 million
were 7% of revenue in fiscal year 1998, compared to $32 million, or 7% of
revenue, in fiscal year 1997. Adjusted for general and administrative expenses
attributable to the TFS business, VSEA's general and administrative expenses
were $25 million, or 7% of TFS-adjusted revenue in fiscal year 1997.
Sale of Business. In June 1997, VSEA completed the sale of its TFS business.
Total proceeds received from the sale of the TFS business were $146 million in
cash. The gain on the sale was $33 million, net of income taxes of $18 million.
A $52 million reserve was recorded to cover, among other items, purchase price
disputes, retained liabilities, transaction costs, employee terminations,
facilities separation costs, indemnification obligations, litigation expense
and other contingencies (See Note 5 of the Notes to the Semiconductor Equipment
Business Combined Financial Statements). During the remainder of fiscal year
1997, $10.3 million of this reserve was used (primarily for the cash settlement
of transaction and legal indemnification and defense costs). During fiscal year
1998, an additional $7.2 million of this reserve was used (primarily for the
cash settlement of transaction, employee termination, facilities separation and
legal indemnification and defense costs). The reserve as of October 2, 1998 was
$34 million and related to costs associated with pending litigation and
indemnity obligations relating to certain patent infringement claims by Applied
Materials as well as purchase price disputes with Novellus arising out of the
sale of the TFS business. See "Business - Legal Proceedings."
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Other Charges. In the fourth quarter of fiscal year 1998, VSEA recorded a
charge of approximately $6 million, relating primarily to inventory write-downs
of approximately $4 million and to termination benefits of approximately
$2 million for approximately 240 employees at its Massachusetts facilities.
Inventory write-downs were charged to cost of revenue. At October 2, 1998, VSEA
had paid approximately $1 million of these termination benefits. The remaining
$1 million in termination benefits is expected to be paid by the end of the
third quarter of fiscal year 1999.
Taxes on Earnings. VSEA's effective income tax rate was 30.1% in fiscal year
1998, compared to 32.9% in fiscal year 1997. These rates are lower than the
U.S. federal statutory rate principally due to the tax benefits arising from
the use of a foreign sales corporation, tax credits and joint venture income.
The fiscal year 1998 rate was less than the fiscal year 1997 rate as the tax
credits in 1998 produced a higher tax benefit. Future tax rates may vary from
the historic rates depending on the worldwide allocations of earnings and tax
planning strategies.
Net Earnings. Net earnings were $11 million ($0.38 pro forma per share) or 3%
of revenue in fiscal year 1998. This represented an 84% reduction from the $71
million of net earnings ($2.33 pro forma per share) or 16% of revenue in fiscal
year 1997. The decrease in net earnings primarily reflects the sale of the TFS
business, which provided an after-tax gain of $33 million ($1.09 pro forma per
share) in fiscal year 1997, and the other factors described above.
Fiscal Year 1997 Compared to Fiscal Year 1996
Revenue. VSEA's revenue of $448 million in fiscal year 1997 was 33% lower than
its revenue of $667 million in fiscal year 1996. Adjusted for revenue
attributable to the TFS business, VSEA's revenue was 26% lower in fiscal year
1997 than in fiscal year 1996. Beginning in the later half of fiscal year 1996,
the semiconductor equipment industry began to experience a slowdown. The
slowdown was a product of excess capacity and sharply decreasing device prices
within the DRAM market segment. This slowdown lasted through the first half of
fiscal year 1997, when industry conditions began to improve slightly as a
result of strengthening demand from logic and microprocessor device
manufacturers, primarily located in Taiwan.
International revenue was $231 million, or 52% of VSEA's revenue in fiscal year
1997, compared to $430 million, or 64% of revenue, in fiscal year 1996. VSEA's
North American (primarily United States) and European region revenue were 45%
and 11% of revenue, respectively, in fiscal year 1997 compared to 34% and 12%
of revenue, respectively, in fiscal year 1996. The aggregate of Taiwan, Japan
and Korea revenue as a percentage of revenue was 39% in fiscal year 1997,
compared to 50% in fiscal year 1996. Adjusted for revenue attributable to the
TFS business, international revenue was $208 million, or 55% of VSEA's revenue
in fiscal year 1997, compared to $342 million, or 67% of revenue, in fiscal
year 1996.
Royalty income increased 8% in fiscal year 1997, compared to fiscal year 1996,
primarily because of increased royalties for the license agreement with TEL for
the use of MB/2/ technology.
Gross Profit. VSEA's gross profit of $185 million in fiscal year 1997, and $267
million in fiscal year 1996, represented 41% and 40% of revenue in fiscal year
1997 and fiscal year 1996, respectively. Adjusted for gross profit attributable
to the TFS business, VSEA's gross profit in fiscal year 1997 was 43% of TFS-
adjusted revenue compared to 42% of TFS-adjusted revenue in fiscal year 1996.
The slight increase in gross profit as a percentage of revenue was due to
changes in product and territory mix, particularly the increase in higher-
margin medium-current system sales.
Research and Development. Research and development expenses of $47 million in
fiscal year 1997 were 11% of revenue compared to $56 million, or 8% of revenue,
in fiscal year 1996. Adjusted for research and development expenses
attributable to the TFS business, research and development expenses represented
8% and 6% of TFS-adjusted revenue in fiscal year 1997 and fiscal year 1996,
respectively. The $8 million reduction in research and development expenses
from fiscal year 1996 to 1997 was primarily due to the sale of the TFS business
in fiscal year 1997.
Marketing. Marketing expenses of $51 million in fiscal year 1997 were 11% of
revenue compared to $53 million, or 8% of revenue in fiscal year 1996. Adjusted
for marketing expenses attributable to the TFS business, VSEA's marketing
expenses were $40 million or 11% of TFS-adjusted revenue in fiscal year 1997,
compared to $35 million or 7% of TFS-adjusted revenue in fiscal year 1996. The
increase on a TFS-adjusted basis between the fiscal years was a result of
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VSEA's increased investment in process support, such as the Introduction
Support Teams and Productivity Transfer Teams.
General and Administrative. General and administrative expenses of $32 million
were 7% of revenue in fiscal year 1997, compared to $36 million, or 5% of
revenue, in fiscal year 1996. Adjusted for general and administrative expenses
attributable to the TFS business, VSEA's general and administrative expenses
were 7% of TFS-adjusted revenue in fiscal year 1997 compared to 6% of TFS-
adjusted revenue in fiscal year 1996. The reduction in general and
administrative expenses between fiscal year 1996 and fiscal year 1997 was
primarily due to the sale of the TFS business and decreased volume-related
expenses.
Taxes on Earnings. VSEA's effective income tax rate was 32.9% in fiscal year
1997, compared to 35.1% in fiscal year 1996. The fiscal year 1997 rate was
lower than the U.S. federal statutory rate principally due to the tax benefits
arising from the use of a foreign sales corporation, tax credits and joint
venture income. The fiscal year 1997 rate was less than the fiscal year 1996
tax rate as the fiscal year 1997 rate included a larger benefit from joint
venture income.
Net Earnings. Net earnings were $71 million ($2.33 pro forma per share) or 16%
of revenue in fiscal year 1997. This was 11% lower than the $79 million in net
earnings ($2.56 pro forma per share) or 12% of revenue in fiscal year 1996. The
decline in earnings resulting from the reduction of revenue between fiscal year
1996 and fiscal year 1997 was significantly offset by the $33 million after-tax
gain ($1.09 pro forma per share) in fiscal year 1997 from the sale of the TFS
business.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for VSEA's 1999 fiscal year.
The impact of the implementation of SFAS No. 131 on the reporting of VSEA's
segment information has not yet been determined.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for VSEA's
2000 fiscal year. The impact of the implementation of SFAS No. 133 on the
combined financial statements of VSEA has not yet been determined.
Liquidity and Capital Resources
VSEA's debt has historically been incurred or managed at the parent level. In
connection with the Distribution, it is anticipated that VSEA will assume
approximately $5 million of Varian's Notes Payable. VSEA will not be able to
rely on the earnings, assets or cash flows of VMS or IB after the Distribution
nor, however, will its earnings, assets or cash flows be used to contribute to
the capital requirements of those entities.
Varian has used a centralized cash management system to finance its operations.
Cash deposits from most of the businesses are transferred to Varian on a daily
basis, and Varian funds its required disbursements. As the result, VSEA
reported no cash and cash equivalents at January 1, 1999, October 2, 1998 and
September 26, 1997. Pursuant to the Distribution Agreement, VSEA will receive a
cash contribution from Varian such that VSEA's cash and cash equivalents equal
$100 million and its Consolidated Debt, expected to consist of Notes Payable,
will not exceed $5 million. Such cash and cash equivalents are expected to
represent VSEA's principal source of liquidity for the foreseeable future. See
"Forecasted Capitalization." As of January 1, 1999, interest rates on Varian's
outstanding Notes Payable ranged from 1.50% to 9.75%, and the weighted average
interest rate on these Notes Payable was 1.93%. The specific Notes Payable that
VSEA will assume in connection with the Distribution will be determined in
accordance with the Distribution Agreement. See "The Distribution -
Distribution Agreement." In addition, VSEA may enter into one or more credit
facilities for working capital and other general corporate purposes after the
Distribution. Any such credit facility may contain certain representations and
warranties, conditions, affirmative, negative and financial covenants and
events of default customary for such facilities. VSEA does not expect that it
will have any outstanding borrowings under any such credit facility as of the
Distribution.
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During the first quarter of fiscal year 1999, VSEA consumed $5 million of cash
in operations, compared to the use of $18 million in the first quarter of
fiscal year 1998. Accounts receivable and inventory levels decreased during the
first quarter of fiscal year 1999, versus increasing during the first quarter
of fiscal year 1998.
VSEA generated $40 million of cash from operations in fiscal year 1998,
compared to $72 million in fiscal year 1996. VSEA used $3 million of cash for
operations in fiscal year 1997. Fiscal year 1998 net income (plus non-cash
charges for depreciation) was $19 million. Another major source of cash was the
$38 million decrease in accounts receivable, partially offset by a $26 million
decrease in accounts payable and accrued liabilities, all of which were
attributable to reduced volume.
During the first quarter of fiscal year 1999, VSEA used no cash for investing
activities, compared to $5 million that was used during the first quarter of
fiscal year 1998, all of which related to capital expenditures.
VSEA used $38 million for investing activities in fiscal year 1998. Cash used
for investing activities in fiscal year 1998 was primarily for the acquisitions
of a product line of Genus, Inc. and the remaining minority interest in Varian
Korea Ltd. This compares to $141 million generated by investing activities,
primarily the sale of the TFS business, in fiscal year 1997, which was
partially offset by $11 million in capital expenditures. VSEA used $22 million
for investing activities in fiscal year 1996 primarily for capital
expenditures.
As a consequence of the industry slowdown, VSEA currently has no plans to
materially modify or expand its facilities or to make other material capital
expenditures. Restructuring plans associated with the Distribution are
currently being developed and may result in additional costs and expenditures.
The Distribution Agreement provides that VSEA is responsible for certain
litigation described under "Business - Legal Proceedings" and further provides
that VSEA will indemnify IB and VMS for one-third of the costs, expenses and
other liabilities of Varian relating to certain discontinued operations of
Varian, including certain environmental liabilities. See "- Environmental
Matters."
VSEA's liquidity is affected by many factors, some based on the normal
operations of the business and others related to the uncertainties of the
industry and global economies. Although VSEA's cash requirements will fluctuate
based on the timing and extent of these factors, VSEA's management believes
that cash generated from operations, together with the cash contribution to be
made by Varian to VSEA at the time of the Distribution and VSEA's borrowing
capability, will be sufficient to satisfy commitments for capital expenditures
and other cash requirements for the current fiscal year and fiscal year 2000.
Environmental Matters
VSEA's operations are subject to various foreign, federal, state and/or local
laws regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment. This includes discharges into
soil, water and air, and the generation, handling, storage, transportation and
disposal of waste and hazardous substances. In addition, several countries are
reviewing proposed regulations that would require manufacturers to dispose of
their products at the end of a product's useful life. These laws have the
effect of increasing costs and potential liabilities associated with the
conduct of such operations.
Varian has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under CERCLA at eight sites where
Varian is alleged to have shipped manufacturing waste for recycling or
disposal. Varian is also involved in various stages of environmental
investigation and/or remediation under the direction of, or in consultation
with, foreign, federal, state and/or local agencies at certain current or
former Varian facilities (including facilities disposed of in connection with
Varian's sale of its Electron Devices business during fiscal year 1995 and the
sale of its TFS business during fiscal year 1997). Expenditures by Varian for
environmental investigation and remediation amounted to $5 million in fiscal
year 1998, compared with $2 million in fiscal year 1997 and $5 million in
fiscal year 1996.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of January 1, 1999, Varian nonetheless estimated that the future
exposure for environmental related investigation and remediation
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<PAGE>
costs for these sites and facilities ranged in the aggregate from $21 million
to $48 million. The time frame over which these costs are expected to be
incurred varies with each site and facility, ranging up to approximately 30
years as of January 1, 1999. Management of Varian believes that no amount in
the foregoing range of estimated future costs is more probable of being
incurred than any other amount in such range and therefore Varian had accrued
$21 million in estimated environmental costs as of January 1, 1999. The amount
accrued has not been discounted to present value.
As to other sites and facilities, Varian has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of January 1, 1999, Varian estimated that the future exposure for
environmental-related investigation and remediation costs for these sites and
facilities ranged in the aggregate from $40 million to $74 million. The time
frame over which these costs are expected to be incurred varies with each site
and facility, ranging up to approximately 30 years as of January 1, 1999. As to
each of these sites and facilities, management of Varian determined that a
particular amount within the range of estimated costs was a better estimate of
the future environmental liability than any other amount within the range, and
that the amount and timing of these future costs were reliably determinable.
Together, these amounts totaled $51 million at January 1, 1999. Accordingly,
Varian had accrued $22 million as of January 1, 1999, which represents its best
estimate of the future costs discounted at 4%, net of inflation. This accrual
is in addition to the $21 million described in the preceding paragraph.
Under the Distribution Agreement, VSEA has agreed to indemnify VMS and IB for
one-third of these environmental investigation and remediation costs, as
adjusted for any insurance proceeds and tax benefits expected to be realized
upon the payment of these costs. Accordingly, VSEA had recorded $8 million as
its portion of these estimated future costs for environmental liabilities as of
January 1, 1999.
The foregoing amounts are only estimates of anticipated future environmental
related costs, and the amounts actually spent may be greater or less than such
estimates. The aggregate range of cost estimates reflects various uncertainties
inherent in many environmental investigation and remediation activities and the
large number of sites and facilities involved. VSEA believes that most of these
cost ranges will narrow as investigation and remediation activities progress.
VSEA believes that its reserves are adequate, but as the scope of its
obligation becomes more clearly defined, these reserves may be modified and
related charges against earnings may be made. Although any ultimate liability
arising from environmental related matters described herein could result in
significant expenditures that, if aggregated and assumed to occur within a
single fiscal year, would be material to VSEA's financial statements, the
likelihood of such occurrence is considered remote. Based on information
currently available to VSEA's management and its best assessment of the
ultimate amount and timing of environmental related events, management believes
that the costs of these environmental related matters are not reasonably likely
to have a material adverse effect on the consolidated financial statements of
VSEA.
Year 2000
General. The "Year 2000" problem refers to computer programs and other
equipment with embedded microprocessors ("non-IT systems") which use only the
last two digits to refer to a year, and which therefore might not properly
recognize a year that begins with "20" instead of the familiar "19." As a
result, those computer programs and non-IT systems might be unable to operate
or process accurately certain date-sensitive data before or after January 1,
2000. Because VSEA relies heavily on computer programs and non-IT systems, and
relies on third parties which themselves rely on computer programs and non-IT
systems, the Year 2000 problem if not addressed could adversely effect VSEA's
business, results of operations and financial condition.
State of Readiness. VSEA has initiated a comprehensive assessment of potential
Year 2000 problems with respect to (1) internal systems, (2) products and (3)
significant third parties with which VSEA does business.
VSEA has substantially completed its assessment of potential Year 2000 problems
in internal systems, which systems have been categorized as follows, in order
of importance: (a) enterprise information systems; (b) enterprise networking
and telecommunications; (c) factory-specific information systems; (d) non-IT
systems; (e) computers and packaged software; and (f) facilities systems. With
respect to enterprise information systems, Varian in 1994 initiated replacement
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of its existing systems with a single company-wide system supplied by SAP
America, Inc., which system is designed and tested by SAP for Year 2000
capability. Installation of that system has been staged to replace first those
existing systems that are not Year 2000 capable. Installation of the new SAP
system is approximately 70% complete, with 90% completion expected by July 1999
and full completion expected by the end of 1999. Upgrade of enterprise
information systems is approximately 88% complete, with 96% completion expected
by July 1999 and 100% completion expected by December 1999; upgrade of
networking and telecommunications systems is complete; upgrade of factory-
specific information systems is approximately 42% complete, with 67% completion
expected by July 1999 and 84% completion expected by December 1999; and upgrade
of non-IT systems, computers and packaged software is approximately 85%
complete, with 100% completion expected by July 1999 (except in the case of
some computers and packaged software, which might not be completed until
December 1999) and upgrade of facilities systems is approximately 75% complete,
with 100% completion expected by July 1999.
VSEA has initiated an assessment of potential Year 2000 problems in its current
and previously-sold products. With respect to current products, that assessment
and corrective actions are complete, and VSEA believes that all of its current
products are Year 2000 capable; however, that conclusion is based in part on
Year 2000 assurances or warranties from suppliers of computer programs and non-
IT systems which are integrated into or sold with VSEA's current products.
With respect to previously-sold products, VSEA does not intend to assess Year
2000 preparedness of every product it has ever sold, but rather is focusing its
assessments on products that will be under written warranties or are still
relatively early in their useful life, are more likely to be dependent on non-
IT systems that are not Year 2000 capable and cannot be easily upgraded with
readily available externally-utilized computers and packaged software or with
internally developed software. These assessments are expected to be
substantially completed by April 1999. Where VSEA identifies previously-sold
products that are not Year 2000 capable, VSEA intends in some cases to develop
and offer to sell upgrades or retrofits, identify corrective measures which the
customer could itself undertake or identify for the customer other suppliers of
upgrades or retrofits. There may be instances where VSEA will be required to
repair and/or upgrade such products at its own expense. Schedules for
completing those corrective actions vary considerably among VSEA's businesses
and products, but are generally expected to be substantially completed by July
1999.
VSEA is still assessing potential Year 2000 problems of third parties with
which VSEA has material relationships, which are primarily suppliers of
products or services. These assessments will identify and prioritize critical
suppliers, review those suppliers' written assurances on their own assessments
and correction of Year 2000 problems, and develop appropriate contingency plans
for those suppliers which might not be adequately prepared for Year 2000
problems. In this respect, VSEA is requiring its suppliers to complete a
questionnaire that was prepared and recommended by SEMATECH, an industry group
comprised of U.S. semiconductor manufacturers and designed to assess each
supplier's Year 2000 readiness. Additionally, officials of VSEA plan to visit
and audit the Year 2000 compliance efforts of all sole source suppliers, or
those having a software content in their products. These assessments are
expected to be substantially completed by August 1999.
Costs. As of January 1, 1999, VSEA estimates that it had incurred less than $1
million to assess and correct Year 2000 problems. Although difficult to assess,
based on its assessment to date, VSEA estimates that it will incur less than $1
million in additional costs to assess and correct Year 2000 problems, which
costs are expected to be incurred throughout fiscal year 1999 and the first
half of fiscal year 2000. All of these costs have been and will continue to be
expensed as incurred.
This estimate of future costs has not been reduced by expected recoveries from
certain third parties, which are subject to indemnity, reimbursement or
warranty obligations for Year 2000 problems. In addition, VSEA expects that
certain costs will be offset by revenue generated by the sale of upgrades and
retrofits and other customer support services relating to Year 2000 problems.
However, there can be no assurance that VSEA's actual costs to assess and
correct Year 2000 problems will not be higher than the foregoing estimate.
Risks. Failure of VSEA and its key suppliers to accurately assess and correct
Year 2000 problems, would likely result in interruption of certain of VSEA's
normal business operations, which could have a material adverse effect on
VSEA's
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business, results of operations and financial condition. If VSEA does not
adequately identify and correct Year 2000 problems in its information systems
it could experience an interruption in its operations, including manufacturing,
order processing, receivables collection and accounting, such that there would
be delays in product shipments, lost data and a consequential impact on
revenues, expenditures and financial reporting. If VSEA does not adequately
identify and correct Year 2000 problems in its non-IT systems it could
experience an interruption in its manufacturing and related operations, such
that there would be delays in product shipments and a consequential impact on
revenues. If VSEA does not adequately identify and correct Year 2000 problems
in previously-sold products it could experience warranty or product liability
claims by users of products which do not function correctly. If VSEA does not
adequately identify and correct Year 2000 problems of the significant third
parties with which it does business it could experience an interruption in the
supply of key components or services from those parties, such that there would
be delays in product shipments or services and a consequential impact on
revenues.
Management believes that appropriate corrective actions have been or will be
accomplished within the cost and time estimates stated above. Although VSEA
does not expect to be 100% Year 2000 compliant by the end of 1999, VSEA does
not currently believe that any Year 2000 non-compliance in VSEA's information
systems will have a material adverse effect on VSEA's business, results of
operations or financial condition. However, given the inherent complexity of
the Year 2000 problem, there can be no assurance that actual costs will not be
higher than currently anticipated or that corrective actions will not take
longer than currently anticipated to complete. Risk factors which might result
in higher costs or delays include the ability to identify and correct in a
timely fashion Year 2000 problems; regulatory or legal obligations to correct
Year 2000 problems in previously-sold products; ability to retain and hire
qualified personnel to perform assessments and corrective actions; the
willingness and ability of critical suppliers to assess and correct their own
Year 2000 problems, including the products they supply to VSEA; and the
additional complexity which will likely be caused by undertaking during fiscal
year 1999 and fiscal year 2000 the separation of currently shared enterprise
information systems as a result of the Distribution. See "Risk Factors -
Transitioning to New Information Technology Infrastructure."
Because of uncertainties as to the extent of Year 2000 problems with VSEA's
previously-sold products and the extent of any legal obligation of VSEA to
correct Year 2000 problems in those products, VSEA cannot yet assess risks to
VSEA with respect to those products. Because its assessments are not yet
complete, VSEA also cannot yet conclude that the failure of critical suppliers
to assess and correct Year 2000 problems is not reasonably likely to have a
material adverse effect on VSEA's results of operations.
Contingency Plans. With respect to VSEA's enterprise information systems, VSEA
has a contingency plan if the SAP system is not fully installed before December
31, 1999. That plan primarily involves installation where necessary of a Year
2000 capable upgrade of existing information systems pending complete
installation of the SAP system. That upgrade is currently in acceptance
testing, and if functional will be held for contingency purposes.
With respect to products and significant third parties, VSEA intends, as part
of its on-going assessment of potential Year 2000 problems, to develop
contingency plans for more critical problems that might not have been corrected
by December 31, 1999. It is currently anticipated that the focus of these
contingency plans will be the possible interruption of supply of key components
or services from third parties.
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MARKET RISK
Foreign Currency Exchange Risk
As a global concern, VSEA faces exposure to adverse movements in foreign
currency exchange rates. This exposure may change over time as VSEA's business
practices evolve and could have a material adverse impact on VSEA's financial
results. Historically, VSEA's primary exposures have related to non-U.S. dollar
denominated sales and purchases throughout Europe and Asia. The Euro was
adopted as a common currency for members of the European Monetary Union on
January 1, 1999. VSEA is evaluating, among other issues, the impact of the Euro
conversion on its foreign currency exposure. Based on its evaluation to date,
VSEA does not expect the Euro conversion to create any adverse change in its
currency exposure due to VSEA's existing hedging practices.
At the present time, Varian hedges its currency exposures in respect of the
Semiconductor Equipment Business that are associated with certain assets and
liabilities denominated in non-functional currencies and with anticipated
foreign currency cash flows. Varian does not enter into forward exchange
contracts for trading purposes. VSEA's forward exchange contracts generally
range from one to three months in original maturity, and no forward exchange
contract has an original maturity greater than one year.
Forward exchange contracts outstanding as of October 2, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
Notional Notional
Value Value Fair
Purchased Sold Value
--------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C>
Japanese yen.......................................... $ -- $ 231 $ 7
French francs......................................... -- 2,884 (117)
British pounds........................................ -- 55 --
Italian lira.......................................... 90 -- (5)
German marks.......................................... -- 2,011 (108)
Taiwan dollars........................................ -- 910 (25)
Korean won............................................ -- 7,738 18
Swiss francs.......................................... 6 -- --
---- ------- -----
Total............................................... $ 96 $13,829 $(230)
==== ======= =====
</TABLE>
There were no unrealized gains or losses for the forward exchange contracts as
of October 2, 1998. The fair value of forward exchange contracts generally
reflects the estimated amounts that VSEA would receive or pay to terminate the
contracts at the reporting date, thereby taking into account and approximating
the current unrealized and realized gains or losses of open contracts. The
notional amounts of forward exchange contracts are not a measure of VSEA's
exposure.
Interest Rate Risk
Although payments under certain of the operating leases for VSEA's facilities
are tied to market indices, VSEA is not exposed to material interest rate risk
associated with its operating leases.
There have been no material changes in the Market Risk information reported
above as of January 1, 1999.
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SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST
ASSUMPTIONS
The following financial forecast of the capitalization of VSEA is based on
forecasts and assumptions by Varian's management concerning events and
circumstances that are expected to occur subsequent to the latest historical
balance sheet date but prior to and including April 2, 1999 (the Distribution
Date), including future results of operations and other events. For purposes of
the forecasted capitalization at April 2, 1999, VSEA's net loss in the second
quarter of fiscal year 1999 is assumed to be the same as the net loss in the
first quarter of fiscal year 1999. In addition, restructuring plans associated
with the Distribution are currently being developed and may result in
additional charges to VSEA's equity. Assumptions with respect to events that
will occur between January 2, 1999 and April 2, 1999, include the following:
. Receipt of a cash contribution from Varian of $100 million and the
assumption of Notes Payable of $5 million from Varian.
. Amendment of VSEA's Certificate of Incorporation to give VSEA authorized
capital stock of (i) 150,000,000 shares of VSEA Common Stock of which
approximately 30,344,000 shares will be issued and outstanding upon the
Distribution (based upon the number of shares of Varian Common Stock
outstanding as of January 1, 1999, increased by shares issued pursuant to
Varian's Employee Stock Purchase Plan, and anticipated stock option
exercises from January 2, 1999 through April 2, 1999) and (ii) 5,000,000
shares of preferred stock, $.01 par value per share, none of which will be
issued and outstanding upon the Distribution.
In Varian's management's judgment, the listed assumptions and forecasts reflect
those material events or transactions that occurred since January 2, 1999 or
are expected to occur prior to the Distribution Date, other than the potential
restructuring charges discussed in the first paragraph above. There have been
no changes in accounting principles anticipated in this capitalization forecast
nor are any such changes currently contemplated.
Limitations on Projections and Forecasts
The assumptions and estimates underlying the projected and forecasted data and
information in this Information Statement are inherently uncertain and,
although considered reasonable by management of Varian, are subject to
significant business, economic and competitive uncertainties, many of which are
beyond the control of Varian and its subsidiaries. Accordingly, there can be no
assurance that the projected and forecasted financial results will be realized.
In fact, actual results in the future usually will differ from the forecasted
financial results and the differences may be material.
Neither Varian nor any of its subsidiaries intends after the date of this
Information Statement to update any forecasted or projected financial data or
information contained in this Information Statement and the absence of such an
update should not be construed as any indication regarding the views or beliefs
of management of Varian (or of VSEA after the Distribution) concerning the
forecasted or projected data or information contained in this Information
Statement.
41
<PAGE>
FORECASTED CAPITALIZATION
The following table sets forth the combined capitalization of VSEA as of
January 1, 1999 on a historical basis, forecasted at April 2, 1999 (the
Distribution Date), and as adjusted to give effect to the Distribution and the
other transactions contemplated by the Distribution Agreement. The significant
assumptions used below have been described in "Summary of Significant
Capitalization Forecast Assumptions" on the preceding page. The following data
is qualified in its entirety by the financial statements of the Semiconductor
Equipment Business and other information contained elsewhere in this
Information Statement.
<TABLE>
<CAPTION>
January 1, Forecasted At Pro Forma
1999 April 2, After
Historical 1999(/1/) Distribution(/1/)
---------- ------------- -----------------
<S> <C> <C> <C>
Cash and cash equivalents........... $ -- $ -- $100.0
====== ===== ======
Notes payable....................... $ -- $ -- $ 5.0
====== ===== ======
Equity:
Divisional Equity................. $103.0 $ -- $ --
Common stock, par value $.01 per
share:
authorized - 150,000,000 shares
issued and outstanding - none
historical and 30,344,000
pro forma........................ -- 0.3 0.3
Preferred stock, par value $.01
per share:
authorized - 5,000,000 shares
issued and outstanding - none
historical or pro forma.......... -- -- --
Capital in Excess of Par Value.. -- 95.7 190.7
------ ----- ------
Total Equity.................. 103.0 96.0 191.0
------ ----- ------
Total Capitalization........ $103.0 $96.0 $191.0
====== ===== ======
</TABLE>
- -------
(1) See "Summary of Significant Capitalization Forecast Assumptions" on the
preceding page.
42
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements of the
Semiconductor Equipment Business, which will become VSEA following the
Distribution, set forth below consist of a pro forma balance sheet as of
January 1, 1999 and a pro forma statement of earnings for the year ended
October 2, 1998 and for the quarter ended January 1, 1999. The pro forma
balance sheet was prepared to give effect to the Distribution as if it had
occurred on January 1, 1999 and the pro forma statement of earnings was
prepared to give effect to the Distribution as if it had occurred on September
27, 1997. The unaudited pro forma balance sheet set forth below does not
purport to represent what the Semiconductor Equipment Business' financial
position actually would have been had the Distribution occurred on the date
indicated or to project the Semiconductor Equipment Business' financial
position for any future date. The unaudited pro forma statement of earnings set
forth below does not purport to represent what the Semiconductor Equipment
Business' operations actually would have been or to project the Semiconductor
Equipment Business' operating results for any future period. The unaudited pro
forma adjustments are based upon currently available information and certain
assumptions that the Semiconductor Equipment Business' management believes are
reasonable. The unaudited pro forma statements should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the historical financial statements of the Semiconductor
Equipment Business and the notes thereto appearing elsewhere in this
Information Statement.
43
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
January 1, 1999
<TABLE>
<CAPTION>
VSEA Pro Forma VSEA
Historical Adjustments(/1/) Pro Forma
---------- ---------------- ---------
(Dollars in millions)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents................ $ -- $100.0 $100.0
Other current assets..................... 156.8 -- 156.8
------ ------ ------
Total current assets..................... 156.8 100.0 256.8
Property, Plant and Equipment, net....... 36.6 -- 36.6
Other Assets............................. 23.2 -- 23.2
------ ------ ------
Total Assets............................. $216.6 $100.0 $316.6
====== ====== ======
Liabilities and Equity
Current Liabilities
Notes payable............................ $ -- $ 5.0 $ 5.0
Other current liabilities................ 104.6 -- 104.6
------ ------ ------
Total Current Liabilities................ 104.6 5.0 109.6
Long-Term Debt........................... -- -- --
Other Liabilities........................ 9.0 -- 9.0
------ ------ ------
Total Liabilities........................ 113.6 5.0 118.6
Equity................................... 103.0 95.0 198.0
------ ------ ------
Total Liabilities and Equity............. $216.6 $100.0 $316.6
====== ====== ======
</TABLE>
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
(1) Assumes a cash contribution by Varian to VSEA of $100.0 million and the
transfer to VSEA of $5.0 million in Notes Payable from Varian in connection
with the Distribution.
44
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Earnings
Quarter Ended January 1, 1999
<TABLE>
<CAPTION>
VSEA Pro Forma VSEA
Historical Adjustments(/1/) Pro Forma
---------- ---------------- ---------
(Dollars in millions,
except per share amounts)
<S> <C> <C> <C>
Revenue............................... $ 47.4 $ -- $ 47.4
------ ---- ------
Operating Costs and Expenses
Cost of revenue....................... 35.2 -- 35.2
Research and development.............. 7.7 -- 7.7
Marketing............................. 7.5 -- 7.5
General and administrative............ 7.3 -- 7.3
------ ---- ------
Total operating costs and expenses.... 57.7 -- 57.7
------ ---- ------
Operating Earnings (Loss)............. (10.3) -- (10.3)
Interest expense...................... -- -- --
------ ---- ------
Operating Earnings (Loss) before
Taxes................................ (10.3) -- (10.3)
Taxes on (loss) earnings.............. (3.6) -- (3.6)
------ ---- ------
Net Earnings (Loss)................... $ (6.7) $ -- $ (6.7)
====== ==== ======
Pro Forma Net Earnings (Loss) Per
Share(/2/)........................... $(0.22) $(0.22)
====== ======
</TABLE>
Notes to Unaudited Pro Forma Condensed Combined Statement of Earnings
(1) Reflects pro forma adjustment for interest expense on $5.0 million of Notes
Payable at an estimated annual rate of interest of 1.93%. A change of 25
basis points in this estimated annual rate of interest would impact pro
forma interest expense by $3,000. The pro forma adjustment for income taxes
is based upon statutory income tax rates.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of Varian Common Stock outstanding during
the quarter ended January 1, 1999, reflecting the ratio of one share of
VSEA Common Stock for each share of Varian Common Stock outstanding at the
time of the Distribution.
45
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Earnings
Fiscal Year 1998
<TABLE>
<CAPTION>
VSEA Pro Forma VSEA
Historical Adjustments(/1/) Pro Forma
---------- ---------------- ---------
(Dollars in millions,
except per share amounts)
<S> <C> <C> <C>
Revenue................. $342.9 $ -- $342.9
------ ----- ------
Operating Costs and
Expenses
Cost of revenue......... 225.2 -- 225.2
Research and
development............ 40.8 -- 40.8
Marketing............... 35.2 -- 35.2
General and
administrative......... 25.3 -- 25.3
------ ----- ------
Total operating costs
and expenses........... 326.6 -- 326.6
------ ----- ------
Operating Earnings...... 16.3 -- 16.3
Interest expense........ -- (0.1) (0.1)
------ ----- ------
Operating Earnings
before Taxes........... 16.3 (0.1) 16.2
Taxes on earnings....... 4.9 -- 4.9
------ ----- ------
Net Earnings............ $ 11.4 $(0.1) $ 11.3
====== ===== ======
Pro Forma Net Earnings
Per Share(/2/)......... $ 0.38 $ 0.38
====== ======
</TABLE>
Notes to Unaudited Pro Forma Condensed Combined Statement of Earnings
(1) Reflects pro forma adjustment for interest expense on $5.0 million of Notes
Payable at an estimated annual rate of interest of 1.93%. A change of 25
basis points in this estimated annual rate of interest would impact pro
forma interest expense by $13,000. The pro forma adjustment for income
taxes is based upon statutory income tax rates.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of Varian Common Stock outstanding during
fiscal year 1998, reflecting the ratio of one share of VSEA Common Stock
for each share of Varian Common Stock outstanding at the time of the
Distribution.
46
<PAGE>
BUSINESS
General
VSEA, a newly-formed, wholly-owned subsidiary of Varian, will own and operate
the Semiconductor Equipment Business after the Distribution. References in this
section to "VSEA" refer to VSEA and its subsidiaries after giving effect to the
Internal Transfers and the Distribution. References in this section to the
Semiconductor Equipment Business refer to the historical business and
operations of the Semiconductor Equipment Business conducted by Varian prior to
the Distribution.
Overview
VSEA designs, manufactures, markets and services semiconductor processing
equipment used in the fabrication of integrated circuits. VSEA is a leading
supplier of ion implantation systems, key pieces of capital equipment used to
manufacture semiconductor chips. VSEA has shipped more than 2,500 systems
worldwide, and more VSEA ion implanters are at work than those from all other
manufacturers combined.
VSEA provides customers with world-class products and support. VSEA achieved
the number one ranking for the second consecutive year in VLSI Research Inc.'s
1998 customer satisfaction survey. The annual study surveys semiconductor
manufacturing customers worldwide. VSEA was ranked as the industry's top large
supplier of wafer processing capital equipment and received the highest overall
point total ever achieved by a large equipment supplier.
VSEA equipment is used by virtually every major semiconductor manufacturer in
the United States, Europe, Japan, Korea and throughout the Asia Pacific region.
Its award-winning support network offers chip producers around-the-clock,
worldwide service, training and process support. VSEA has become an industry
leader in providing after-market products and services that reduce operating
costs and extend the cost-effective life of its products.
VSEA's business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market
demand for integrated circuits and products utilizing integrated circuits. The
semiconductor industry has been experiencing a slowdown resulting from
depressed DRAM pricing, manufacturing over-capacity and the economic
difficulties affecting many Asian countries. This has caused semiconductor
manufacturers to reduce their capital equipment investments, and in certain
cases customers have either rescheduled or canceled capital equipment
purchases.
Background
VSEA
VSEA's role in the semiconductor fabrication market can be traced to Varian's
pioneering work in ultra-high vacuum technology. In the 1960s, this ability to
create ultra-high vacuum environments was applied to physics and space research
projects. Since chip fabrication must also be performed in ultra-clean
environments, Varian's vacuum expertise proved critical to the development of
many of today's sophisticated systems. As the needs of the burgeoning
semiconductor industry grew, the Semiconductor Equipment Business developed
methods for controlling electron beams and ions in ultra-clean environments. It
also conducted research into methods of manipulating and depositing new
materials onto silicon wafers.
The Semiconductor Equipment Business entered the ion implantation business in
1975 through the acquisition of Extrion Corporation, in Gloucester,
Massachusetts. Since then, the Semiconductor Equipment Business has produced a
complete line of medium and high current implanters. These systems introduce
precise quantities of dopant materials into the wafers, creating desired
electrical characteristics. In June 1997, the Semiconductor Equipment Business
sold its TFS business, which made physical vapor deposition equipment, also
known as sputtering systems, to Novellus. In July 1998, the Semiconductor
Equipment Business acquired the high-energy ion implantation equipment product
line of Genus, Inc. ("Genus").
47
<PAGE>
The Industry
The semiconductor industry has experienced significant growth in recent years
due to the continued increase of the personal computer market, the expansion of
the telecommunications industry, the emergence of new applications such as
consumer electronics products, wireless communications devices and portable
computers and the increased semiconductor content in these electronics systems.
Significant performance advantages and lower prices for integrated circuits
have contributed to the growth and expansion of the semiconductor industry. In
response to the growth in demand for integrated circuits, the semiconductor
industry has significantly increased its manufacturing capacity through the
expansion of existing facilities and construction of new facilities.
The fabrication of integrated circuits requires a number of complex and
repetitive processing steps, including deposition, photolithography, etch and
ion implantation. Deposition is a process in which a film of either
electrically insulating, or electrically conductive, material is deposited on
the surface of a wafer. Photolithography is used to transfer a device or
circuit pattern into a light-sensitive, resistant layer which, after
development, can be used in turn to transfer the pattern onto the silicon
surface. The etch process completes the transfer of the pattern into the
various thin films used to make the integrated circuit. Finally, ion
implantation provides a means for introducing dopant material into the silicon
surface, typically into selected areas defined by the photolithographic
process. These selectively doped areas become the electrical components of the
integrated circuits.
Semiconductor manufacturers generally measure the cost performance of their
production equipment in terms of "cost per wafer," which is determined by
factoring in the fixed costs for acquisition and installation of the system,
its variable operating costs and its net throughput rate. A system with higher
throughput allows the semiconductor manufacturer to recover the purchase price
of the system over a greater number of wafers and thereby reduce the cost of
ownership of the system on a per wafer basis. Throughput is most accurately
measured on a net or overall basis, which takes into account the processing
speed of the system and any non-operational downtime for cleaning, maintenance
or other repairs. The increased costs of larger and more complex semiconductor
wafers have made high yields extremely important in selecting processing
equipment. To achieve higher yields and better film quality, implant systems
must be capable of repeating the original process on a consistent basis without
a disqualifying level of defects. This characteristic, known in the industry as
"repeatability," is extremely important in achieving commercially acceptable
yields. Repeatability is more easily achieved in those systems that can operate
at desired throughput rates without requiring the system to approach its
critical tolerance limits.
The continuing evolution of semiconductor devices to smaller geometries and
more complex multi-level circuitry has significantly increased the cost and
performance requirements of the capital equipment used to manufacture these
devices. Many of the advanced 200mm fabrication lines that are currently
planned, or in construction, will cost over $1 billion each, representing a
substantial increase over the costs of prior generation fabrication facilities.
Increased capital depreciation costs will continue to become a much larger
percentage of the aggregate production costs for semiconductor manufacturers
relative to labor, materials and other variable manufacturing costs. As a
result, there has been an increasing focus by the semiconductor industry on
obtaining increased productivity and higher returns from its semiconductor
manufacturing equipment, thereby reducing the effective cost of ownership of
such systems.
Products
VSEA designs and manufactures a broad range of implant tools, using data-driven
quality processes to produce reliable systems and provide total support to its
customers. VSEA's products are used for ion implantation in semiconductor
manufacturing. During ion implantation, silicon wafers are bombarded by a high-
velocity beam of electrically charged ions. These ions penetrate film materials
at selected sites, changing their electrical properties.
VSEA entered the medium current portion of the implantation market in 1971. Its
medium current ion implanters include the VIISta(TM) 810 (a 300mm-compatible
product), the EHP-220, and the EHP-500. The EHP-220 and EHP-500 are the third
evolutionary generations of the E-series, the world's most widely accepted
medium current machines.
VSEA entered the high current portion of the implant market in 1981. Its high
current ion implanters include the VIISta(TM) 80 and the SHC-80 (both 300mm-
compatible products), the VIISion(TM) 80 LE and the VIISion(TM) 200 LE.
48
<PAGE>
VIISion(TM) LE is acknowledged as the most economical batch system available
today. It offers tripled low-energy boron beam currents, increased mechanical
throughput, and an improved particle specification. The SHC-80 is the world's
first, serial-process, high current implanter. It is compatible with both 200mm
wafers and 300mm wafers for advanced processes. The SHC-80 promises throughput
improvements up to 30 percent greater than the same process on batch machines.
The VIISta(TM) 80 extends the SHC-80's performance to sub-KeV energy levels.
VSEA's high-energy (MeV) ion implantation equipment product line, purchased
from Genus in fiscal year 1998, represents an excellent fit with VSEA's
existing medium and high current product lines, and offers a rapid entry to the
fast growing, high-energy sector of the industry.
Over 85% of the VSEA implanters shipped since 1975 are still in use through a
comprehensive upgrade and refurbishment program and world-class support network
that continually improves the capability of older systems.
Customer Support and Services
VSEA provides a range of innovative customer support products designed to
improve the productivity of its worldwide customers as well as to provide a
direct link to VSEA factories and research centers.
Remote Assist(TM) is a completely new semiconductor equipment service
capability that quickly puts product experts "virtually" into customer
fabrication facilities. This offering uses advanced video conferencing
capabilities and a new video helmet for linking on-site engineers with VSEA
support offices and factories.
The Introduction Support Teams and Productivity Transfer Teams assist the
customer in bringing VSEA implanters up, and in making them productive as
quickly as possible. These teams speed process qualification and smooth
integration into the production environment, often reducing installation time
by anywhere from two to more than five weeks.
FAB Care Plus(TM) is a unique program which encourages customers to tailor an
overall support program that meets a company's specific needs - whether it be
for a research facility or an offshore production facility. FAB Care Plus(TM)
solutions can be implemented around the world to provide consistent and
reliable support.
For parts management, VSEA has strategically placed Parts Banks throughout the
world to provide carefully regulated inventory, global delivery and logistics
services. VSEA also offers a comprehensive consumable parts program that can be
tailored to the individual fabrication facility.
Through VEDoc(TM), an electronic documentation system, customers can easily
access information about its implanters. All assembly drawings, schematics,
parts lists, maintenance and operation manuals, and video-illustrated
maintenance procedures are available in this easy-to-follow CD-ROM format.
VSEA's commitment to customer service extends to training and support. It
operates applications laboratories on three continents that contain not only
the latest equipment, but also the latest technology. For instance, VSEA's Ion
Implant Systems VIP facility, with a class 1/10 cleanroom, a post-implant
process laboratory, process training and applications support is available to
handle customer wafers for process evaluation and to assist with new process
requirements.
Marketing and Sales
Historically, VSEA has sold close to one-half of its systems in any particular
period to its top ten customers. Revenue from VSEA's ten largest customers in
fiscal years 1998, 1997 and 1996 accounted for 47%, 46% and 52% of revenue,
respectively. VSEA expects that sales of its products to relatively few
customers will continue to account for a high percentage of its revenue in the
foreseeable future. During fiscal year 1998, revenue from Intel Corporation
("Intel") accounted for 14% of VSEA's revenue, and Intel was the only customer
that accounted for 10% or more of VSEA's revenue during that period.
VSEA has sold one or more ion implantation products to each of the 20 largest
semiconductor manufacturers in the world. VSEA's sales objective is to work
closely with customers to secure purchase orders for multiple systems as such
customers expand existing facilities and build next-generation, wafer
facilities. VSEA seeks to build customer loyalty and
49
<PAGE>
to achieve a high level of repeat business by offering highly reliable
products, comprehensive field support and a responsive parts replacement and
service program.
None of VSEA's customers has entered into a long-term agreement requiring it to
purchase VSEA's products. VSEA believes that sales to certain of its customers
will decrease in the near future as those customers complete current purchasing
requirements for new or expanded fabrication facilities. Although the
composition of the group comprising VSEA's largest customers has varied from
year to year, the loss of a significant customer or any reduction in orders
from any significant customer, including reductions due to customer departures
from recent buying patterns, market, economic or competitive conditions in the
semiconductor industry or in the industries that manufacture products utilizing
integrated circuits, could adversely affect VSEA's business, financial
condition and results of operations. In addition, sales of VSEA's systems
depend, in significant part, upon the decision of a prospective customer to
increase manufacturing capacity in an existing fabrication facility or to
transfer a manufacturing process to a new fabrication facility, both of which
typically involve a significant capital commitment. In addition, VSEA has from
time to time experienced delays in finalizing system sales following the
initial system's qualification. Due to these and other factors, VSEA's systems
typically have a lengthy sales cycle during which VSEA may expend substantial
funds and management effort. See "Risk Factors - Variability of Operating
Results."
The ability to provide prompt and effective field support is critical to VSEA's
sales efforts, due to the substantial operational and financial commitments
made by customers that purchase ion implantation systems. VSEA's strategy of
supporting its installed base through both its customer support and research
and development groups has served to encourage use of VSEA's systems in
production applications and has accelerated penetration of certain key
accounts. VSEA believes that its marketing efforts are enhanced by the
technical expertise of its research and development personnel, who provide
customer process support and participate in a number of industry forums such as
conferences and technical publications.
VSEA has 6 sales and service offices located in the United States and 11 in
Western Europe and Asia for a total of 17 worldwide. VSEA has a global
infrastructure of sales, marketing and service engineers linked through VSEA's
Knowledge Network(TM), Lotus Notes(R) and SAP(R) operating systems, allowing
VSEA to globally review bookings and sales forecasts against detailed account
management plans. VSEA's spare parts distribution capability has been
benchmarked by Intel as the best in the industry. Through modeling of parts
usage by equipment type, installed base distribution, freight, routes and
specific customs regulations, VSEA has developed an infrastructure of parts
distribution and warehousing through partnering with Federal Express.
The Semiconductor Equipment Business has a long standing direct presence in
Europe. In Japan, Varian's semiconductor equipment was sold and serviced by TEL
from 1978 to 1996. During much of the 18-year relationship, a joint venture,
TEL-Varian Ltd., manufactured or customized equipment in Japan for the
Semiconductor Equipment Business. In December 1996, Varian and TEL revised
their relationship to enable Japanese customers to have more direct access to
the Semiconductor Equipment Business' product, engineering and support
organizations worldwide. Shortly thereafter, Varian formed a wholly-owned
subsidiary, Varian Japan, K. K., that today provides direct support of VSEA's
growing Japanese customer base.
Using the original TEL joint venture relationship as a model, Varian formed
Varian Korea Ltd. ("VKL") in 1985 with its distributor in Korea. What started
as a venture for handling sales and service of semiconductor equipment and
vacuum products in Korea was expanded to include manufacturing in 1989. Its
63,000-square-foot factory in Songtan City includes a Class 10,000
manufacturing area. In January 1998, the Company purchased the remaining 39% of
the VKL joint venture held by the original joint venture partner.
Managing global operations and sites located throughout the world presents
challenges associated with cultural diversities and organizational alignment.
Moreover, each region in the global semiconductor equipment market exhibits
unique characteristics that can cause capital equipment investment patterns to
vary significantly from period to period. Although international markets
provide VSEA with significant growth opportunities, periodic economic
downturns, trade balance issues, political instability and fluctuations in
interest and foreign currency exchange rates are all risks that could affect
global product and service demand. Many Pacific Rim countries are currently
experiencing a significant
50
<PAGE>
economic downturn and are continuing to experience further banking and currency
difficulties that could lead to a deepening of the economic recession in those
countries. Specifically, the decline in value of the Korean currency, together
with difficulties obtaining credit, have resulted in a decline in the
purchasing power of VSEA's Korean customers. This in turn has resulted in the
cancellation or delay of orders for VSEA's products from Korean customers, thus
adversely affecting VSEA's results of operations. In addition, if Japan's
economy weakens further, investments by Japanese customers may be negatively
affected, and it is possible that economic recovery in other Pacific Rim
countries could be delayed. VSEA actively manages its exposure to changes in
foreign currency exchange rates, but there can be no assurance that future
changes in foreign currency exchange rates will not have a material adverse
effect on its results of operations or financial condition.
International revenue of VSEA for the fiscal year ended October 2, 1998 was
approximately $239 million, or 70% of revenue. For fiscal years 1997 and 1996,
international revenue of VSEA was approximately $231 million and $430 million,
respectively, or 52% and 64% of revenue, respectively. For the fiscal year
ended October 2, 1998, revenue of VSEA from customers in North America
(primarily the United States), Taiwan, Europe, Japan and Korea were
approximately 30%, 24%, 19%, 11% and 9%, respectively, of VSEA's total revenue.
For the fiscal year ended September 26, 1997, revenue of VSEA from customers in
North America (primarily the United States), Taiwan, Europe, Japan and Korea
were approximately 45%, 19%, 11%, 9% and 11%, respectively, of VSEA's total
revenue. VSEA's business is not seasonal in nature, but it is cyclical based on
the capital equipment investment expenditures of major semiconductor
manufacturers. These expenditure patterns are based on many factors, including
anticipated market demand for integrated circuits, the development of new
technologies and global economic conditions. The cyclicality in the
semiconductor equipment market over the last several years has resulted in a
decline in sales since 1996, with orders and backlog under continuous pressure.
This situation is the combined result of an oversupply in memory chips, a
decline in PC demand and the rippling of the Asian financial crises through the
Korean, Taiwanese and Japanese markets. See "Risk Factors - International
Sales and Manufacturing."
Backlog
As of January 1, 1999, October 2, 1998 and September 26, 1997, VSEA's backlog
was $81 million, $80 million and $151 million, respectively. VSEA includes in
its backlog only those orders for which it has accepted purchase orders and
assigned shipment dates within twelve months. All orders are subject to
cancellations or rescheduling by customers with limited or no penalties. Due to
possible changes in system delivery schedules, cancellations of orders and
delays in systems shipments, VSEA's backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period.
Manufacturing
VSEA manufactures its products at its production facilities in Gloucester,
Massachusetts; Newburyport, Massachusetts (recently acquired); Songtan, Korea;
and Yamanashi, Japan. VSEA's Gloucester facility has become the low-cost
manufacturer of ion implanters through the use of advanced manufacturing
methods and technologies, including, just-in-time, demand flow technology,
statistical process control and solids modeling. Despite operating in a
cyclical and competitive market, VSEA has strengthened its profitability by
steadily increasing efficiency and reducing operating expenses. VSEA has also
significantly reduced its costs through a reduction in rework, scrap, warranty
and testing costs. See "Risk Factors - International Sales and Manufacturing."
VSEA's manufacturing activities consist primarily of assembling and testing
components and subassemblies, which are acquired from third-party suppliers and
then integrated into a finished system by VSEA. VSEA utilizes an outsourcing
strategy for the manufacture of major subassemblies and performs system design,
assembly and testing in-house. VSEA believes that outsourcing enables it to
minimize its fixed costs and capital expenditures while also providing the
flexibility to increase production capacity. This strategy also allows VSEA to
focus on product differentiation through system design and quality control.
Through the use of manufacturing specialists, VSEA believes that its subsystems
incorporate advanced technologies in robotics, vacuum and microcomputers. VSEA
works closely with its suppliers on achieving mutual cost reduction through
joint design efforts.
51
<PAGE>
VSEA manufactures its systems in clean-room environments that are similar to
the clean rooms used by semiconductor manufacturers for wafer fabrication. This
procedure is intended to reduce installation and production qualification times
and the amount of particulates and other contaminants in the assembled system,
which in turn improves yield and reduces downtime for the customer. Following
disassembly, the tested system is packaged in multiple layers of plastic
shrink-wrap to maintain cleanroom standards during shipment.
VSEA uses outsourcing to take advantage of economies of scale at outside
manufacturing facilities and to alleviate manufacturing bottlenecks. VSEA
purchases material and components from various suppliers that are either
standard products or built to VSEA specifications. Some of the components and
subassemblies included in VSEA's products are obtained from a limited group of
suppliers. Although VSEA seeks to reduce its dependence on these limited
sources, disruption or termination of certain of these sources could occur and
such disruptions could have at least a temporary adverse effect on VSEA's
operations. Moreover, a prolonged inability to obtain certain components could
have a material adverse effect on VSEA's business, financial condition and
results of operations and could result in damage to customer relationships.
Quality efforts at VSEA begin with product development. VSEA uses 3D, computer-
aided design, finite element analysis and other computer-based modeling methods
to prove new designs. A VSEA implanter design is thoroughly tested and proven
throughout all stages of development before the first production system is
built. Concurrent engineering programs ensure that new designs are quickly and
successfully integrated into manufacturing.
Competition
The semiconductor manufacturing equipment market is highly competitive and is
characterized by a small number of large players and over 250 small domestic
and foreign participants. The larger companies include Applied Materials, Lam
Research, Eaton, Novellus, TEL, Nikon, Canon and ASML. VSEA faces significant
competitive factors in the ion implantation market. Within this segment, as
estimated for calendar 1998 at a public conference by Dataquest, VSEA, Eaton,
Applied Materials, Nissin and Ulvac had 40%, 41%, 13%, 3% and 3%, respectively,
of the market share for ion implantation equipment.
Significant competitive factors in the ion implantation market include
relationships, price/cost of ownership, technological performance, distribution
and financial viability. Other significant competitive factors in the
semiconductor equipment market include system performance and flexibility,
cost, the size of each manufacturer, its installed customer base, capability
for customer support and breadth of product line. VSEA believes it competes
favorably in each of these categories. For example, its gradual transition from
joint ventures and distributor agreements to direct selling and service has
given VSEA the ability to serve customers on a global basis through the
management of information critical to consistent, timely delivery of services
and products. Management believes that to remain competitive it will require
significant financial resources to offer a broad range of products, to maintain
customer service and support centers worldwide and to invest in product and
process research and development.
Certain of VSEA's existing and potential competitors have substantially greater
financial resources and more extensive engineering, manufacturing, marketing
and customer service and support organizations. VSEA expects its competitors to
continue to improve the design and performance of their current products and
processes and to introduce new products and processes with enhanced price and
performance characteristics. If VSEA's competitors enter into strategic
relationships with leading semiconductor manufacturers covering ion
implantation products similar to those sold by VSEA, its ability to sell its
products to those manufacturers could be adversely affected.
In addition, a substantial investment is required by customers to install and
integrate capital equipment into a semiconductor production line. As a result,
once a semiconductor manufacturer has selected a particular vendor's capital
equipment, VSEA believes that the manufacturer will be generally reliant upon
that equipment for the specific production line application. Accordingly, VSEA
may experience difficulty in selling a product line to a particular customer
for a significant period of time if that customer selects a competitor's
product. Increased competitive pressure could lead to lower prices for VSEA's
products, thereby materially and adversely affecting VSEA's business, financial
52
<PAGE>
condition and results of operations. There can be no assurance that VSEA will
be able to compete successfully in the future. See "Risk Factors -
Competition."
Research and Development
The semiconductor manufacturing industry is subject to rapid technological
change requiring new product introductions and enhancements. VSEA's ability to
remain competitive in this market will depend in part upon its ability to
develop new and enhanced systems and to introduce these systems at competitive
prices and on a timely and cost-effective basis. Accordingly, VSEA devotes a
significant portion of its personnel and financial resources to research and
development programs and seeks to maintain close relationships with its
customers to remain responsive to their product needs.
VSEA's current research and development efforts are directed at development of
new systems and processes and improving existing system capabilities. VSEA is
focusing its research and development efforts on the completion of the
VIISta(TM) platform, the next generation ion implant system. VIISta(TM) is
designed to cover the complete range of implants required for the next several
generations of integrated circuits and extend production capability to 0.10
micron geometries. VIISta(TM) medium and high current systems were introduced
in mid-1998 and are expected to achieve production implementation by mid-1999.
VSEA is currently developing the next generation VIISta(TM) high-energy system
with the goal of demonstrating advanced capabilities of serial implantation to
this market segment in 1999.
Worldwide expenditures by VSEA (net of customer funding) for research and
development during fiscal years 1998, 1997 and 1996 were $41 million, $47
million and $56 million, respectively, or approximately 12%, 11% and 8% of
revenue, respectively. VSEA expects in future years that research and
development expenditures will continue to represent a substantial percentage of
revenue.
The success of VSEA in developing, introducing and selling new and enhanced
systems depends upon a variety of factors, including new product selection,
timely and efficient completion of product design and development, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. There can be no
assurance that VSEA will be successful in selecting, developing, manufacturing
and marketing new products or in enhancing its existing products. VSEA's
inability to complete the development or meet the technical specifications of
any of its new systems or enhancements or to manufacture and ship these systems
or enhancements in volume in a timely manner would materially and adversely
affect VSEA's business, financial condition and results of operations. See
"Risk Factors - Technological Change and Dependence on New Products."
Patent and Other Proprietary Rights
As a leader in the manufacture and sale of ion implantation equipment, VSEA has
pursued a policy of seeking patent, copyright, trademark and trade secret
protection in the United States and other countries for developments,
improvements and inventions originating within its organization that are
incorporated in VSEA's products or that fall within its fields of interest. As
of February 1, 1999, VSEA owned approximately 119 patents in the United States
and approximately 219 patents throughout the world, and had approximately 84
patent applications on file with various patent agencies worldwide. VSEA
intends to file additional patent applications as appropriate.
VSEA relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title to
protect its rights. VSEA has trademarks, both registered and unregistered, that
are maintained and enforced to provide customer recognition for its products in
the marketplace. VSEA also has agreements with third parties that provide for
licensing of patented or proprietary technology. These agreements include
royalty-bearing licenses and technology cross-licenses. The current royalty
bearing license agreements with Applied Materials and TEL for gas-assisted
wafer heat transfer patents produced approximately $5.9 million in royalties in
fiscal year 1998 and over $40 million in royalties since 1992. The principal
patent covered by these licenses will expire on July 14, 2004.
VSEA's competitors, like companies in many high-technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. There has also been substantial litigation regarding patent and
other intellectual property rights in semiconductor-related industries. As set
forth in " - Legal Proceedings" below, VSEA is
53
<PAGE>
currently involved in such litigation and there can be no assurances as to the
results of such litigation. There can be no assurance that VSEA or its
licensors or suppliers will not be subject to additional claims of patent
infringement or that any claim will not require that VSEA pay substantial
damages or delete certain features from its products or both. See "Risk
Factors - Uncertain Protection of Patent and Other Proprietary Rights."
Sale of Business
Effective as of June 13, 1997, the Semiconductor Equipment Business completed
the sale of its TFS business. Total proceeds received from the sale were $145.5
million in cash. A $51.5 million reserve was recorded to cover, among other
items, purchase price disputes, retained liabilities, transaction costs,
employee terminations, facilities separation costs, indemnification
obligations, litigation expense and other contingencies. The gain on the sale
was $33.2 million (net of income taxes of $17.8 million).
Environmental Matters
For a discussion of environmental matters, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Environmental
Matters."
Employees
At February 1, 1999, VSEA had a total of approximately 1,258 full-time and
temporary employees worldwide - 890 in North America, 288 in Asia and 80 in
Western Europe. None of VSEA's employees based in the United States is subject
to collective bargaining agreements and VSEA has never experienced a work
stoppage, slowdown, or strike. VSEA's employees based in certain foreign
countries may, from time to time, be subject to collective bargaining
agreements. VSEA currently considers its employee relations to be good.
VSEA's success depends to a significant extent upon a limited number of key
employees and other members of senior management of VSEA. The loss of the
services of one or more of these key employees could have a material adverse
effect on VSEA. The success of VSEA's future operations depends in large part
on VSEA's ability to recruit and retain engineers and technicians, as well as
marketing, sales, service and other key personnel, who are in competitive
demand and limited supply because of the unique skill sets required. VSEA's
inability to attract and retain the personnel it requires could have a material
adverse effect on VSEA's results of operations.
Properties
VSEA has 6 sales and service offices located in the United States and 11
located outside of the United States, including offices in France, Germany,
Hong Kong, Japan, Korea, Singapore, Taiwan, and the United Kingdom. VSEA has
two manufacturing facilities located in Massachusetts, one in Korea and one in
Japan, in addition to its headquarters facility in Gloucester, Massachusetts
and its research center located in Palo Alto, California. These offices and
facilities aggregate more than 562,000 square feet of which 209,000 square feet
is leased. Since 1994, the manufacturing facilities have been registered to the
internationally recognized ISO 9001 quality standard. Field support operations
in the U.S., Korea, France and Taiwan have been registered to the ISO 9002
standard.
Although at current levels of sales, VSEA has excess capacity, VSEA's
management does not believe there is any material, long-term, excess capacity
in VSEA's facilities, although utilization is subject to change based on
customer demand. Furthermore, VSEA's management believes that VSEA's facilities
and equipment generally are well-maintained, in good operating condition,
suitable for VSEA's purposes, and adequate for its present operations.
Legal Proceedings
In June 1997, Applied Materials filed a civil action against Varian in the U.S.
District Court for the Northern District of California alleging infringement of
four Applied Materials patents relating to sputter coating systems (the
"Applied Litigation"). Applied Materials contends that these patents are
infringed by the M2i, MB/2/ (TM) and Inova(TM) systems that
54
<PAGE>
were made and sold by Varian's TFS business prior to Varian's sale of its TFS
business to Novellus effective as of June 13, 1997. The complaint requests
unspecified money damages and an injunction preventing further alleged
infringement and requests that any damages awarded be increased up to three-
fold for Varian's and Novellus' alleged willful infringement. Novellus was
subsequently added as a defendant in this action and, as part of the sale of
the TFS business, Varian agreed to indemnify Novellus for certain damages it
may suffer as a result of such litigation and to reimburse Novellus for up to
$7.5 million of its litigation expenses (of which $2.1 million had been
reimbursed as of January 1, 1999). Varian's answer denied infringement and
asserted that Applied Materials' patents are invalid and that
one of the asserted patents is unenforceable. Varian also filed a separate suit
seeking damages and injunctive relief against Applied Materials contending that
certain of Applied Materials' business practices violated antitrust laws. That
action has been procedurally related to the infringement case and is pending
before the same judge. Novellus has asserted three of its patents, obtained as
part of its purchase of the TFS business, against Applied Materials. Discovery
has begun but no date has been set for completion of discovery. During the
fourth quarter of fiscal year 1998, Varian and Applied Materials began informal
discussions concerning the possibility of resolving some or all of the issues
raised by the Applied Litigation and Varian's antitrust suit through settlement
or mediation. Discussions regarding a proposed procedure for non-binding
mediation are continuing but have not yet resulted in a definitive mediation
arrangement. On December 9 and 10, 1998, the Court held a "Markman" hearing for
the purpose of determining how the various claims of the four Applied Materials
and the three Novellus patents should be interpreted. The parties are awaiting
this decision. Pursuant to the Distribution Agreement, VSEA has agreed to
indemnify IB and VMS for any costs, liabilities or expenses with respect to any
legal proceedings relating to the Semiconductor Equipment Business, including
the Applied Litigation. In the event of an outcome unfavorable to VSEA, VSEA
might be liable for damages for past sales up to the June 1997 closing date of
the sale of the TFS business to Novellus and may have to pay Novellus under the
indemnification obligations described above. See Note 10 to the Notes to
Combined Financial Statements of the Semiconductor Equipment Business of Varian
Associates, Inc.
In connection with the sale of the TFS business, Novellus has submitted to
arbitration a claim against Varian arising out of a dispute over the closing
date balance sheet, for which VSEA has also agreed to indemnify VMS and IB. In
addition, VSEA has agreed to pay for one-third of the costs, liabilities and
expenses of VSEA and VMS with respect to certain legal proceedings relating to
discontinued operations of Varian. See "The Distribution - Distribution
Agreement."
VSEA is also involved in certain other legal proceedings arising in the
ordinary course of its business. While there can be no assurances as to the
ultimate outcome of any litigation involving VSEA, VSEA's management does not
believe any pending legal proceeding will result in a judgment or settlement
that will have a material adverse effect on VSEA's financial position, results
of operations or cash flows. See "Risk Factors - Legal Proceedings."
55
<PAGE>
MANAGEMENT
Board of Directors
The five persons identified below constitute the board of directors of VSEA
(the "VSEA Board"). Each individual listed below (other than Richard A.
Aurelio) is currently also a director of Varian and will resign from the Board
of Directors of Varian effective as of the Distribution Date. The VSEA Board
will be divided into three classes. Directors for each class will be elected at
the annual meeting of stockholders held in the year in which the term for such
class expires and will serve thereafter for three years.
The following table sets forth names, in alphabetical order, and information
about the VSEA Board:
<TABLE>
<CAPTION>
Initial
Name, Age and Current Term
Principal Occupation Expires Information
--------------------- ------- -----------
<C> <C> <S>
Richard A. Aurelio, 54....................... 2002 Mr. Aurelio is the
Executive Vice President of Varian Executive Vice President
of Varian responsible
for the Semiconductor
Equipment Business.
Mr. Aurelio joined
Varian in 1991 from a
position as Executive
Vice President of
Holland's ASM
Lithography, where he
was also President of
its U.S. affiliate. He
was hired as President
of the Semiconductor
Equipment Business in
1991 and was elevated to
Executive Vice President
of Varian in 1992.
Ruth M. Davis, 70............................ 2000 Dr. Davis is President
President and Chief Executive Officer and Chief Executive
of the Pymaturing Group, Inc. Officer of the
Pymaturing Group, Inc.
(a technology management
company), positions she
has held since 1981. She
is a director of Air
Products and Chemicals,
Inc., BTG, Inc.,
Ceridian Corporation,
Consolidated Edison
Company of New York,
Inc., Premark
International, Inc., The
Principal Mutual Life
Insurance Company, and
Tupperware Corporation.
Dr. Davis is also
Chairman of the Board of
The Aerospace
Corporation. She has
been a director of
Varian since 1981.
Robert W. Dutton, 54......................... 2001 Dr. Dutton is Director
Director of Research at the Center of Research at the
for Integrated Systems and Professor of Center for Integrated
Electrical Engineering at Stanford Systems and Professor of
University Electrical Engineering
at Stanford University,
positions he has held
since 1991 and 1971,
respectively. Dr. Dutton
has been a director of
Varian since 1996.
Angus A. MacNaughton, 67..................... 2002 Mr. MacNaughton is
President of Genstar Investment President of Genstar
Corporation Investment Corporation
(a private investment
company), a position he
has held since 1987. He
is a director of
Canadian Pacific
Limited, Sun Life
Assurance Company of
Canada, Sun Life
Assurance Company of
Canada (U.S.), Sun Life
Insurance & Annuity
Company of Canada (NY)
and DCS Business
Services, Inc. Mr.
MacNaughton is also
Vice-Chairman of the
Board of Barrick Gold
Corporation. He has been
a director of Varian
since 1986.
J. Tracy O'Rourke, 63........................ 2001 Mr. O'Rourke is Chairman
Chairman of the Board and of the Board and Chief
Chief Executive Officer of Varian Executive Officer of
Varian, positions he has
held since 1990. Mr.
O'Rourke has been a
director of Varian since
1990.
</TABLE>
56
<PAGE>
Compensation of Directors
The non-employee Chairman of the VSEA Board will receive a retainer fee of
$120,000. Under the VSEA Omnibus Stock Plan, each director who is not an VSEA
employee will also receive upon initial appointment or election to the VSEA
Board a non-qualified stock option to acquire 50,000 shares of VSEA Common
Stock, and will receive annually beginning with the second annual meeting
following his or her election or appointment a non-qualified stock option to
acquire 5,000 shares of VSEA Common Stock. In lieu of these grants, any non-
employee Chairman will receive upon initial appointment a non-qualified stock
option to acquire 200,000 shares of VSEA Common Stock. Such stock options will
be granted with an exercise price equal to the fair market value of VSEA Common
Stock on the date of grant, becoming exercisable on the date of grant and
having a ten-year term. Directors who are VSEA employees will receive no
compensation for their services as directors.
Committees of the VSEA Board of Directors
The business of VSEA will be managed under the direction of the VSEA Board.
VSEA will have Audit and Compensation Committees of the VSEA Board. Members of
the Audit and Compensation Committees will not be employees of VSEA.
Audit Committee
The Audit Committee's principal functions will be to review the scope of the
annual audit of VSEA by its independent auditors, review the annual financial
statements of VSEA and the related audit report as prepared by the independent
auditors, recommend to the VSEA Board selection of the independent auditors
each year and review any non-audit fees paid to the independent auditors. The
members of the Audit Committee are the following non-employee directors: Ruth
M. Davis, Robert W. Dutton, Angus A. MacNaughton (Chairman) and J. Tracy
O'Rourke.
Compensation Committee
The Compensation Committee will administer the stock and cash incentive plans
of VSEA, and in this capacity it will make option grants or awards under these
plans. In addition, the Compensation Committee will determine the compensation
of the President and Chief Executive Officer and the other senior executives.
The Compensation Committee will also recommend the establishment of policies
dealing with various compensation and employee benefit plans for VSEA. The
members of the Compensation Committee are the following non-employee directors:
Ruth M. Davis, Robert W. Dutton, Angus A. MacNaughton and J. Tracy O'Rourke
(Chairman).
57
<PAGE>
Executive Officers
Set forth below is certain information with respect to the persons who are
expected to serve as executive officers of VSEA immediately following the
Distribution. Those persons listed below who are currently officers of Varian
will relinquish their positions with Varian effective as of the Distribution
Date.
<TABLE>
<CAPTION>
Business Experience Prior to
Becoming
Name and Title Age an Executive Officer of VSEA
-------------- --- ----------------------------------
<C> <C> <S>
Richard A. Aurelio......................... 54 Mr. Aurelio is the Executive Vice
President and Chief Executive Officer President of Varian responsible
for the Semiconductor Equipment
Business. Mr. Aurelio joined
Varian in 1991 from a position as
Executive Vice President of
Holland's ASM Lithography, where
he was also President of its U.S.
affiliate. Mr. Aurelio was hired
as President of the Semiconductor
Equipment Business in 1991 and was
elevated to Executive Vice
President of Varian in 1992.
Charles M. McKenna......................... 53 Dr. McKenna is Vice President and
Chief Operating and Technology Officer General Manager of Varian's Ion
Implant Systems business,
positions he has held since 1989.
Dr. McKenna has held various other
positions in the Semiconductor
Equipment Business during his 15
years with Varian. He is a
director of Micrion Corporation.
G. Dennis Key.............................. 56 Mr. Key is Vice President, Sales
Vice President, Sales and Marketing and Marketing of the Semiconductor
Equipment Business, a position he
has held since joining Varian in
1998. Prior to joining Varian, he
was an independent consultant in
the semiconductor industry from
1996 to 1998. Mr. Key was Vice
President of Worldwide Sales and
Field Operations at Lam Research
Corporation (a semiconductor
equipment manufacturer) from 1988
to 1996.
Walter F. Sullivan......................... 47 Mr. Sullivan is Vice President,
Vice President, Customer Support Customer Support, of the
Semiconductor Equipment Business,
a position he has held since 1995.
Prior to joining Varian in 1995,
he was Group Director, Worldwide
Customer Support Operations for
PictureTel Corporation (a
telecommunications equipment
company), a position he held from
1993 to 1995.
Ernest L. Godshalk III..................... 53 Mr. Godshalk is Vice President,
Vice President and Chief Financial Officer Finance of the Semiconductor
Equipment Business, a position he
has held since joining Varian in
November 1998. Prior to joining
Varian, he was Managing Director
of Elgin Management Group (an
investment company), a position he
held from 1993 to 1996 and again
in 1998. Mr. Godshalk was Chief
Financial Officer and Secretary of
Prodigy, Inc. (an internet
company) from 1996 to 1998.
</TABLE>
58
<PAGE>
Executive Officer Compensation
Summary of Compensation
Table I below sets forth a summary of the compensation paid by Varian for the
last three fiscal years to the chief executive officer of VSEA and the four
additional most highly compensated individuals (based on their fiscal year 1998
compensation from Varian) who are expected to be executive officers of VSEA
immediately after the Distribution.
Table I
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
----------------------------------
Awards Payout
------------------------- --------
Annual Compensation Securities
---------------------------------- Underlying
Other Annual Restricted Options/ LTIP All Other
Name and Salary Bonus Compensation Stock SARs Payouts Compensation
Principal Position Year ($) ($)(/1/) ($)(/2/) Awards($)(/3/) (#)(/4/) ($)(/5/) ($)(/6/)
- ------------------ ---- ------- -------- ------------ -------------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard A. Aurelio 1998 338,910 80,995 34,319 0 36,000 463,501 110,864
President and 1997 323,148 533,492 20,602 244,388 36,000 653,016 122,904
Chief Executive Officer 1996 310,990 645,915 21,258 204,225 36,000 628,056 105,818
Charles M. McKenna 1998 198,304 22,499 5,439 0 17,000 158,917 24,530
Chief Operating and 1997 180,504 159,559 8,089 52,369 20,000 182,520 25,452
Technology Officer 1996 171,658 184,890 4,069 43,763 15,000 175,032 20,787
G. Dennis Key 1998 121,156 10,653 0 65,625 20,000 34,781 888
Vice President, 1997 N/A N/A N/A N/A N/A N/A N/A
Sales and Marketing 1996 N/A N/A N/A N/A N/A N/A N/A
Walter F. Sullivan 1998 153,139 26,825 3,935 0 10,000 110,340 15,815
Vice President, 1997 145,128 141,473 4,322 52,369 12,000 80,852 11,963
Customer Support 1996 137,240 234,470 2,122 43,763 10,000 0 650
Ernest L. Godshalk III(/7/) 1998 N/A N/A N/A N/A N/A N/A N/A
Vice President and 1997 N/A N/A N/A N/A N/A N/A N/A
Chief Financial Officer 1996 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- -------
(1) Consists of Varian Management Incentive Plan awards, Cash Profit-Sharing
Plan allocations and (in some cases) special cash bonuses.
(2) Consists of amounts reimbursed for the payment of taxes on certain
perquisites and personal benefits and (in some cases) cash payments for
unused accrued vacation time.
(3) Consists of restricted shares of Varian Common Stock (valued at the closing
market price on the date of grant), which shares are released from
restrictions in three equal installments over a three-year period (the
principal restriction being continued employment until the respective
release dates), during which dividends, if any, are paid on such shares.
The number and value (at $34.375 per share) of aggregate restricted stock
holdings at the end of fiscal year 1998 were as follows: Mr. Aurelio, 8,400
shares, $288,750; Dr. McKenna, 1,800 shares, $61,875; Mr. Key, 2,000
shares, $68,750; Mr. Sullivan, 1,800 shares, $61,875; and Mr. Godshalk, 0
shares, $0. Shares of restricted stock awarded for fiscal years 1998, 1997
and 1996, respectively, which partially vest in under three years were as
follows: Mr. Aurelio, 0 shares, 4,200 shares and 4,200 shares; Dr. McKenna,
0 shares, 900 shares and 900 shares; Mr. Key, 2,000 shares, 0 shares and 0
shares; Mr. Sullivan, 0 shares, 900 shares and 900 shares; and Mr.
Godshalk, 0 shares, 0 shares and 0 shares.
(4) Consists of shares of Varian Common Stock that may be acquired under stock
options granted pursuant to the Varian Omnibus Stock Plan (no stock
appreciation rights have been granted).
(5) Consists of cash payouts in fiscal years 1999, 1998 and 1997 under the
long-term incentive feature of the Varian Omnibus Stock Plan for three-year
cycles ended with fiscal years 1998, 1997 and 1996, respectively.
(6) Consists of (a) Varian contributions (including interest) to Retirement and
Profit-Sharing Program and Supplemental Retirement Plan accounts for fiscal
years 1998, 1997 and 1996, respectively (Mr. Aurelio, $110,847, $121,103
and $104,378; Dr. McKenna, $23,561, $24,766 and $20,243; Mr. Key, $0, $0
and $0; Mr. Sullivan, $14,205, $11,140 and $0; and Mr. Godshalk, $0, $0 and
$0); and (b) Varian-paid premiums for group term life insurance in fiscal
years 1998, 1997 and 1996, respectively (Mr. Aurelio, $17, $1,801 and
$1,440; Dr. McKenna, $969, $686 and $544; Mr. Key, $888, $0 and $0; Mr.
Sullivan, $980, $823 and $650; and Mr. Godshalk, $0, $0 and $0).
(7) Mr. Godshalk became an employee of Varian in November 1998 and was
appointed Vice President and Chief Financial Officer of VSEA on February
19, 1999.
59
<PAGE>
Stock Options
Grant of Options
Table II below sets forth information with respect to grants of options to
purchase Varian Common Stock during the fiscal year ended October 2, 1998 to
the individuals listed in Table I. These grants were made pursuant to the
Varian Omnibus Stock Plan and are reflected in Table I.
Table II
Option/SAR Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Potential Realizable
Percent Value at Assumed
Number of of Total Annual Rates of Stock
Securities Options/SARs Exercise Price Appreciation
Underlying Granted to or Base for Option Term(/2/)
Options/SARs Employees in Price Expiration ----------------------
Name Granted (#)(/1/) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ---------------- ------------ -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Aurelio...... 36,000 3.55 58.1563 11/20/07 1,316,671 3,336,702
Charles M. McKenna...... 17,000 1.68 58.1563 11/20/07 621,761 1,575,665
G. Dennis Key........... 20,000 1.97 33.0313 09/11/08 415,464 1,052,868
Walter F. Sullivan...... 10,000 0.99 58.1563 11/20/07 365,742 926,862
Ernest L. Godshalk III.. N/A N/A N/A N/A N/A N/A
</TABLE>
- -------
(1) Consists of stock options, which were granted at an exercise price of 100%
of the market price of the underlying shares on the date of grant, become
exercisable over three years at the rate of approximately one-third each
year and expire ten years from the date of grant. Payment of the exercise
price may be made under a promissory note or by delivery of already-owned
shares.
(2) The 5% and 10% assumed annual rates of stock price appreciation would
result from per share prices of $94.73 and $150.84, respectively ($53.80
and $85.67 for Mr. Key). Such assumed rates are not intended to represent a
forecast of possible future appreciation of Varian Common Stock or total
stockholder return.
Aggregated Option Exercises and Year-End Value
Table III sets forth as of October 2, 1998, for each of the individuals listed
in Table I (i) the total number of shares of Varian Common Stock received upon
exercise of options during fiscal year 1998, (ii) the value realized upon such
exercise (based on the fair market value of the underlying shares of Varian
Common Stock on the exercise date), (iii) the total number of unexercised
options to purchase Varian Common Stock (exercisable and unexercisable) and
(iv) the value of such options which were in-the-money at October 2, 1998
(based on the closing price of Varian Common Stock at October 2, 1998,
$34.375).
Table III
Aggregated Option/SAR Exercises In Last Fiscal Year and Fiscal Year-End
Option/SAR Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money
Shares Underlying Unexercised Options/SARs
Acquired Options/SARs at Fiscal at Fiscal
on Value Year-End (#) Year-End ($)
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Aurelio...... 10,000 387,488 66,000 72,000 0 0
Charles M. McKenna...... 0 0 33,166 35,334 36,120 0
G. Dennis Key........... 0 0 0 20,000 0 26,874
Walter F. Sullivan...... 0 0 13,666 21,334 0 0
Ernest L. Godshalk III.. N/A N/A N/A N/A N/A N/A
</TABLE>
60
<PAGE>
Long-Term Incentive Plans--Awards In Last Fiscal Year(/1/)
<TABLE>
<CAPTION>
Number of
Shares, Performance or Estimated Future Payouts under
Units or Other Period Non-Stock Price-Based Plans
Other Until ----------------------------------------
Rights Maturation or Threshold Target Maximum
Name (#) Payout ($)(/2/) ($)(/3/) ($)(/4/)
- ---- --------- -------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Richard A. Aurelio...... N/A 1998-2000 25,604 0 --
Charles M. McKenna...... N/A 1998-2000 6,177 0 --
G. Dennis Key........... N/A 1998-2000 6,953 0 --
Walter F. Sullivan...... N/A 1998-2000 4,679 0 --
Ernest L. Godshalk III.. N/A N/A N/A N/A N/A
</TABLE>
- -------
(1) Determinations by Varian's Organization and Compensation Committee (the
"Varian Committee") that a named executive officer may participate in the
long-term incentive feature of the Varian Omnibus Stock Plan ("LTI") and
might receive a payout for a specified period is an award for purposes of
this table. Awards (i. e., the determination of participation in the LTI)
for the 1998-2000 cycle were made in fiscal year 1998. Under the LTI, each
named executive officer is eligible to receive compensation payable in cash
or in Varian Common Stock, or a combination thereof, based upon Varian
achievement of objectives for average annual return on net assets ("RONA")
and revenue growth ("RG") over a three-year cycle. No estimate or
assumption made in connection with this table is intended to represent a
forecast of possible future performance of Varian.
(2) If the minimum level of RONA or RG established by the Varian Committee at
the beginning of the three-year cycle is achieved, the minimum amount
payable ranges from 3% to 7.5% of annual base salary as of the end of the
last fiscal year of the cycle. If neither RONA nor RG for the three-year
cycle equals the applicable minimum level, no amount will be paid. The
minimum amount payable, if any amount is paid at all, depends on each named
executive's base salary in the last year of the cycle, and the amounts set
forth above assume that each named executive officer's annual base salary
at the end of fiscal year 2000 will be identical to the executive officer's
calendar year 1999 annual base salary.
(3) A "Target" award is not determinable under the LTI. The amounts shown are
estimates of the payout for the three-year cycle assuming (a) that the RONA
and revenues for the remaining years of the cycle are the same as RONA and
revenues for fiscal year 1998 and (b) that each named executive officer's
annual base salary at the end of fiscal year 2000 will be identical to
calendar year 1999 annual base salary. The actual payment for the three-
year cycle may be greater or less than the estimates shown in this column,
depending upon the actual RONA and revenues for fiscal years 1998, 1999 and
2000, the actual base salary of the named executive officer at the end of
fiscal year 2000, and the aggregate payout to all participants (see
footnote 4 below).
(4) The maximum amount payable is not determinable or estimable prior to the
end of the three-year cycle for the following reason: If the maximum levels
of RONA and RG established by the Varian Committee at the beginning of the
three-year cycle are achieved or exceeded, the maximum amount payable
ranges from 100% to 200% of annual base salary as of the end of the last
fiscal year of the cycle. The maximum amount payable is reduced, however,
if the aggregate LTI payout to all participants (including the named
executive officers) would exceed 5% (before such payouts) of Varian's pre-
tax operating earnings in the last fiscal year of the three-year cycle.
This variable makes the maximum amount not determinable or estimable.
Certain Relationships and Related Transactions
In connection with the March 1991 recruitment and subsequent relocation of Mr.
Aurelio, Varian provided to Mr. Aurelio financing in the amount of $500,000 to
purchase a residence in California. The financing is evidenced by a promissory
note secured by a deed of trust on the property. The note bears an interest
rate based on the appreciation of the property, and no interest is payable
under the note (nor can the actual interest rate be determined) until the note
becomes due. Periodic payments of principal are not required and the note
becomes due (a) upon sale of the property, (b) either one year or three years
after Mr. Aurelio's employment by Varian terminates (depending on the
circumstances of that termination) or (c) 30 years after the date of the note,
whichever occurs first. In connection with Mr. Aurelio's employment by VSEA
after the Distribution, Mr. Aurelio will exchange the existing note for a
comparable promissory note secured by a deed of trust on the property for the
benefit of VSEA.
Change In Control Agreements
Certain VSEA executive officers are already parties to change in control
agreements with Varian which provide for the payment of specified compensation
and benefits upon certain terminations of their employment following a change
in control of Varian. These change in control agreements, which are required to
be assumed by VSEA pursuant to the terms of such agreements, will be amended
and restated as of the Distribution Date (the "Agreements") to reflect the
executive officers' new and increased responsibilities with VSEA. In addition,
VSEA executive officers not already parties to change in control agreements
with Varian will be offered similar change in control agreements with VSEA
effective as of the Distribution Date.
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<PAGE>
Under the Agreements, a change in control will be defined to occur (a) if any
individual or group becomes the beneficial owner of 30% or more of the combined
voting power of VSEA's outstanding securities, (b) if "continuing directors"
(defined as the directors of VSEA as of the date of the Agreement and any
successor to any such director who was nominated or selected by a majority of
the directors in office at the time of his nomination or selection and who is
not affiliated or associated in any way with an individual or group who is a
beneficial owner of more than 10% of the combined voting power of VSEA's
outstanding securities) cease to constitute at least a majority of the board of
directors, or (c) if there occurs a reorganization, merger, consolidation or
other corporate transaction involving VSEA in which the stockholders of VSEA do
not own more than 50% of the combined voting power of VSEA or other corporation
resulting from such transaction, or (d) if all or substantially all of VSEA's
assets are sold, liquidated or distributed. In the Agreements, the affected
executive officers will agree not to voluntarily leave VSEA's employ during a
tender or exchange offer, proxy solicitation in opposition to the board of
directors or other effort by any party to effect a change in control of VSEA.
This is intended to assure that management will continue to act in the interest
of the stockholders rather than be affected by personal uncertainties during
any attempts to effect a change in control of VSEA, and to enhance VSEA's
ability to attract and to retain executives.
Each Agreement will provide that if within 18 months of a change in control (i)
VSEA terminates the employee's employment other than by reason of his death,
disability, retirement or for cause (as defined in the Agreement) or (ii) the
employee terminates his employment for "good reason," the employee will receive
a lump sum severance payment equal to 2.99 (in the case of the Chief Executive
Officer) and 2.50 (in the case of the other senior executives) times the sum of
the employee's annual base salary plus the highest annual and multi-year
bonuses paid to the employee in any of the three years ending prior to the date
of termination. "Good reason" is defined as the following after a change in
control of VSEA: certain material changes in assignment of duties; certain
reductions in compensation; certain material changes in employee benefits and
perquisites; a change in the site of employment; VSEA's failure to obtain the
written assumption by its successor of the obligations contained in the
Agreement; attempted termination of employment for cause on grounds
insufficient to constitute a basis of termination for cause under the terms of
the Agreement; or VSEA's failure to promptly make any payment required under
the terms of the Agreement in the event of a dispute relating to employment
termination. In addition, in the case of the Chief Financial Officer, "good
reason" is defined to exist if he is not given an "equivalent position" as
defined in his Agreement. In the case of the Chief Executive Officer, he may
resign for any reason within 18 months following a change in control and be
entitled to the payments and other benefits provided for in his Agreement.
Each Agreement will provide that upon termination or resignation occurring
under the circumstances described above, the employee will receive a
continuation of all insurance and other benefits on the same terms as if he
remained an employee or equivalent benefits will be provided until the earlier
to occur of commencement of substantially equivalent full-time employment with
a new employer or 24 months after the date of termination of employment with
the company. Each Agreement will also provide that all stock options granted
will become exercisable in full according to their terms, and that any
unreleased restricted stock will be released from restrictions. Each Agreement
will further provide that in the event that any payments and benefits received
by the employee from the company would subject that person to the excise tax
contained in Section 280G of the Code the employee will be entitled to receive
an additional payment that will place the employee in the same after-tax
economic position that the employee would have enjoyed if such excise tax had
not applied.
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THE VSEA OMNIBUS STOCK PLAN
The VSEA Omnibus Stock Plan has been adopted by the VSEA Board effective as of
the Distribution.
Purpose of the VSEA Omnibus Stock Plan
The VSEA Omnibus Stock Plan is intended to promote the success of VSEA by
providing a vehicle under which a variety of stock-based incentive and other
awards can be granted to employees and consultants and to directors of VSEA who
are not employees of VSEA or any affiliate ("non-employee directors").
Description of the VSEA Omnibus Stock Plan
The following paragraphs provide a summary of the principal features of the
VSEA Omnibus Stock Plan and its operation.The VSEA Omnibus Stock Plan has been
filed as an exhibit to the Registration Statement of which this Information
Statement is a part. See "Available Information."
General
The VSEA Omnibus Stock Plan provides for the granting of stock options, stock
appreciation rights ("SARs"), restricted stock, performance units and
performance shares (collectively, "VSEA Awards") to eligible VSEA Omnibus Stock
Plan participants. The maximum number of shares of VSEA Common Stock available
for VSEA Awards under the VSEA Omnibus Stock Plan will be 6,000,000, plus such
number of shares as may be granted in substitution of other options in
connection with the Distribution.
Administration of the VSEA Omnibus Stock Plan
The VSEA Omnibus Stock Plan will be administered by the Compensation Committee
of the VSEA Board. The members of the Compensation Committee must qualify as
"non-employee directors" under Rule 16b-3 under the Exchange Act, and as
"outside directors" under Section 162(m) of the Code ("Section 162(m)") (for
purposes of qualifying the VSEA Omnibus Stock Plan as performance-based
compensation under Section 162(m)).
Subject to the terms of the VSEA Omnibus Stock Plan, the VSEA Committee has the
sole discretion to determine the employees and consultants who will be granted
VSEA Awards, the size and types of such VSEA Awards, and the terms and
conditions of such VSEA Awards. The Compensation Committee may delegate its
authority to grant and administer awards to one or more officers or directors
appointed by the Compensation Committee, but only the Compensation Committee
can make awards to participants who are subject to Section 16 of the Exchange
Act.
Eligibility to Receive Awards
Employees and consultants of VSEA and its affiliates are eligible to be
selected to receive one or more VSEA Awards. The actual number of individuals
who will receive VSEA Awards under the VSEA Omnibus Stock Plan cannot be
determined because eligibility for participation in the VSEA Omnibus Stock Plan
is at the discretion of the Compensation Committee. The VSEA Omnibus Stock Plan
also provides for the grant of non-qualified stock options to VSEA's non-
employee directors. Such options will be granted pursuant to an automatic, non-
discretionary formula.
Options
The Compensation Committee may grant non-qualified stock options, incentive
stock options (which are entitled to favorable tax treatment), or a combination
thereof. The number of shares covered by each option will be determined by the
Compensation Committee, but during any fiscal year of VSEA, no participant may
be granted options for more than 1,000,000 shares.
The price of the shares of VSEA Common Stock subject to each stock option is
set by the Compensation Committee but cannot be less than 100% of the fair
market value (on the date of grant) of the shares covered by the option. In
addition, the exercise price of an incentive stock option must be at least 110%
of fair market value if (on the grant date)
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<PAGE>
the participant owns stock possessing more than 10% of the total combined
voting power of all classes of stock of VSEA or any of its subsidiaries.
Nevertheless, substitute options may be granted at less than fair market value
to employees or consultants who receive such options in connection with a
corporate reorganization. Also, the aggregate fair market value of the shares
(determined on the grant date) covered by incentive stock options which first
become exercisable by any participant during any calendar year may not exceed
$100,000.
The exercise price of each option must be paid in full at the time of exercise.
The Compensation Committee also may permit payment through the tender of shares
of VSEA Common Stock that are already owned by the participant, or by any other
means which the Compensation Committee determines to be consistent with the
VSEA Omnibus Stock Plan's purpose. Any taxes required to be withheld must be
paid by the participant at the time of exercise.
Options become exercisable at the times and on the terms established by the
Compensation Committee. Options expire at the times established by the
Compensation Committee but not later than 10 years after the date of grant
(except in certain cases involving the death of the optionee). The Compensation
Committee may extend the maximum term of any option granted under the VSEA
Omnibus Stock Plan, subject to the preceding limits.
Non-Employee Director Options
Under the VSEA Omnibus Stock Plan, each non-employee director automatically
will receive, as of the later of (a) the non-employee director's appointment or
election to the VSEA Board or (b) the effective date of the VSEA Omnibus Stock
Plan, a non-qualified stock option to purchase 50,000 shares. Each non-employee
director will also automatically receive a non-qualified stock option to
purchase 5,000 shares coincident with each subsequent annual meeting of VSEA
beginning with the second annual meeting following his or her appointment or
election, provided the non-employee director serves continuously as a director
through the next grant date. In lieu of the above grants, any non-employee
Chairman of the VSEA Board automatically will receive, as of the later of (a)
the date he or she becomes Chairman or (b) the effective date of the VSEA
Omnibus Stock Plan, a non-qualified stock option to purchase 200,000 shares.
The exercise price of each non-employee director and Chairman option will be
100% of the fair market value (on the date of grant) of the shares covered by
the option. Nevertheless, substitute options may be granted at less than fair
market value to non-employee directors who receive such options in connection
with a corporate reorganization. Each option will become exercisable on the
grant date. All options granted to non-employee directors generally will have a
term of ten years from the date of grant. If a director terminates service on
the VSEA Board prior to an option's normal expiration date, the period of
exercisability of the option may be shorter, depending upon the reason for the
termination.
Stock Appreciation Rights
The Compensation Committee determines the terms and conditions of each SAR.
SARs may be granted in conjunction with an option, or may be granted on an
independent basis. The number of shares covered by each SAR will be determined
by the Compensation Committee, but during any fiscal year of VSEA, no
participant may be granted SARs for more than 1,000,000 shares. Upon exercise
of an SAR, the participant will receive payment from VSEA in an amount
determined by multiplying: (1) the difference between the fair market value of
a share on the date of exercise over the grant price (fair market value of a
share on the grant date), times (2) the number of shares with respect to which
the SAR is exercised. SARs may be paid in cash or shares of Common Stock, as
determined by the Compensation Committee. SARs are exercisable at the times and
on the terms established by the Compensation Committee.
Restricted Stock Awards
Restricted stock awards are shares of VSEA Common Stock that vest in accordance
with terms and conditions established by the Compensation Committee. The number
of shares of restricted stock granted to a participant (if any) will be
determined by the Compensation Committee, but during any fiscal year of VSEA,
no participant may be granted more than 100,000 shares.
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<PAGE>
In determining whether an award of restricted stock should be made and/or the
vesting schedule for an award, the Compensation Committee may impose whatever
conditions to vesting as it determines to be appropriate. For example, the
Compensation Committee may determine to grant restricted stock only if
performance goals established by the Compensation Committee are satisfied. Any
performance goals may be applied on a company-wide or an individual business
unit basis, as determined by the Compensation Committee. See " - Performance
Goals."
Performance Units and Performance Shares
Performance Units and Performance Shares are VSEA Awards which will result in a
payment to a participant only if performance goals established by the
Compensation Committee are satisfied. The initial value of each Performance
Unit and each Performance Share shall not exceed the fair market value (on the
date of grant) of a share of VSEA Common Stock. The applicable performance
goals will be determined by the Compensation Committee, and may be applied on a
company-wide or an individual business unit basis, as deemed appropriate in
light of the participant's specific responsibilities. See " - Performance
Goals."
In addition to the performance requirements discussed above, Performance Units
and Performance Shares are subject to additional limits set forth in the VSEA
Omnibus Stock Plan. During any fiscal year of VSEA, no participant shall
receive more than 100,000 Performance Units or Performance Shares.
Performance Goals
The Compensation Committee in its discretion may make performance goals
applicable to a participant with respect to an VSEA Award. At the Compensation
Committee's discretion, one or more of the following performance goals may
apply: EBIT, EBITDA, earnings per share, net income, operating cash flow,
return on assets, return on equity, return on sales, revenue and stockholder
return. The Compensation Committee may also use other performance goals.
EBIT means VSEA's or a business unit's income before reductions for interest
and taxes. EBITDA means VSEA's or a business unit's income before reductions
for interest, taxes, depreciation and amortization. Earnings per share means
VSEA's or a business unit's net income, divided by a weighted average number of
common shares outstanding and dilutive common equivalent shares deemed
outstanding. Net income means VSEA's or a business unit's income after taxes.
Operating cash flow means VSEA's or a business unit's sum of net income plus
depreciation and amortization less capital expenditures plus certain specified
changes in working capital. Return on assets means the percentage equal to
VSEA's or a business unit's EBIT (before incentive compensation), divided by
VSEA's or a business unit's, as applicable, average net assets. Return on
equity means the percentage equal to VSEA's net income, divided by average
stockholders' equity. Return on sales means the percentage equal to VSEA's or a
business unit's EBIT (before incentive compensation), divided by VSEA's or the
business unit's, as applicable, revenue. Revenue means VSEA's or a business
unit's net sales. Stockholder return means the total return (change in share
price plus reinvestment of any dividends) of a share of the VSEA Common Stock.
Nontransferability of VSEA Awards
VSEA Awards granted under the VSEA Omnibus Stock Plan may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the applicable laws of descent and distribution.
Tax Aspects
A recipient of a stock option or SAR will not have taxable income upon the
grant of the option. For options and SARs other than incentive stock options,
the participant will recognize ordinary income upon exercise in an amount equal
to the excess of the fair market value of the shares over the exercise price
(the "appreciation value") on the date of exercise. Any gain or loss recognized
upon any later disposition of the shares generally will be capital gain or
loss.
The purchase of shares upon exercise of an incentive stock option will not
result in any taxable income to the participant, except for purposes of the
alternative minimum tax. Gain or loss recognized by the participant on a later
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<PAGE>
sale or other disposition will either be long-term capital gain or loss or
ordinary income depending upon whether the participant holds the shares
transferred upon the exercise for a specified period. Any ordinary income
recognized will be in the amount, if any, by which the lesser of the fair
market value of such shares on the date of exercise or the amount realized from
the sale exceeds the option price.
Unless the participant elects to be taxed at the time of receipt of restricted
stock, Performance Units or Performance Shares, the participant will not have
taxable income upon the receipt of the VSEA Award, but upon vesting will
recognize ordinary income equal to the fair market value of the shares or cash
at the time of vesting.
At the discretion of the Compensation Committee, the VSEA Omnibus Stock Plan
allows a participant to satisfy tax withholding requirements under federal and
state tax laws in connection with the exercise or receipt of an VSEA Award by
electing to have shares of VSEA Common Stock withheld, or by delivering to VSEA
already-owned shares, having a value equal to the amount required to be
withheld.
VSEA generally will be entitled to a tax deduction in connection with an VSEA
Award under the VSEA Omnibus Stock Plan only in an amount equal to the ordinary
income realized by the participant and at the time the participant recognizes
such income. However, VSEA may not be entitled to a deduction in connection
with certain substitute stock options issued in connection with the
Distribution. In addition, Section 162(m) contains special rules regarding the
federal income tax deductibility of compensation paid to VSEA's Chief Executive
Officer and to each of the other four most highly compensated executive
officers. The general rule is that annual compensation paid to any of these
specified executives will be deductible only to the extent that it does not
exceed $1 million. However, VSEA can preserve the deductibility of certain
compensation in excess of $1 million if it complies with conditions imposed by
Section 162(m), including the establishment of a maximum number of shares with
respect to which VSEA Awards may be granted to any one employee during one
year, and if for VSEA Awards other than options and SARs, the VSEA Omnibus
Stock Plan sets forth performance goals which must be achieved prior to payment
of the VSEA Awards. The VSEA Omnibus Stock Plan has been designed to permit the
Compensation Committee to grant VSEA Awards which satisfy the requirements of
Section 162(m), thereby permitting VSEA to continue to receive a federal income
tax deduction in connection with such VSEA Awards.
Amendment and Termination of the VSEA Omnibus Stock Plan
The VSEA Board generally may amend or terminate the VSEA Omnibus Stock Plan at
any time and for any reason.
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<PAGE>
THE VSEA MANAGEMENT INCENTIVE PLAN
The VSEA Management Incentive Plan has been adopted by the VSEA Board effective
as of the Distribution.
Background and Reasons for Adoption
Under Section 162(m), the federal income tax deductibility of compensation paid
to VSEA's Chief Executive Officer and to each of its next four most highly
compensated executive officers may be limited to the extent that it exceeds
$1million in any one year. VSEA can deduct compensation in excess of that
amount if it qualifies as "performance-based compensation" under Section
162(m). The VSEA Management Incentive Plan is intended to permit VSEA to pay
incentive compensation which qualifies as performance-based compensation,
thereby permitting VSEA to receive a federal income tax deduction for the
payment of such incentive compensation.
Description of the VSEA Management Incentive Plan
The following paragraphs provide a summary of the principal features of the
VSEA Management Incentive Plan and its operation. The VSEA Management Incentive
Plan has been filed as an exhibit to the Registration Statement of which this
Information Statement is a part.
Purpose of the VSEA Management Incentive Plan
The VSEA Management Incentive Plan is intended to motivate VSEA's key employees
to increase stockholder value by (1) linking a portion of their cash
compensation to VSEA's financial performance, (2) providing rewards for
improving VSEA's financial performance and (3) helping to attract and retain
key employees.
Administration of the VSEA Management Incentive Plan
The VSEA Management Incentive Plan will be administered by the Compensation
Committee. The members of the Compensation Committee must qualify as "outside
directors" under Section 162(m) (for purposes of qualifying the VSEA Management
Incentive Plan as performance-based compensation under such section). Subject
to the terms of the VSEA Management Incentive Plan, the Compensation Committee
has the sole discretion to determine the key employees who will be granted
awards, and the amounts, terms and conditions of each award. The Compensation
Committee may delegate its authority to grant and administer awards to one or
more officers or directors appointed by the Compensation Committee, but only
with respect to awards that are not intended to qualify as performance-based
compensation under Section 162(m).
Eligibility to Receive Awards
Eligibility for the VSEA Management Incentive Plan is determined in the
discretion of the Compensation Committee. In selecting participants for the
VSEA Management Incentive Plan, the Compensation Committee will choose key
employees of VSEA and its affiliates who are likely to have a significant
impact on VSEA performance.
Awards and Performance Goals
Under the VSEA Management Incentive Plan, the Compensation Committee will
establish (1) the performance goals which must be achieved in order for the
participant to actually be paid an award and (2) a formula or table for
calculating a participant's award, depending upon how actual performance
compares to the preestablished performance goals. A participant's award will
increase or decrease as actual performance increases or decreases. The
Compensation Committee also will determine the period for measuring actual
performance (the "performance period"). Performance periods may last as long as
three fiscal years of VSEA.
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The Compensation Committee may set performance periods and performance goals
which differ from participant to participant. For example, the Compensation
Committee may choose performance goals based on either company-wide or business
unit results, as deemed appropriate in light of the participant's specific
responsibilities. For purposes of qualifying awards as performance-based
compensation under Section 162(m), the Compensation Committee will specify
performance goals from the following list: EBIT, EBITDA, earnings per share,
net income, operating cash flow, return on assets, return on equity, return on
sales, revenue and stockholder return.
EBIT means VSEA's or a business unit's income before reductions for interest
and taxes. EBITDA means VSEA's or a business unit's income before reductions
for interest, taxes, depreciation and amortization. Earnings per share means
VSEA's or a business unit's net income, divided by a weighted average number of
common shares outstanding and dilutive common equivalent shares deemed
outstanding. Net income means VSEA's or a business unit's income after taxes.
Operating cash flow means VSEA's or a business unit's sum of net income plus
depreciation and amortization less capital expenditures plus certain specified
changes in working capital. Return on assets means the percentage equal to
VSEA's or a business unit's EBIT (before incentive compensation), divided by
VSEA's or a business unit's, as applicable, average net assets. Return on
equity means the percentage equal to VSEA's net income, divided by average
stockholders' equity. Return on sales means the percentage equal to VSEA's or a
business unit's EBIT (before incentive compensation), divided by VSEA's or the
business unit's, as applicable, revenue. Revenue means VSEA's or a business
unit's net sales. Stockholder return means the total return (change in share
price plus reinvestment of any dividends) of a share of the VSEA Common Stock.
For any performance period, no participant may receive an award of more than
the lesser of (1) 400% of the Participant's annualized salary rate on the last
day of the performance period or (2) $4 million. Also, the total of all awards
for any performance period cannot exceed 8% of VSEA's EBIT before incentive
compensation for the most recently completed fiscal year of VSEA. Awards which
exceed this overall limit will be pro-rated so that the total does not exceed
such limit.
Determination of Actual Awards
After the end of each performance period, a determination will be made as to
the extent to which the performance goals applicable to each participant were
achieved or exceeded. The actual award (if any) for each participant will be
determined by applying the formula to the level of actual performance which was
achieved. However, the Compensation Committee retains discretion to eliminate
or reduce the actual award payable to any participant below that which
otherwise would be payable under the applicable formula. Awards under the VSEA
Management Incentive Plan generally will be payable in cash or VSEA Common
Stock within 120 days after the performance period during which the award was
earned.
Amendment and Termination of the VSEA Management Incentive Plan
The VSEA Board may amend or terminate the VSEA Management Incentive Plan at any
time and for any reason.
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OWNERSHIP OF VSEA COMMON STOCK
VSEA is currently a wholly owned subsidiary of Varian. Table IV sets forth
information as to the beneficial ownership of VSEA Common Stock as of the
Distribution Date (and following the Distribution) as if the Distribution took
place on February 1, 1999, by (a) each officer named in Table I, (b) each
director of VSEA, (c) all directors and executive officers of VSEA as a group
and (d) each person who, to VSEA's knowledge, beneficially owned more than 5%
of the outstanding shares. The information in Table IV is based on the
ownership of Varian Common Stock as of February 1, 1999 and the number of
shares of VSEA Common Stock expected to be distributed to each existing
stockholder of Varian in the Distribution.
Table IV
<TABLE>
<CAPTION>
Percent of
Shares of VSEA Common Stock Outstanding Shares
Expected to be Expected to be
Name Beneficially Owned(/1/)(/2/) Beneficially Owned(/1/)
- ---- ---------------------------- -----------------------
Directors and Officers
<S> <C> <C>
Ruth M. Davis........... 10,452(/3/) *
Robert W. Dutton........ 4,600(/4/) *
Angus A. MacNaughton.... 26,800(/5/) *
J. Tracy O'Rourke....... 481,500(/6/) 1.6
Richard A. Aurelio...... 125,722(/7/) *
Charles M. McKenna...... 63,154(/8/) *
G. Dennis Key........... 2,546(/9/) *
Walter F. Sullivan...... 26,133(/10/) *
Ernest L. Godshalk III.. 900(/11/) *
All Directors and
Executive Officers of
VSEA
VSEA a Group (10
persons)............... 748,357(/12/) 2.5
<CAPTION>
Name and Address of
Beneficial Owner
- -------------------
Principal Stockholders
<S> <C> <C>
FMR Corp./Edward C.
Johnson 3d/Abigail P.
Johnson................ 3,305,860(/13/) 11.0
82 Devonshire Street
Boston, Massachusetts
02109
State Treasurer......... 2,075,760(/14/) 6.9
State of Michigan
c/o Director of
Investments
P.O. Box 1128
Lansing, Michigan 48901
Merrill Lynch & Co.,
Inc. (Merrill Lynch
Asset Management
Group)................. 1,756,000(/15/) 5.9
Merrill Lynch Capital
Fund, Inc.............. 1,750,000(/15/) 5.8
800 Scudders Mill Road
Plainsboro, New Jersey
08536
Sound Shore Management,
Inc.................... 1,506,500(/16/) 5.0
8 Sound Shore Drive
Greenwich, Connecticut
06836
</TABLE>
- -------
* The percentage of shares of VSEA Common Stock expected to be beneficially
owned does not exceed one percent of the shares of VSEA Common Stock
expected to be outstanding.
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of VSEA Common Stock which such
person has the right to acquire within 60 days following February 1, 1999.
For purposes of computing the percentage of outstanding shares of VSEA
Common Stock held by each person or group of persons named above, any
security which such person or persons has or have the right to acquire
within 60 days following February 1, 1999 is deemed to be outstanding, but
is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Fractional shares are rounded
down to the nearest whole share.
(2) To VSEA's knowledge, unless otherwise indicated, the person named in the
table has sole voting and investment power with respect to the shares or
shares such voting and investment power with such person's spouse or
children.
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(3) Includes 8,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan.
(4) Includes 4,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan.
(5) Includes (a) 16,000 shares which may be acquired under exercisable stock
options granted pursuant to the Varian Omnibus Stock Plan and (b) 5,000
shares held in a trust of which Mr. MacNaughton is sole trustee.
(6) Includes (a) 8,001 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan and (b) 391,000 shares which may be acquired on
or within 60 days of February 1, 1999 under stock options granted pursuant
to the Varian 1982 Non-Qualified Stock Option Plan and the Varian Omnibus
Stock Plan.
(7) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan, (b) 102,000 shares which may be acquired on or
within 60 days of February 1, 1999 under stock options granted pursuant to
the Varian Omnibus Stock Plan and (c) 217 shares held by Mr. Aurelio's
daughter.
(8) Includes (a) 900 shares of restricted stock granted pursuant to the Varian
Omnibus Stock Plan and (b) 50,499 shares which may be acquired on or
within 60 days of February 1, 1999 under stock options granted pursuant to
the Varian Omnibus Stock Plan.
(9) Includes (a) 2,000 shares of restricted stock granted pursuant to the
Varian Omnibus Stock Plan.
(10) Includes (a) 900 shares of restricted stock granted pursuant to the Varian
Omnibus Stock Plan and (b) 24,333 shares which may be acquired on or
within 60 days of February 1, 1999 under stock options granted pursuant to
the Varian Omnibus Stock Plan.
(11) Includes 900 shares of restricted stock granted pursuant to the Varian
Omnibus Stock Plan.
(12) Includes (a) 16,901 shares of restricted stock granted to executive
officers pursuant to the Varian Omnibus Stock Plan, (b) 602,382 shares
which may be acquired on or within 60 days of February 1, 1999 by
executive officers and directors under stock options granted pursuant to
the Varian 1982 Non-Qualified Stock Option Plan and the Varian Omnibus
Stock Plan, (c) 5,217 shares as to which voting and/or investment power is
shared (see certain of the foregoing footnotes) and (d) 900 shares of
restricted stock granted to Ernest L. Godshalk III (expected to be an
executive officer of VSEA) pursuant to the Varian Omnibus Stock Plan.
(13) According to an amendment to a Schedule 13G dated February 1, 1999, FMR
Corp. has sole voting power over 113,900 of these shares and sole
dispositive power over all 3,305,860 shares. Fidelity Management &
Research, a wholly owned subsidiary of FMR, is the beneficial owner of
3,143,860 of these shares as a result of acting as investment adviser to
certain investment companies. Edward C. Johnson 3d and Abigail P. Johnson
own 12.0% and 24.5%, respectively, of the voting stock of FMR Corp. and
therefore may be deemed to have beneficial ownership of the shares
referenced.
(14) Based on a Schedule 13D dated August 12, 1997.
(15) According to an amendment to a Schedule 13G dated January 29, 1999,
Merrill Lynch & Co., Inc (through Merrill Lynch Asset Management, L.P.)
has shared voting power and shared dispositive power over all 1,756,000
shares. Also according to that Schedule 13G, Merrill Lynch Capital Fund,
Inc. has shared voting power and shared dispositive power over 1,750,000
of such shares.
(16) According to an amendment to a Schedule 13G dated January 22, 1999, Sound
Shore Management, Inc. has sole voting power over 1,378,800 of such
shares, shared voting power over 24,200 of such shares and sole
dispositive power over all 1,506,500 shares.
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FINANCING
On an historical basis, Varian incurred or managed indebtedness at the parent
level, and VSEA was not allocated any of Varian's debt as Varian used a
centralized approach to cash management and the financing of its operations.
The amount of debt to be retained by VMS and assumed by or transferred to VSEA
and IB and the determination of the initial capital structures of VSEA, IB and
VMS as of the Distribution Date are based upon the goals of maximizing combined
stockholder value for Varian's present stockholders while enabling VSEA to
maintain sufficient cash flow to cover anticipated operating deficits caused by
the current downturn in the semiconductor equipment market.
The Notes Payable may, as a result of the Internal Transfers and debt
allocation provisions of the Distribution Agreement, remain outstanding as
direct and indirect obligations of VSEA as of the Distribution Date. In
connection with the Distribution, Varian will contribute cash to VSEA so that
at the time of the Distribution, VSEA will have approximately $100 million in
cash and cash equivalents and its Consolidated Debt, expected to be comprised
of Notes Payable, will not exceed $5 million. Based on the assumptions stated
in such section, the allocation of indebtedness to VSEA at the Distribution
Date should approximate the amounts reflected in "Forecasted Capitalization."
Management of VSEA believes that there is sufficient financing capability in
respect of VSEA to accomplish the contemplated allocation of indebtedness. See
"Forecasted Capitalization."
VSEA may enter into a credit facility for working capital and other general
corporate purposes. The credit facility may contain certain customary financial
and operating covenants, including restrictions upon incurring indebtedness and
liens, making certain fundamental changes, selling assets and paying dividends.
It is not expected that VSEA will have any outstanding borrowings under its
credit facility as of the Distribution.
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DESCRIPTION OF THE CAPITAL STOCK
General
Pursuant to VSEA's Certificate of Incorporation which will be in effect at the
time of the Distribution, the authorized capital stock of VSEA will consist of
(i) 150,000,000 shares of VSEA Common Stock of which approximately 29,985,829
million shares will be issued and outstanding upon consummation of the
Distribution (based on the number of shares of Varian Common Stock outstanding
as of February 1, 1999) and (ii) 5,000,000 shares of preferred stock, $.01 par
value per share ("Preferred Stock"), none of which will be issued and
outstanding upon consummation of the Distribution.
All outstanding shares of VSEA Common Stock are, and the shares to be issued in
the Distribution will be, validly issued, fully paid and nonassessable.
Common Stock
Each holder of VSEA Common Stock is entitled to one vote for each share owned
of record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. Accordingly, the holders of a majority of the shares
voting for the election of directors can elect all the directors if they choose
to do so, subject to any voting rights of holders of Preferred Stock to elect
directors. Subject to the preferential rights of any outstanding series of
Preferred Stock, and to the restrictions on payment of dividends imposed by any
credit facilities that may be entered into by VSEA, the holders of VSEA Common
Stock will be entitled to such dividends as may be declared from time to time
by the VSEA Board from funds legally available therefor, and will be entitled,
after payment of all prior claims, to receive pro rata all assets of VSEA upon
the liquidation, dissolution or winding up of VSEA. Holders of VSEA Common
Stock have no redemption or conversion rights or preemptive rights to purchase
or subscribe for securities of VSEA. Certain provisions of the Certificate of
Incorporation and By-Laws of VSEA that will be in effect at the time of the
Distribution may have the effect of making more difficult an acquisition of
control of VSEA in a transaction not approved by the VSEA Board. See "Delaware
Law and Certain Charter and By-Law Provisions."
VSEA has applied for quotation of the VSEA Common Stock on the Nasdaq National
Market under the symbol "VSEA."
Preferred Stock
The authorized capital stock of VSEA includes shares of Preferred Stock, none
of which are currently issued or outstanding. The VSEA Board is authorized to
divide the Preferred Stock into series and, with respect to each series, to
determine the preferences and rights and the qualifications, limitations or
restrictions thereof, including the dividend rights, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, sinking fund
provisions, the number of shares constituting the series and the designation of
such series. The VSEA Board could, without stockholder approval, issue
Preferred Stock with voting and other rights that could adversely affect the
voting power of the holders of VSEA Common Stock and which could have certain
anti-takeover effects.
In connection with the Rights Plan, the VSEA Board has authorized 50,000 shares
of Participating Preferred (the "Participating Preferred"). For a description
of the rights, powers and preferences of the Participating Preferred for VSEA,
see " - Rights Plan."
Rights Plan
The VSEA Board has adopted the Rights Plan pursuant to which one right (a
"Right") to purchase one one-thousandth of a share of Participating Preferred
at a purchase price of $120 (substantially above the expected current trading
value for VSEA) to be determined, subject to adjustment, will be distributed
with the VSEA Common Stock in the Distribution. The Rights will be issuable on
the terms and subject to the conditions set forth in the Rights Plan. The
Rights will expire no later than April 2, 2009. The Rights will be exercisable
on the earlier to occur of (i) the first date of public announcement (or such
earlier or later date as the VSEA Board may determine) that a person or "group"
has acquired beneficial ownership of 15% or more of the outstanding VSEA Common
Stock (an "Acquiring Person") and
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(ii) ten business days (or such later date as the VSEA Board may determine)
following the commencement of a tender or exchange offer the consummation of
which would result in a person or group becoming an Acquiring Person.
If any person or group becomes an Acquiring Person or commences a tender or
exchange offer upon consummation of which such person or group would become an
Acquiring Person, each Right not owned by such Acquiring Person or certain
related parties would entitle its holder to purchase, at the Right's then
current exercise price, shares of VSEA Common Stock, or, in the discretion of
the VSEA Board, shares of Participating Preferred, having a value equal to
twice the Right's then current exercise price. The effect would be to
significantly dilute the equity interest of the Acquiring Person. In addition,
if, after a person or group becomes an Acquiring Person, VSEA is involved in a
merger or other business combination transaction in which (i) the holders of
all of the outstanding VSEA Common Stock immediately prior to the consummation
of the transaction are not the holders of the surviving corporation's voting
power or (ii) more than 50% of VSEA's assets or earning power is sold or
transferred, each Right will entitle its holder to purchase, at the Right's
then current exercise price, common shares of the acquiring company having a
value equal to twice the Right's then current exercise price.
The purchase price payable, and the shares issuable, upon exercise of the
Rights will be subject to adjustment from time to time as specified in the
Rights Plan. VSEA will generally be entitled to redeem the Rights in whole, but
not in part, at $0.001 per Right at any time prior to the earlier to occur of
(i) a person becoming an Acquiring Person or (ii) expiration of the Rights.
Shares of Participating Preferred purchasable upon exercise of the Rights will
not be redeemable and will be designed so that each one one-thousandth of a
share has economic and voting terms similar to one share of VSEA Common Stock.
Each share of Participating Preferred will be entitled to a minimum
preferential quarterly dividend payment of $2.50 per share but, if greater,
will be entitled to an aggregate dividend per share of 1,000 times the dividend
declared per share of VSEA Common Stock. In the event of liquidation of VSEA,
the holders of Participating Preferred will be entitled to a minimum
preferential liquidation payment of $100.00, provided that they will be
entitled to an aggregate payment per share of at least 1,000 times the
aggregate payment made per share of VSEA Common Stock. Each share of
Participating Preferred will have one thousand votes, voting together with the
VSEA Common Stock. These rights are protected by customary anti-dilution
provisions.
Transfer Agent and Rights Agent
The transfer agent for the VSEA Common Stock is First Chicago Trust Company of
New York. First Chicago Trust Company of New York will also be the Rights Agent
under the Rights Plan.
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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation of VSEA that will be in effect at the time of
the Distribution (the "VSEA Charter") will provide that a director will not be
personally liable to VSEA or its stockholders for monetary damages for any
breach of fiduciary duty as a director, except in certain cases where liability
is mandated by the Delaware General Corporation Law (the "DGCL"). The VSEA
Charter and/or By-Laws of VSEA that will be in effect as of the Distribution
also provide for indemnification, to the fullest extent permitted by law, of
any person who is or was involved in any manner in any pending, threatened or
completed investigation, claim or other proceeding by reason of the fact that
such person is or was a director, officer, employee or agent of VSEA, or, at
the request of VSEA, is or was serving as a director, officer, employee or
agent of another entity, against all expenses, liabilities, losses and claims
incurred or suffered by such person in connection with the investigation, claim
or other proceeding. VSEA has entered into, or intends to enter into,
agreements to provide indemnification for directors and officers in addition to
the indemnification provided for in the VSEA Charter and By-Laws. These
agreements, among other things, will indemnify directors and officers to the
fullest extent permitted by law for certain expenses (including attorneys'
fees) and all losses, claims, liabilities, judgments, fines and settlement
amounts incurred by such person arising out of or in connection with such
person's service as a director or officer of VSEA or another entity for which
such person was serving as an officer or director at the request of VSEA and
will provide for advancement of such expenses to such persons. Other than as
described herein, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of VSEA or any other entity as to
which indemnification is being sought under these provisions from VSEA, and
VSEA is not aware of any pending or threatened litigation that may result in
claims for indemnification under these provisions by a director, officer,
employee or other agent.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Delaware Law
VSEA is subject to the provisions of Section 203 of the DGCL ("Section 203").
In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, in certain cases, within three years
prior, did own) 15% or more of the corporation's voting stock. Under Section
203, a business combination between the corporation and an interested
stockholder is prohibited unless it satisfies one of the following conditions:
(i) the board of directors must have previously approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; or (ii) on consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation,
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by (a) persons who
are directors and also officers and (b) employee stock plans, in certain
instances); or (iii) the business combination is approved by the board of
directors and authorized at an annual or special meeting of the stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder.
Certain Charter and By-Law Provisions
The VSEA Charter contains provisions that will make more difficult the
acquisition of control of VSEA by means of a tender offer, open market
purchases, a proxy fight or otherwise that are not approved by the VSEA Board.
The VSEA By-Laws also contain provisions that could have an anti-takeover
effect.
The purposes of such provisions of the VSEA Charter and By-Laws are to
discourage certain types of transactions, described below, which may involve an
actual or threatened change of control of VSEA and to encourage persons seeking
to acquire control of VSEA to negotiate the terms of any proposed business
combination or offer with the VSEA Board. The provisions are designed to reduce
the vulnerability of VSEA to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares or is otherwise
unfair to stockholders of VSEA, or an
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unsolicited proposal for the restructuring or sale of all or part of VSEA. VSEA
believes that, as a general rule, such proposals would not be in the best
interests of VSEA or its stockholders. These provisions will help ensure that
the VSEA Board, if confronted by a surprise proposal from a third party which
has acquired a block of stock, will have sufficient time to review the proposal
and appropriate alternatives to the proposal and to act in what it believes to
be the best interests of the stockholders.
There has been a marked increase in hostile takeover activity during the last
several years. VSEA believes that the provisions discussed herein may provide
some measure of protection for stockholders against certain potentially
coercive takeover tactics. Such takeover tactics include the accumulation of
substantial stock positions in public companies by third parties as a prelude
to proposing a takeover, a restructuring or sale of all or part of the company
or another similar extraordinary corporate action. Such actions are often
undertaken by a third party without advance notice to, or consultation with,
the management or board of directors of a company. In many cases, the purchaser
seeks representation on a company's board of directors in order to increase the
likelihood that its proposal will be implemented by a company. If a company
resists the efforts of the purchaser to obtain representation on the company's
board, a purchaser may commence a proxy contest to have its nominees elected to
the board of directors in place of certain directors or in place of the entire
board of directors. In some cases, a purchaser may not truly be interested in
taking over a company, but may use the threat of a proxy fight and/or a bid to
take over a company as a means of forcing the company to repurchase its equity
position at a substantial premium over market price.
VSEA believes that the threat of imminent removal of the VSEA management or
VSEA Board in such situations would severely curtail the ability of management
or the VSEA Board to negotiate effectively with such purchasers. Management or
the VSEA Board would be deprived of the time and information necessary to
evaluate the takeover proposal, to study alternative proposals and to help
ensure that the best price is obtained in any transaction involving VSEA that
may ultimately be undertaken. If the real purpose of a takeover bid were to
force VSEA to repurchase an accumulated stock interest at a premium price,
management or the VSEA Board would face the risk that, if it did not repurchase
the purchaser's stock interest, VSEA's business and management would be
disrupted, perhaps irreparably.
These provisions, individually and collectively, may impede or discourage a
merger, tender offer or proxy fight, even if such transaction or occurrence may
be favorable to the interests of the stockholders, and may delay or frustrate
the assumption of control by a holder of a large block of VSEA Common Stock and
the removal of incumbent management, even if such removal might be beneficial
to stockholders. Furthermore, these provisions may deter or could be used to
frustrate a future takeover attempt which is not approved by the incumbent
board of directors, but which the holders of a majority of the shares may deem
to be in their best interests or in which stockholders may receive a
substantial premium for their stock over prevailing market prices of such
stock. By discouraging takeover attempts these provisions might have the
incidental effect of inhibiting certain changes in management (some or all of
the members of which might be replaced in the course of a change of control)
and also the temporary fluctuations in the market price of the stock which
often result from actual and rumored takeover attempts.
Set forth below is a description of such provisions in the VSEA Charter and By-
Laws. Such description is intended as a summary only and is qualified in its
entirety by reference to the VSEA Charter and By-Laws, which have been filed as
exhibits to the Registration Statement. Capitalized terms used and not defined
herein are defined in the VSEA Charter or By-Laws.
Classified Boards of Directors
The VSEA Charter provides for the VSEA Board to be divided into three classes
serving staggered terms. The classification of directors will have the effect
of making it more difficult for stockholders to change the composition of the
board of directors in a relatively short period of time. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the board of directors. Such a delay may help ensure
that the VSEA Board, if confronted by a stockholder's attempt to force a stock
repurchase at a premium above market price, a proxy contest or an extraordinary
corporate transaction, will have sufficient time to review the proposal and
appropriate alternatives to the proposal and to act in what they believe are
the best interests of the stockholders. VSEA also believes that a classified
board of directors will help to assure the continuity and stability of the VSEA
Board and the business
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strategies and policies of VSEA as determined by the VSEA Board, because
generally a majority of the directors at any given time will have had prior
experience as directors of VSEA.
The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
VSEA as the case may be, even though such an attempt might be beneficial to
VSEA and its stockholders. The classified board provision could thus increase
the likelihood that incumbent directors will retain their positions.
Number of Directors; Removal; Filling Vacancies
The VSEA Charter provides that the specific number of directors (which must be
at least three) shall be fixed by resolution of the VSEA Board. In addition,
the VSEA Charter provides that, subject to any rights of the holders of
preferred stock, only a majority of the directors then in office shall have the
authority to fill any vacancies on the VSEA Board. Accordingly, the existing
board members could prevent any stockholder from obtaining majority
representation on the VSEA Board by enlarging the VSEA Board and filling the
new directorships with its own nominees.
Moreover, the VSEA Charter provides that directors may be removed only for
cause by the affirmative vote of holders of at least a majority of the voting
power of all of the then-outstanding shares of VSEA Common Stock. This
provision, when coupled with the provisions of the VSEA Charter authorizing
only the VSEA Board to fill vacant directorships, would preclude stockholders
from removing incumbent directors without cause and filling the vacancies
created by such removal with their own nominees. These provisions reflect
existing Delaware law absent a contrary provision in a company's charter.
Limitations on Stockholder Action by Written Consent; Special Meetings
Under the DGCL, unless otherwise provided in the certificate of incorporation,
any action required or permitted to be taken by the stockholders of a Delaware
corporation may be taken without a meeting, without prior notice and without a
stockholder vote if a written consent setting forth the action to be taken is
signed by the holders of outstanding stock having the requisite number of
shares that would be necessary to authorize such action at a meeting at which
all shares entitled to vote thereon were present and voted. The VSEA Charter
provides that stockholder action can be taken only at an annual or special
meeting of stockholders, and prohibit stockholder action by written consent in
lieu of a meeting. The VSEA By-Laws provide that, subject to the rights of
holders of any series of the Preferred Stock, special meetings of stockholders
can be called only by the Chairman of the Board, the Chief Executive Officer,
the Vice Chairman of the Board (if any), the President or the VSEA Board.
Stockholders are not permitted to call a special meeting or to require that the
VSEA Board call a special meeting of stockholders. Moreover, the business
permitted to be conducted at any special meeting of stockholders will be
limited to the purpose or purposes of the meeting as stated in the notice of
the meeting.
The provisions of the VSEA Charter restricting stockholder action by written
consent may have the effect of delaying consideration of a stockholder proposal
until the next annual meeting unless a special meeting is called by the
Chairman of the Board, the Chief Executive Officer, the Vice Chairman of the
Board (if any), the President or pursuant to a board resolution. These
provisions would also prevent the holders of a majority of the voting power of
VSEA Common Stock from using the written consent procedure to take stockholder
action and from taking action by consent without giving all the stockholders
entitled to vote on a proposed action the opportunity to participate in
determining such proposed action. Moreover, a stockholder could not force
stockholder consideration of a proposal over the opposition of the VSEA Board
by calling a special meeting of stockholders prior to the time the VSEA Board
believed such consideration to be appropriate.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
The VSEA By-Laws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the VSEA Board, of candidates
for election as directors (the "Nomination Procedure") and with regard to
certain matters to be brought before an annual meeting of stockholders (the
"Business Procedure").
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Pursuant to the VSEA By-Laws, the Nomination Procedure provides that only
persons who are nominated by, or at the direction of, the VSEA Board or by a
stockholder of record who has given timely prior written notice to the
Secretary prior to the meeting at which directors are to be elected will be
eligible for election as directors. The Business Procedure provides that at an
annual meeting only such business can be conducted as has been brought before
the meeting pursuant to the notice of the meeting, by, or at the direction of,
the VSEA Board or by a stockholder of record who has given timely prior written
notice to the Secretary of such stockholder's intention to bring such business
before the meeting. To be timely, notice must generally be received by not less
than 60 days nor more than 90 days prior to the first anniversary of the
mailing of the proxy statement in connection with the previous year's annual
meeting. For notice of a stockholder nomination to be made at a special meeting
at which directors are to be elected to be timely, such notice must be received
not earlier than the 90th day before such meeting and not later than the later
of (1) the 60th day prior to such meeting and (2) the tenth day after public
announcement of the date of such meeting is first made.
Under the Nomination Procedure, notice from a stockholder who proposes to
nominate a person at a meeting for election as director must contain certain
information about that person, including such person's consent to be nominated
and such information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee, and certain
information about the stockholder proposing to nominate that person or the
beneficial owner, if any, on whose behalf the nomination is made. Under the
Business Procedure, notice relating to the conduct of business must contain
certain information about such business and about the stockholder who proposes
to bring the business before the meeting including a brief description of the
business the stockholder proposes to bring before the meeting, the reasons for
conducting such business at such meeting, the class and number of shares of
stock beneficially owned by such stockholder, and by the beneficial owner, if
any, on whose behalf the proposal is made, and any material interest of such
stockholder, and such beneficial owner in the business so proposed. If the
Chairman or other officer presiding at a meeting determines that a person was
not nominated in accordance with the Nomination Procedure, such person will not
be eligible for election as a director, or if he or she determines that other
business was not properly brought before such meeting in accordance with the
Business Procedure, such business will not be conducted at such meeting.
The purpose of the Nomination Procedure is, by requiring advance notice of
nominations by stockholders, to afford the VSEA Board a meaningful opportunity
to consider the qualifications of the proposed nominees and, to the extent
deemed necessary or desirable by the VSEA Boards, to inform stockholders about
such qualifications. The purpose of the Business Procedure is, by requiring
advance notice of proposed business, to provide a more orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the VSEA Board to provide the VSEA Board with a meaningful
opportunity to inform stockholders, prior to such meeting, of any business
proposed to be conducted at such meetings, together with any recommendation as
to the VSEA Board's position or belief as to action to be taken with respect to
such business, so as to enable stockholders better to determine whether they
desire to attend such meeting or grant a proxy to the VSEA Board as to the
disposition of any such business. Although the VSEA By-Laws will not give the
VSEA Board any power to approve or disapprove stockholder nominations for the
election of directors or of any other business desired by a stockholder to be
conducted at an annual meeting, the By-Laws may have the effect of precluding a
nomination for the election of directors or precluding the conducting of
business at a particular annual meeting if the proper procedures are not
followed, and may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of VSEA, even if the conduct of such solicitation
or such attempt might be beneficial to VSEA and its stockholders.
Amendment of Certain Charter and By-Law Provisions
The VSEA Charter contains provisions requiring the affirmative vote of the
holders of at least 66 2/3% of the outstanding VSEA Common Stock to amend the
provisions of such charter pertaining to classification of the VSEA Board,
filling vacancies in the VSEA Board, removal of directors and the requirement
that stockholders can act only at annual or special meetings and not by written
consent. The VSEA Charter and By-Laws also require the vote of at least 66 2/3%
of the outstanding VSEA Common Stock for stockholders to adopt, amend or repeal
any provision of the VSEA By-Laws. These provisions will make it more difficult
for stockholders to change the VSEA Charter and By-Laws, including
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changes designed to facilitate the exercise of control over VSEA. In addition,
the requirement for approval by at least a 66 2/3% stockholder vote will enable
the holders of a minority of VSEA's capital stock to prevent holders of a less
than 66 2/3% majority from amending the indicated provisions of the VSEA
Charter and By-Laws.
Preferred Stock
The VSEA Charter authorizes the VSEA Board to establish series of Preferred
Stock and to determine, with respect to any series of Preferred Stock, the
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as are stated in the
board resolutions providing for such series. The number of authorized shares of
Preferred Stock will be 5,000,000.
VSEA believes that the availability of such Preferred Stock will provide VSEA
with increased flexibility in structuring possible future financing and
acquisitions, and in meeting other corporate needs which might arise. Having
such authorized shares available for issuance will allow VSEA to issue shares
of Preferred Stock without the expense and delay of a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of VSEA
Common Stock, will be available for issuance without further action by
stockholders, unless such action is required by applicable law or the rules of
any stock exchange on which the securities may be listed. Although the VSEA
Board does not have any intention at the present time of doing so, it could
issue a series of Preferred Stock that could, subject to certain limitations
imposed by the securities laws and stock exchange rules, depending on the terms
of such series, impede the completion of a merger, tender offer or other
takeover attempt. For instance, such series of preferred stock might impede a
business combination by including class-voting rights that would enable the
holder to block such a transaction. The VSEA Board will make any determination
to issue such shares based on its judgment as to the best interests of VSEA and
its then existing stockholders. The board, in so acting, could issue Preferred
Stock having terms which could discourage an acquisition attempt or other
transaction that some, or a majority, of the stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over the then market price of such stock. The authorized and
unissued Preferred Stock of VSEA as well as the authorized and unissued VSEA
Common Stock would be available, and the VSEA Charter explicitly authorizes use
of capital stock, for the above purposes.
In connection with the Rights Plan, the VSEA Board has authorized 50,000 shares
of Participating Preferred. No such shares of Participating Preferred are
currently outstanding. For a description of the rights, powers and preferences
of the Participating Preferred, see "Description of the Capital Stock - Rights
Plan."
Common Stock
The VSEA Charter will authorize the VSEA Board to issue up to 150,000,000
shares of VSEA Common Stock.
The authorized but unissued VSEA Common Stock will provide VSEA with the
ability to meet future capital needs and to provide shares for possible
acquisitions and stock dividends or stock splits. The VSEA Board would have the
ability, in the event of a proposed merger, tender offer or other attempt to
gain control of VSEA that was not approved by such board, to issue additional
common stock that would dilute the stock ownership of the acquiror.
Rights Plan
VSEA has entered into the Rights Plan. The Rights to be distributed in
accordance with the Rights Plan will have certain anti-takeover effects. Each
of the Rights will cause substantial dilution to a person or group that
attempts to acquire VSEA and thereby effect a change in the composition of the
VSEA Board on terms not approved by the VSEA Board, including by means of a
tender offer at a premium to the market price. The Rights should not interfere
with any merger or business combination approved by the VSEA Board, since the
Rights may be redeemed by VSEA, at the applicable redemption price, prior to
the time that a person or group has become an Acquiring Person. See
"Description of the Capital Stock - Rights Plan."
78
<PAGE>
AVAILABLE INFORMATION
VSEA has filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement under the Exchange Act with respect to the VSEA Common
Stock being received by the stockholders of Varian Common Stock in the
Distribution. This Information Statement does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
to which reference is hereby made.
Statements made in this Information Statement as to the contents of any
contract, agreement or other documents referred to herein are not necessarily
complete. With respect to each such contract, agreement or other documents
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto filed by VSEA with the
Commission may be inspected at the public reference facilities of the
Commission listed below.
After the Distribution, VSEA will be subject to the information requirement of
the Exchange Act, and in accordance therewith will file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at its principal offices at
450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material maybe obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
VSEA intends to furnish its stockholders with annual reports containing
consolidated financial statements (beginning with fiscal year 1999) audited by
independent accountants.
No person is authorized by Varian or VSEA to give any information or to make
any representations other than those contained in this Information Statement
and, if given or made, such information or representations must not be relied
upon as having been authorized.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Semiconductor Equipment Business of Varian Associates, Inc.
- -----------------------------------------------------------
<S> <C>
Report of Independent Accountants........................................ F-2
Combined Statements of Earnings for the first quarters ended January 1,
1999 (unaudited) and January 2, 1998 (unaudited) and for the three
fiscal years ended October 2, 1998...................................... F-3
Combined Balance Sheets at January 1, 1999 (unaudited) and at October 2,
1998 and September 26, 1997............................................. F-4
Combined Statements of Divisional Equity for the first quarter ended
January 1, 1999 (unaudited) and for the three fiscal years ended October
2, 1998................................................................. F-5
Combined Statements of Cash Flows for the first quarters ended January 1,
1999 (unaudited) and January 2, 1998 (unaudited) and for the three
fiscal years ended October 2, 1998...................................... F-6
Notes to Combined Financial Statements................................... F-7
Report of Independent Accountants on Financial Statement Schedule........ S-I
Schedule II - Valuation and Qualifying Accounts.......................... S-II
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of Varian Associates, Inc.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of earnings, divisional equity, and cash flows present
fairly, in all material respects, the financial position of the Semiconductor
Equipment Business of Varian Associates, Inc. (the "Company") at October 2,
1998 and September 26, 1997, and the results of its operations and its cash
flows for each of the three years in the period ended October 2, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 31, 1998
F-2
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Combined Statements of Earnings
<TABLE>
<CAPTION>
Quarter Ended Fiscal Years
------------------------ ---------------------------
January 1, January 2,
1999 1998 1998 1997 1996
----------- ----------- -------- -------- --------
(unaudited) (unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue................... $47,355 $114,288 $342,944 $448,322 $667,246
------- -------- -------- -------- --------
Operating Costs and
Expenses
Cost of revenue........... 35,195 64,785 225,237 263,639 400,117
Research and development.. 7,717 9,827 40,823 47,195 55,642
Marketing................. 7,457 11,760 35,211 50,783 52,721
General and
administrative........... 7,321 6,607 25,363 31,893 36,419
Gain on sale of Thin Film
Systems business......... -- -- -- (51,039) --
------- -------- -------- -------- --------
Total operating costs and
expenses................. 57,690 92,979 326,634 342,471 544,899
------- -------- -------- -------- --------
Operating (Loss) Earnings
before Taxes............. (10,335) 21,309 16,310 105,851 122,347
Taxes on (loss) earnings.. (3,638) 6,419 4,913 34,855 43,004
------- -------- -------- -------- --------
Net (Loss) Earnings....... $(6,697) $ 14,890 $ 11,397 $ 70,996 $ 79,343
======= ======== ======== ======== ========
Pro Forma Net (Loss)
Earnings Per Share....... $ (0.22) $ 0.49 $ 0.38 $ 2.33 $ 2.56
======= ======== ======== ======== ========
Shares used in pro forma
per share computations... 29,848 30,086 29,910 30,451 31,024
======= ======== ======== ======== ========
</TABLE>
See accompanying Notes to the Combined Financial Statements.
F-3
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Combined Balance Sheets
<TABLE>
<CAPTION>
Fiscal Year-End
January 1, ------------------
1999 1998 1997
----------- -------- --------
(unaudited)
(Dollars in thousands)
ASSETS
<S> <C> <C> <C>
Current Assets
Accounts receivable........................... $ 61,813 $ 62,677 $ 98,678
Inventories................................... 56,402 60,692 50,233
Other current assets.......................... 38,563 38,754 41,404
-------- -------- --------
Total Current Assets.......................... 156,778 162,123 190,315
-------- -------- --------
Property, Plant, and Equipment................ 82,464 84,128 65,885
Accumulated depreciation and amortization..... (45,862) (45,314) (37,271)
-------- -------- --------
Net Property, Plant, and Equipment............ 36,602 38,814 28,614
-------- -------- --------
Other Assets.................................. 23,198 23,689 14,370
-------- -------- --------
Total Assets.................................. $216,578 $224,626 $233,299
======== ======== ========
<CAPTION>
LIABILITIES AND DIVISIONAL EQUITY
<S> <C> <C> <C>
Current Liabilities
Accounts payable - trade...................... $ 2,826 $ 10,513 $ 19,465
Accrued expenses.............................. 77,770 77,050 90,793
Product warranty.............................. 16,733 21,435 16,948
Advance payments from customers............... 7,291 3,631 2,065
-------- -------- --------
Total Current Liabilities..................... 104,620 112,629 129,271
Long-Term Accrued Expenses.................... 6,947 6,796 6,247
Deferred Taxes................................ 2,040 1,952 3,044
-------- -------- --------
Total Liabilities............................. 113,607 121,377 138,562
-------- -------- --------
Commitments and Contingencies (Notes 9 and 10)
Divisional Equity............................. 102,971 103,249 94,737
-------- -------- --------
Total Liabilities and Divisional Equity....... $216,578 $224,626 $233,299
======== ======== ========
</TABLE>
See accompanying Notes to the Combined Financial Statements.
F-4
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Combined Statements of Divisional Equity
<TABLE>
<CAPTION>
(Dollars
in
thousands)
<S> <C>
Balance, Fiscal Year-End, 1995...................................... $ 133,536
Net earnings for the year........................................... 79,343
Net transfers (to) from Varian Associates, Inc...................... (49,573)
---------
Balance, Fiscal Year-End, 1996...................................... 163,306
Net earnings for the year........................................... 70,996
Net transfers (to) from Varian Associates, Inc...................... (139,565)
---------
Balance, Fiscal Year-End, 1997...................................... 94,737
Net earnings for the year........................................... 11,397
Net transfers (to) from Varian Associates, Inc...................... (2,885)
---------
Balance, Fiscal Year-End, 1998...................................... 103,249
Net loss for the period............................................. (6,697)
Net transfers (to) from Varian Associates, Inc...................... 6,419
---------
Balance, Janaury 1, 1999 (unaudited)................................ $ 102,971
=========
</TABLE>
See accompanying Notes to the Combined Financial Statements.
F-5
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended Fiscal Years
------------------------ -----------------------------
January 1, January 2,
1999 1998 1998 1997 1996
----------- ----------- -------- --------- --------
(unaudited) (unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net Cash Provided by
(Used in) Operating
Activities............. $(4,952) $(18,158) $ 40,219 $ (2,706) $ 71,577
------- -------- -------- --------- --------
Investing Activities
Proceeds from sale of
Thin Film Systems...... -- -- -- 145,500 --
Purchase of property,
plant, and equipment... -- (4,721) (7,191) (10,732) (22,418)
Purchase of businesses,
net of cash acquired... -- -- (31,014) -- --
Other................... -- -- -- 6,535 --
------- -------- -------- --------- --------
Net Cash Provided by
(Used in) Investing
Activities............. -- (4,721) (38,205) 141,303 (22,418)
------- -------- -------- --------- --------
Financing Activities
Net transfers (to) from
Varian Associates,
Inc.................... 6,419 22,298 (2,885) (139,565) (49,573)
------- -------- -------- --------- --------
Net Cash Provided by
(Used in) Financing
Activities............. 6,419 22,298 (2,885) (139,565) (49,573)
------- -------- -------- --------- --------
Effects of Exchange Rate
Changes on Cash........ (1,467) 581 871 968 414
------- -------- -------- --------- --------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ -- -- -- -- --
Cash and Cash
Equivalents at
Beginning of Period.... -- -- -- -- --
------- -------- -------- --------- --------
Cash and Cash
Equivalents at End of
Period................. $ -- $ -- $ -- $ -- $ --
======= ======== ======== ========= ========
Detail of Net Cash
Provided by (Used in)
Operating Activities
Net Earnings (Loss)..... $(6,697) $ 14,890 $ 11,397 $ 70,996 $ 79,343
Adjustments to reconcile
net earnings (loss) to
net cash provided by
(used in) operating
activities
Depreciation............ 2,212 1,734 7,290 11,180 9,295
Gain on sale of Thin
Film Systems business.. -- -- -- (51,039) --
Deferred taxes.......... 88 -- 4,500 (8,593) (7,713)
Changes in assets and
liabilities:
Accounts receivable..... 2,745 (4,364) 38,185 (675) (12,190)
Inventories............. 4,290 (15,996) 3,676 47 (4,336)
Other current assets.... 191 (950) (2,480) 3,600 (1,780)
Accounts payable--
trade.................. (7,941) (6,743) (10,047) (541) (8,981)
Accrued expenses........ 630 (11,588) (15,697) (23,675) 995
Product warranty........ (4,758) 2,546 (1,821) (4,431) 1,638
Advance payments from
customers.............. 3,646 929 1,605 (5,086) 10,297
Long-term accrued
expenses............... 151 (44) 549 4,792 5,961
Other................... 491 1,428 3,062 719 (952)
------- -------- -------- --------- --------
Net Cash Provided by
(Used in) Operating
Activities............. $(4,952) $(18,158) $ 40,219 $ (2,706) $ 71,577
======= ======== ======== ========= ========
</TABLE>
See accompanying Notes to the Combined Financial Statements.
F-6
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements
Note 1. Basis of Presentation
On August 21, 1998, the Board of Directors of Varian Associates, Inc. ("VAI")
announced a plan to reorganize into three publicly traded independent companies
by spinning off two of its businesses to stockholders in a tax-free
distribution (the "Distribution"). The Distribution is subject to final
approval by VAI's Board of Directors. Among other things, this approval is
conditioned upon the receipt of a ruling from the Internal Revenue Service that
the spin-off of the two businesses will be a tax free transaction for VAI
stockholders, VAI, the Instruments Business of VAI ("IB"), and the
Semiconductor Equipment Business of VAI (the "Company") and upon the approval
of the plan for the Distribution by VAI stockholders.
Under the plan for the Distribution, the Company and IB will be incorporated as
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc., respectively,
and will become publicly traded companies. Also under the plan for the
Distribution, each of VAI and IB will have between $50 and $100 million of
outstanding indebtedness under VAI's term loans and notes payable, and VAI will
contribute cash to the Company so that at the Distribution, the Company will
have approximately $100 million in cash and cash equivalents and consolidated
debt not exceeding $5 million. The Company will include VAI's business units
that manufacture, sell and service ion implantation and thin film deposition
equipment for use in semiconductor wafer fabrication. Also under the plan for
Distribution, the Company will be incorporated in Delaware in December 1998,
with 150,000,000 shares of common stock and 5,000,000 shares of preferred stock
authorized. Upon incorporation, all outstanding shares of the Company's common
stock will be owned by VAI. For purposes of these financial statements and
notes to these financial statements, the Company includes the assets,
liabilities, operating results and cash flows of the VAI business units
described above that will comprise the Company under the plan for the
Distribution.
The combined financial statements of the Company have been prepared using VAI's
historical bases in the assets and liabilities and historical results of
operations of the Company's businesses, except for the accounting for income
taxes (see Note 2).
The combined financial statements of the Company include the accounts of the
Company's businesses after elimination of inter-business balances and
transactions.
The Company's fiscal years reported are the 52- or 53-week period ended on the
Friday nearest September 30. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week
periods ended on September 26, 1997 and September 27, 1996, respectively.
The combined financial statements generally reflect the financial position,
operating results, and cash flows of the Company as if it were a separate
entity for all periods presented. Where it was practicable to identify
specifically VAI corporate amounts with the activities of the Company, such
amounts have been included in the accounts of the Company. The combined
financial statements also include allocations of certain VAI corporate assets
(including pension assets), liabilities (including profit sharing and pension
benefits), and expenses (including legal, accounting, employee benefits,
insurance services, information technology services, treasury, and other VAI
corporate overhead) to the Company. These amounts have been allocated to the
Company on the basis that is considered by management to reflect most fairly or
reasonably the utilization of the services provided to or the benefit obtained
by the Company. Typical measures and activity indicators used for allocation
purposes include headcount, sales revenue, and payroll expense. Management
believes that the methods used to allocate these amounts are reasonable.
However, these allocations are not necessarily indicative of the amounts that
would have been or that will be recorded by the Company on a stand-alone basis.
For purposes of governing certain of the ongoing relationships between the
Company, VAI, and IB after the Distribution and to provide for an orderly
transition, the Company, VAI, and IB have entered or will enter into
F-7
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
various agreements including a distribution agreement, tax sharing agreement,
employee benefits allocation agreement, intellectual property agreement, and
transition services agreement (collectively, the "Distribution Related
Agreements").
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Foreign Currency Translation
For non-U.S. operations, the U.S. dollar is the functional currency. Monetary
assets and liabilities of foreign subsidiaries are translated into U.S. dollars
at current exchange rates. Non-monetary assets such as inventories and
property, plant, and equipment are translated at historical rates. Income and
expense items are translated at effective rates of exchange prevailing during
each year, except that inventories and depreciation charged to operations are
translated at historical rates. The aggregate exchange loss included in general
and administrative expenses for fiscal years 1998, 1997, and 1996 was $0.9
million, $1.1 million, and $.2 million, respectively.
Revenue Recognition
Revenue related to systems is recognized upon shipment, which usually precedes
customer acceptance as the performance of installation obligations is
essentially perfunctory and there is a demonstrated history of customer
acceptance of such systems following shipment. The Company's products are
generally subject to installation and warranty, and the Company provides for
the estimated future costs of installation, repair, replacement, or customer
accommodation in cost of revenue when revenue is recognized. Service revenue is
recognized ratably over the period of the related contract. Royalty revenue is
recognized upon notification of sale by the Company's licencees. The terms of
the royalty agreements generally require licensees to give notification to the
Company and to pay royalties within 30 to 60 days of the end of the quarter
during which the sales take place.
Legal Expenses
The Company accrues estimated amounts for legal fees expected to be incurred in
connection with loss contingencies.
Financial Instruments
The Company considers currency on hand, demand deposits, and all highly liquid
debt securities with an original maturity of three months or less to be cash
and cash equivalents.
Financial instruments that potentially subject the Company to concentrations of
credit risk comprise trade accounts receivable and forward exchange contracts.
The Company sells its products and extends trade credit to a large number of
customers, who are dispersed across many different geographies. The Company
performs ongoing credit evaluations of these customers and generally does not
require collateral from them. Trade accounts receivable are stated net of
allowances for doubtful accounts of $602,000 at the end of fiscal year 1998 and
$556,000 at the end of fiscal year 1997.
The Company enters into forward exchange contracts to mitigate the effects of
operational (sales orders and purchase commitments) and balance sheet exposures
to fluctuations in foreign currency exchange rates. The Company does not enter
into forward exchange contracts for trading purposes. When the Company's
foreign exchange contracts hedge
F-8
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
operational exposure, the effects of movements in currency exchange rates on
these instruments are recognized in income when the related revenues and
expenses are recognized. All forward exchange contracts hedging operational
exposure are designated and highly effective as hedges. The critical terms of
all forward exchange contracts hedging operational exposure and of the
forecasted transactions being hedged are substantially identical. Accordingly,
the Company expects that changes in the fair value or cash flows of the hedging
instruments and the hedged transactions (for the risk that is being hedged)
will completely offset at the hedge's inception and on an ongoing basis. When
foreign exchange contracts hedge balance sheet exposure, such effects are
recognized in income when the exchange rate changes in accordance with the
requirements for other foreign currency transactions. Gains and losses on
hedges of existing assets or liabilities are included in the carrying amounts
of those assets or liabilities and are ultimately recognized in income as part
of those carrying amounts. Gains and losses related to qualifying hedges of
firm commitments also are deferred and are recognized in income or as
adjustments of carrying amounts when the hedged transaction occurs. Any
deferred gains or losses are included in accrued expenses in the balance sheet.
If a hedging instrument is sold or terminated prior to maturity, gains and
losses continue to be deferred until the hedged item is recognized in income.
If a hedging instrument ceases to qualify as a hedge, any subsequent gains and
losses are recognized currently in income. The Company's forward exchange
contracts generally range from one to three months in original maturity.
Because the impact of movements in currency exchange rates on foreign exchange
contracts generally offsets the related impact on the underlying items being
hedged, forward exchange contracts do not subject the Company to risk that
would otherwise result from changes in currency exchange rates. The Company's
forward exchange contracts contain credit risk in that its banking counter-
parties may be unable to meet the terms of the agreements. The Company seeks to
minimize such risk by limiting its counter-parties to major financial
institutions. Also, the potential risk of loss with any one party resulting
from this type of credit risk is monitored by management of the Company. The
fair value of forward exchange contracts generally reflects the estimated
amounts that the Company would receive or pay to terminate the contracts at the
reporting date, thereby taking into account and approximating the current
unrealized and realized gains or losses of open contracts. The notional amounts
of forward exchange contracts are not a measure of the Company's exposure.
Pro Forma Net Earnings per Share
The computation of pro forma net earnings per share for fiscal years 1998,
1997, and 1996 is based on the weighted average number of shares of VAI common
stock outstanding during the respective periods, reflecting the anticipated
ratio of one share of Company common stock for each share of VAI common stock
at the time of Distribution.
Divisional Equity
Divisional equity includes historical investments and advances from VAI,
including net transfers to/from VAI, third party liabilities paid on behalf of
the Company by VAI, amounts due to affiliates related to purchases, amounts due
to/from VAI for services and other charges, and current period net earnings of
the Company.
Interim Financial Statements (Unaudited)
The unaudited condensed combined interim financial statements and information
reflect all adjustments, which consist of only normal, recurring adjustments,
necessary to present fairly the financial position of the Company at January 1,
1999, the results of its operations for each quarter during fiscal years 1998
and 1997, and its cash flows for the quarters ended January 1, 1999 and January
2, 1998.
Inventories
Inventories are valued at the lower of cost or market (realizable value) using
last-in, first-out (LIFO) cost for the U.S. inventories. All other inventories
are valued principally at average cost. If the first-in, first-out (FIFO)
method had been
F-9
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
used for those operations valuing inventories on a LIFO basis, inventories
would have been higher than reported by $20.3 million in fiscal 1998, $20.6
million in fiscal 1997, and $18.0 million in fiscal 1996.
The Company's inventories include high technology parts and components that may
be specialized in nature or subject to rapid technological obsolescence. While
the Company has programs to minimize the required inventories on hand and
considers technological obsolescence in estimating the required allowance to
reduce recorded amounts to market values, such estimates could change in the
future.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed currently. Plant and
equipment are depreciated over their estimated useful lives using the straight-
line method for financial reporting purposes and accelerated methods for tax
purposes. Machinery and equipment lives vary from 1 to 15 years, and buildings
are depreciated from 3 to 40 years. Leasehold improvements are amortized using
the straight-line method over their estimated useful lives, or the remaining
term of the lease, whichever is less. When assets are retired or otherwise
disposed of, the assets and related accumulated depreciation are removed from
the accounts. Gains or losses resulting from retirements or disposals are
included in earnings from operations.
Other Assets
Goodwill, which is the excess of the cost of acquired businesses over the sum
of the amounts assigned to identifiable assets acquired less liabilities
assumed, is amortized on a straight-line basis over periods ranging from 5 to
40 years. Investments in affiliated companies over whose operations the Company
has significant influence but not control are accounted for under the equity
method.
Impairment of Long-Lived Assets
Whenever events or changes in circumstances indicate that the carrying amounts
of long-lived assets and goodwill related to those assets may not be
recoverable, the Company estimates the future cash flows, undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual disposition. If the sum of the future cash flows is less than
the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets.
Research and Development
Company-sponsored research and development costs related to both present and
future products are expensed currently. Costs related to research and
development contracts are included in inventory and charged to cost of revenue
upon recognition of related revenue. Total expenditures on research and
development for fiscal years 1998, 1997, and 1996, were $40.8 million, $48.1
million, and $56.9 million, respectively, of which $0.9 million and $1.3
million has been funded by customers in fiscal years 1997 and 1996. No research
and development expenditures were funded by customers in fiscal 1998.
Taxes on Earnings
The Company's operating results historically have been included in VAI's
consolidated U.S. and state income tax returns and in tax returns of certain
VAI foreign subsidiaries. Except for the utilization of foreign tax credits,
the provision for income taxes in the Company's combined financial statements
has been determined on a separate-return basis, under which the Company's
provision for income taxes comprises its estimated tax liability and the change
in its deferred income taxes. Foreign tax credits are benefited to the extent
they were utilized in VAI's consolidated tax returns. Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts. Income taxes paid on behalf of the Company by VAI are included in
divisional equity.
F-10
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Effective after the Distribution, the Company will file separate income tax
returns.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. It is effective for the Company's fiscal year
1999. The impact of the implementation of SFAS No. 130 on the combined
financial statements of the Company has not yet been determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for the Company's fiscal year
1999. The Company has not determined the impact of its implementation on the
reporting of the Company's segment information.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for the
Company's fiscal year 2000. The impact of the implementation of SFAS No. 133 on
the combined financial statements of the Company has not yet been determined.
Note 3. Balance Sheet Detail
Inventories
<TABLE>
<CAPTION>
1998 1997
----- -----
(Dollars in
millions)
<S> <C> <C>
Raw materials and parts......................................... $24.7 $23.8
Work in process................................................. 22.5 22.9
Finished goods.................................................. 13.5 3.5
----- -----
Total Inventories............................................. $60.7 $50.2
===== =====
</TABLE>
Property, Plant, and Equipment
<TABLE>
<CAPTION>
1998 1997
----- -----
(Dollars in
millions)
<S> <C> <C>
Land and land improvements...................................... $ 2.4 $ 0.9
Buildings....................................................... 30.1 25.5
Machinery and equipment......................................... 50.4 38.0
Construction in progress........................................ 1.2 1.5
----- -----
Total Property, Plant, and Equipment.......................... $84.1 $65.9
===== =====
</TABLE>
Other Assets
<TABLE>
<CAPTION>
1998 1997
----- -----
(Dollars in
millions)
<S> <C> <C>
Goodwill........................................................ $19.4 $ --
Less accumulated amortization................................... 0.4 --
----- -----
Net goodwill.................................................... 19.0 --
----- -----
Other........................................................... 4.7 14.4
----- -----
Total Other Assets............................................ $23.7 $14.4
===== =====
</TABLE>
F-11
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Amortization expense for goodwill was $0.4 million for fiscal year 1998. There
was no amortization expense for goodwill for fiscal years 1997 and 1996.
Accrued Expenses
<TABLE>
<CAPTION>
1998 1997
----- -----
(Dollars in
millions)
<S> <C> <C>
Payroll and employee benefits................................... $13.6 $19.6
Foreign income taxes payable.................................... 10.3 10.4
Estimated loss contingencies.................................... 34.0 41.2
Other........................................................... 19.2 19.6
----- -----
Total Accrued Expenses.......................................... $77.1 $90.8
===== =====
</TABLE>
Note 4. Forward Exchange Contracts
Forward exchange contracts outstanding as of fiscal year-end 1998 are
summarized as follows:
<TABLE>
<CAPTION>
Notional
Value Notional Fair
Purchased Value Sold Value
--------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C>
Japanese yen.................................... $ -- $ 231 $ 7
French francs................................... -- 2,884 (117)
British pounds.................................. -- 55 --
Italian lira.................................... 90 -- (5)
German marks.................................... -- 2,011 (108)
Taiwan dollars.................................. -- 910 (25)
Korean won...................................... -- 7,738 18
Swiss francs.................................... 6 -- --
----- ------- -----
Total........................................... $96 $13,829 $(230)
===== ======= =====
</TABLE>
There were no unrealized gains or losses for the forward exchange contracts as
of fiscal year-end 1998.
Note 5. Acquisitions and Sale of Business
In July 1998, the Company acquired certain assets and assumed certain
liabilities of the ion implantation division of Genus, Inc. ("Genus") for
approximately $24.15 million in cash, plus additional payments if certain sales
and cash collection targets are met by December 31, 1998. The ion implantation
division of Genus was a supplier of high energy ion implantation equipment for
use in semiconductor wafer fabrication. This acquisition has been accounted for
under the purchase method. The Company is amortizing acquired goodwill of
$16.6 million over 10 years.
In January 1998, the Company acquired the outstanding minority ownership
interest of Varian Korea Ltd. ("VKL") for approximately $7.8 million in cash.
VKL is engaged in the manufacturing, installation, servicing, and sales of
semiconductor manufacturing equipment and other products. The acquisition of
the minority ownership interest has been accounted for using the purchase
method; accordingly, the Company's combined operating results include 100% of
the operating results of VKL subsequent to the acquisition date. The Company is
amortizing acquired goodwill of $2.8 million over 40 years.
The Company's pro forma revenue, earnings from operations, net earnings, and
net earnings per share for fiscal years 1998 and 1997, assuming the VKL
acquisition occurred at the beginning of such years, would not have been
materially different from the actual amounts reported for such periods.
F-12
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
In June 1997, VAI completed the sale of its Thin Film Systems operations, a
product line of the Company ("TFS"). Total proceeds received from the sale of
TFS were $145.5 million in cash. A $51.5 million reserve was recorded to cover,
among other items, purchase price disputes, retained liabilities, transactions
costs, employee terminations, facilities separation costs, indemnification
obligations, litigation expense, and other contingencies. During the remainder
of fiscal 1997, $10.3 million of this reserve was utilized (primarily for the
cash settlement of transaction and legal indemnification and defense costs).
During fiscal 1998, an additional $7.2 million of this reserve was utilized
(primarily for the cash settlement of transaction, employee termination,
facilities separation, and legal indemnification and defense costs). The gain
on the sale was $33.2 million (net of income taxes of $17.8 million). The
reserve as of October 2, 1998 was $34.0 million and related to costs associated
with pending litigation and indemnity obligations relating to certain patent
infringement claims by Applied Materials, Inc. as well as purchase price
disputes with Novellus Systems, Inc. arising out of the sale of TFS (See Note
10).
Note 6. Employee Stock Plans
Under VAI's Omnibus Stock and Employee Stock Purchase Plans, certain employees
of the Company are eligible for the grant of stock options and restricted stock
and are eligible to purchase VAI common stock. The exercise price for incentive
and non-qualified stock options granted under the Omnibus Stock Plan may not be
less than 100% of the fair market value of VAI common stock at the date of
grant. Options granted are exercisable at such times and are subject to such
restrictions and conditions as determined by the Organization and Compensation
Committee of the Board of Directors of VAI, but no option shall be exercisable
later than ten years from the date of grant. Options granted are generally
exercisable in cumulative installments of one-third each year, commencing one
year following the date of grant, and expire if not exercised within seven or
ten years from the date of grant. Restricted stock grants may be awarded at
prices ranging from 0% to 50% of the fair market value of VAI common stock and
may be subject to restrictions on transferability and continued employment as
determined by the Organization and Compensation Committee. Participants in the
Employee Stock Purchase Plan are eligible to purchase VAI common stock at the
lower of 85% of the closing market price of VAI common stock on the first
trading day of the VAI fiscal quarter of the first trading day of the next VAI
fiscal quarter. This discount is treated as equivalent to the cost of issuing
common stock for financial reporting purposes. VAI intends to suspend the
Employee Stock Purchase Plan prior to the Distribution.
At fiscal year-end 1998, outstanding options for VAI common stock held by
Company employees totaled approximately 768,000, of which approximately 329,000
had vested and were exercisable. At fiscal year-end 1998, the exercise prices
of outstanding options range from $10.91 to $58.31.
At fiscal year-end 1997, outstanding options for VAI common stock held by
Company employees totaled approximately 600,000, of which approximately 183,000
had vested and were exercisable. At fiscal year-end 1997, the exercise prices
of outstanding options range from $10.91 to $58.31.
At fiscal year-end 1996, outstanding options for VAI common stock held by
Company employees totaled approximately 604,000, of which approximately 121,000
had vested and were exercisable. At fiscal year-end 1996, the exercise prices
of outstanding options range from $10.91 to $61.19.
Immediately following the Distribution, it is anticipated that the majority of
outstanding awards under the VAI Omnibus Stock Plan held by Company employees
will be replaced by substitute awards under the VSEA Omnibus Stock Plan. The
substitute awards will have the same ratio of the exercise price per share to
the market value per share, the same aggregate difference between market value
and exercise price, and the same vesting provisions, option periods, and other
terms and conditions as the awards they replace.
The Company will comply with the pro forma disclosure requirements set forth in
SFAS No. 123, "Accounting for Stock-Based Compensation," once the number of
substitute awards and related exercise prices are determined. These
determinations cannot be made until subsequent to the Distribution.
F-13
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Note 7. Retirement Plans
Certain employees of the Company in the United States are eligible to
participate in the VAI-sponsored defined contribution plan. The Company's major
obligation is to contribute an amount based on a percentage of each
participant's base pay. The Company also contributes 5% of its combined
operating earnings, as adjusted for discretionary items, as retirement plan
profit sharing. Participants are entitled, upon termination or retirement, to
their portion of the retirement fund assets, which are held by a third-party
trustee. Included in the accompanying combined statements of earnings is an
allocation of total pension expense for Company employees under the VAI-
sponsored defined contribution plan of $3.4 million, $4.0 million, and $4.8
million, for fiscal years 1998, 1997, and 1996, respectively.
At the Distribution, the Company will assume responsibility for pension and
postretirement benefits for active employees of the Company; the responsibility
for all others, principally retirees of VAI, will remain with VAI. An
allocation of assets and liabilities for foreign defined benefit pension,
postemployment, and postretirement benefits, which are not material to the
Company's financial statements, has been included in these combined financial
statements.
Note 8. Taxes on Earnings
Taxes on earnings from operations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(Dollars in
millions)
<S> <C> <C> <C>
Current
U.S. federal......................................... $(1.7) $38.2 $39.3
Non-U.S.............................................. 1.5 1.7 1.2
State and local...................................... 0.6 3.5 6.4
----- ----- -----
Total current...................................... 0.4 43.4 46.9
----- ----- -----
Deferred
U.S. federal......................................... 4.5 (8.5) (3.9)
----- ----- -----
Total deferred..................................... 4.5 (8.5) (3.9)
----- ----- -----
Taxes on Earnings...................................... $ 4.9 $34.9 $43.0
===== ===== =====
</TABLE>
Significant items making up deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
(Dollars in
millions)
<S> <C> <C>
Assets:
Product warranty.............................................. $ 5.4 $ 5.9
Special provisions............................................ 13.4 15.1
Inventory adjustments......................................... 12.5 13.7
Other......................................................... 3.0 5.1
----- -----
34.3 39.8
----- -----
Liabilities:
Accelerated depreciation...................................... 2.0 2.5
Other......................................................... -- 0.5
----- -----
2.0 3.0
----- -----
Net deferred tax asset.......................................... $32.3 $36.8
===== =====
</TABLE>
F-14
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
The classification of the net deferred tax asset on the combined balance sheets
is as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
(Dollars in
millions)
<S> <C> <C>
Net current deferred tax asset (included in other current
assets)...................................................... $34.3 $39.8
Net long-term deferred tax liability.......................... (2.0) (3.0)
----- -----
Net deferred tax asset........................................ $32.3 $36.8
===== =====
</TABLE>
Operating earnings before taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
(Dollars in
millions)
<S> <C> <C> <C>
U.S.................................................... $12.3 $106.1 $121.4
Foreign................................................ 4.0 (0.2) 0.9
----- ------ ------
$16.3 $105.9 $122.3
===== ====== ======
</TABLE>
The effective tax rate on earnings from operations differs from the U.S.
federal statutory tax rate as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate......................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit......... 2.6 2.1 3.4
Foreign sales corporation................................. (3.0) (1.8) (2.9)
Other..................................................... (4.5) (2.4) (0.3)
---- ---- ----
Effective tax rate........................................ 30.1% 32.9% 35.2%
==== ==== ====
</TABLE>
Note 9. Lease Commitments
At fiscal year-end 1998, the Company was committed to minimum rentals under
non-cancellable operating leases for fiscal years 1999 through 2003 and
thereafter, as follows, in millions: $1.8, $1.3, $1.2, $1.2, $1.0, and $10.9,
respectively. Rental expense for fiscal years 1998, 1997, and 1996, in
millions, was $3.3, $2.4, and $2.8, respectively.
Prior to the Distribution, the Company will enter into certain lease or
sublease agreements with VAI, an affiliate, or third parties for certain lease
facilities and other equipment, which agreements principally are a continuation
of existing lease commitments at market rates. These commitments are included
in the amounts above.
Note 10. Contingencies
Environmental Remediation
VAI has been named by the U.S. Environmental Protection Agency or third parties
as a potentially responsible party under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, at eight sites
where the Company is alleged to have shipped manufacturing waste for recycling
or disposal. VAI is also involved in various stages of environmental
investigation and/or remediation under the direction of, or in consultation
with, federal, state, and/or local agencies at certain current or former VAI
facilities (including facilities disposed of in connection with VAI's sale of
its Electron Devices Business during fiscal 1995, and the sale of TFS during
fiscal 1997). VAI's expenditures for environmental investigation and
remediation amounted to $4.9 million in fiscal 1998, compared with $2.3 million
in fiscal 1997 and with $5.2 million in fiscal 1996.
F-15
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 2, 1998, VAI nonetheless estimated that the future
exposure for environmental related investigation and remediation costs for
these sites ranged in the aggregate from $21.6 million to $48.9 million. The
time frame over which these costs are expected to be incurred varies with each
site and facility, ranging up to approximately 30 years as of October 2, 1998.
VAI management believes that no amount in the foregoing range of estimated
future costs is more probable of being incurred than any other amount in such
range, and therefore, VAI has accrued $21.6 million in estimated environmental
costs as of October 2, 1998. This amount accrued by VAI has not been discounted
to present value.
As to other sites and facilities, VAI has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of October 2, 1998, VAI estimated that the future exposure for environmental
related investigation and remediation costs for these sites ranged in the
aggregate from $39.7 million to $73.7 million. The time frame over which these
costs are expected to be incurred varies with each site, ranging up to
approximately 30 years as of October 2, 1998. As to each of these sites and
facilities, VAI management has determined that a particular amount within the
range of estimated costs was a better estimate of the future environmental
liability than any other amount within the range and that the amount and timing
of these future costs were reliably determinable. Together, these amounts
totaled $51.1 million at October 2, 1998. VAI accordingly has accrued $22.3
million, which represents this best estimate of the future costs discounted at
4%, net of inflation. This VAI reserve is in addition to the $21.6 million
described above.
Under the Distribution Related Agreements, the Company has agreed to indemnify
VAI and IB for one-third of these environmental investigation and remediation
costs, as adjusted for insurance proceeds in respect of these environmental
costs and for the tax benefits expected to be realized by VAI upon the payment
of the Company's portion of these environmental costs (Note 11). As of October
2, 1998, the Company's reserve for its portion of environmental liabilities,
based upon future environmental related costs estimated by VAI as of that date
and included in long-term and current accrued expenses, is calculated as
follows:
<TABLE>
<CAPTION>
Total
Recurring Non-recurring Anticipated
Year Costs Costs Future Costs
- ---- --------- ------------- ------------
(Dollars in millions)
<S> <C> <C> <C>
1999..................................... $ 0.4 $0.7 $ 1.1
2000..................................... 0.5 0.2 0.7
2001..................................... 0.5 0.1 0.6
2002..................................... 0.5 -- 0.5
2003..................................... 0.5 -- 0.5
Thereafter............................... 9.6 0.8 10.4
----- ---- -----
Total costs............................ $12.0 $1.8 13.8
===== ==== -----
Imputed interest......................... (6.0)
-----
Total reserve.......................... $ 7.8
=====
</TABLE>
The amounts set forth in the foregoing table are only estimates of anticipated
future environmental related costs, and the amounts actually spent in the years
indicated may be greater or less than such estimates. The aggregate range of
cost estimates reflects various uncertainties inherent in many environmental
investigation and remediation activities and the large number of sites where
VAI is undertaking such investigation and remediation activities. VAI believes
that most of these cost ranges will narrow as investigation and remediation
activities progress. The Company believes that its reserves are adequate, but
as the scope of the obligations becomes more clearly defined, these reserves
may be modified and related charges against earnings may be made.
F-16
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Although any ultimate liability arising from environmental related matters
described herein could result in significant expenditures that, if aggregated
and assumed to occur within a single fiscal year, would be material to the
Company's financial statements, the likelihood of such occurrence is considered
remote. Based on information currently available to management and its best
assessment of the ultimate amount and timing of environmental related events,
the Company's management believes that the costs of these environmental related
matters are not reasonably likely to have a material adverse effect on the
combined financial statements of the Company.
Legal Proceedings
In June 1997, Applied Materials, Inc. ("Applied") filed a civil action against
VAI in the U.S. District Court for the Northern District of California alleging
infringement of four patents relating to sputter coating systems. Applied
contends that its patents are infringed by the M2i, MB/2/ (TM) and Inova (TM)
systems that were manufactured and sold by TFS prior to VAI's sale of TFS to
Novellus Systems, Inc. ("Novellus") in June 1997. The complaint requests
unspecified money damages and an injunction preventing further alleged
infringement and requests that any damages awarded be increased up to three-
fold for VAI's and Novellus' alleged willful infringement. Novellus was
subsequently added as a defendant in this action and, as part of the sale of
TFS, VAI agreed to indemnify Novellus for certain damages it may suffer as a
result of such litigation and to reimburse Novellus for up to $7.5 million of
its litigation expenses. VAI's answer denied infringement and asserted that the
Applied patents that are subject to the claims are invalid and that one of the
asserted patents is unenforceable. VAI also filed a separate suit seeking
damages and injunctive relief against Applied contending that certain of
Applied's business practices violated antitrust laws. That action has been
procedurally related to the infringement case and is pending before the same
judge. Novellus has asserted three of its patents, obtained as part of its
purchases of TFS, against Applied. Discovery has begun, but no date has been
set for completion of discovery. During the fourth quarter of fiscal 1998, VAI
and Applied began informal discussions concerning the possibility of resolving
some or all of the issues raised by the Applied litigation and VAI's antitrust
suit through settlement or mediation. Discussions regarding a proposed
procedure for non-binding mediation are continuing but have not yet resulted in
a definitive mediation arrangement.
In the event of an outcome unfavorable to the Company, the Company may be
liable for damages for past sales through the June 1997 closing date of the
sale of TFS to Novellus and may be liable to Novellus under the indemnification
obligations described above. The Company has accrued certain amounts associated
with the cost of resolving these matters (See Note 5).
As permitted under the asset sale agreement between VAI and Novellus for the
sale of TFS, Novellus has demanded an arbitration arising out of disputes over
the closing balance sheet. Management believes that the Company has meritorious
defenses to the Novellus demands.
The Company has agreed to indemnify VAI and IB for any costs, liabilities or
expenses relating to the Company's legal matters, including the Applied and
Novellus matters. Under the Distribution Related Agreements, the Company has
agreed to reimburse VAI for one-third of the costs, liabilities, and expenses,
adjusted for any related tax benefits recognized or realized by VAI, with
respect to certain legal proceedings relating to discontinued operations of VAI
(Note 11).
Also, from time to time, the Company is involved in a number of legal actions
and could incur an uninsured liability in one or more of them. Accordingly,
while the ultimate outcome of all of the above legal matters is not
determinable, management believes the resolution of these matters will not have
a material adverse effect on the financial condition or results of operations
of the Company.
Note 11. Other Transactions with Affiliates
Purchases from IB for fiscal years 1998, 1997, and 1996 totaled $8.2 million,
$9.2 million, and $18.0 million, respectively.
F-17
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
VAI uses a centralized cash management system to finance its operations. Cash
deposits from most of the Company's businesses are transferred to VAI on a
daily basis, and VAI funds the Company's required disbursements. No interest
has been charged or credited to the Company for these transactions.
VAI provided certain centralized services (Note 1) to the Company. Cost
allocations relating to these centralized services were $17.3 million, $16.7
million, and $17.8 million in fiscal years 1998, 1997, and 1996, respectively,
and are included in operating costs in the combined statements of earnings.
Amounts due to VAI for these expenses are included in Divisional Equity.
Net transfers to or from VAI, included in Divisional Equity, include advances
and loans from affiliates, net cash transfers to or from VAI, third party
liabilities paid on behalf of the Company by VAI, amounts due to affiliates
related to purchases, amounts due to or from VAI for services and other
charges, and income taxes paid on behalf of the Company by VAI. The weighted
average balance due to VAI was $162 million, $149 million, and $89 million for
fiscal years 1998, 1997 and 1996, respectively.
The activity in net transfers (to) from VAI for fiscal years 1998, 1997, and
1996 included in divisional equity in the combined statements of divisional
equity is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
(Dollars in millions)
<S> <C> <C> <C>
VAI services and other charges........................ $ 17.3 $ 16.7 $ 17.8
Cash transfers, net................................... (20.2) (156.3) (67.4)
------ ------- ------
Net transfers (to) from VAI......................... $ (2.9) $(139.6) $(49.6)
====== ======= ======
</TABLE>
The Distribution Related Agreements provide that, from and after the
Distribution, VAI, IB, and the Company will indemnify each and their respective
subsidiaries, directors, officers, employees and agents against all losses
arising in connection with shared liabilities (including certain environmental
and legal liabilities). All shared liabilities will be managed and administered
by VAI and expenses and losses, net of proceeds and other receivables, will be
borne one-third each by VAI, IB, and the Company; the Distribution Related
Agreements also provide that the Company shall assume all Company liabilities,
other than shared liabilities (including accounts payable, accrued payroll, and
pension liabilities) in accordance with their terms.
Note 12. Industry and Geographic Segments
The Company operates in one industry segment: semiconductor wafer fabrication
equipment. Company products are used by major semiconductor manufacturers in
the United States, Europe, Japan, Korea, and throughout the Asia Pacific
region.
The Company operates various manufacturing and marketing operations outside the
United States. Interbusiness sales between geographic areas are accounted for
at cost plus prevailing markups arrived at through negotiations between
otherwise independent profit centers (Note 1).
One customer accounted for 14% of total revenue in fiscal year 1998, and
another customer accounted for 13% of total revenue in fiscal year 1996. No
customer accounted for more than 10% of total revenue in fiscal year 1997.
F-18
<PAGE>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
Notes to Combined Financial Statements--(Continued)
Included in the total of United States revenue is export revenue of $131
million in fiscal 1998, $162 million in fiscal 1997, and $347 million in fiscal
1996. Sales to customers located in Korea accounted for 11% and 24% of total
revenues in fiscal years 1997 and 1996, respectively. Sales to customers
located in Taiwan accounted for 24%, 17%, and 12% of total revenues in fiscal
years 1998, 1997, and 1996, respectively. Sales to customers located in Japan
accounted for 14% of total revenues in fiscal year 1996.
<TABLE>
<CAPTION>
Revenue from Intergeographic
Unaffiliated Revenue from Pre-tax Identifiable
Customers Affiliates Total Revenue Earnings Assets
-------------- ------------------- ---------------- ---------------- --------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States........... $228 $370 $583 $ 85 $ 58 $ 75 $313 $428 $658 $32 $ 87 $161 $148 $165 $230
International........... 109 70 84 12 12 1 121 82 85 (1) (9) (2) 61 32 40
---- ---- ---- ----- ----- ----- ---- ---- ---- --- ---- ---- ---- ---- ----
Total geographic
segments.............. 337 440 667 97 70 76 434 510 743 31 78 159 209 197 270
Eliminations, corporate
& other................ 6 8 -- (97) (70) (76) (91) (62) (76) (15) 28 (37) 16 36 42
---- ---- ---- ----- ----- ----- ---- ---- ---- --- ---- ---- ---- ---- ----
Total Company.......... $343 $448 $667 $ -- $ -- $ -- $343 $448 $667 $16 $106 $122 $225 $233 $312
==== ==== ==== ===== ===== ===== ==== ==== ==== === ==== ==== ==== ==== ====
</TABLE>
Total revenue is based on the location of the operation furnishing goods and
services. International revenue based on final destination of products sold is
$239 million in fiscal 1998, $231 million in fiscal 1997, and $430 million in
fiscal 1996.
Note 13. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue....... $114.3 $105.1 $81.8 $ 41.7 $106.0 $105.9 $121.9 $114.5
------ ------ ----- ------ ------ ------ ------ ------
Gross profit.. 49.5 41.1 23.0 4.1 38.6 46.4 48.6 51.1
------ ------ ----- ------ ------ ------ ------ ------
Net Earnings
(Loss)....... 14.9 10.5 0.7 (14.7) 5.5 10.7 46.1 8.7
====== ====== ===== ====== ====== ====== ====== ======
Pro forma net
earnings
(loss) per
share........ $ 0.49 $ 0.35 $0.03 $(0.49) $ 0.18 $ 0.35 $ 1.51 $ 0.29
====== ====== ===== ====== ====== ====== ====== ======
</TABLE>
Third quarter 1997 net earnings include a $33.2 million ($1.09 pro forma per
share) after-tax gain on the sale of TFS.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Varian Associates, Inc.:
Our report on the combined financial statements of the Semiconductor
Equipment Business of Varian Associates, Inc. is included on page F-2 of this
Form 10. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule listed in the index on
page F-1 of this Form 10.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic combined financial statements taken as a
whole, presents fairly, in all material respects, the information required to
be included therein.
/s/ PricewaterhouseCoopers LLP
By______________________________________
PricewaterhouseCoopers LLP
San Jose, California
October 31, 1998
S-I
<PAGE>
SCHEDULE II
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
for the fiscal years 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance at
Beginning Costs and -------------------------------------- End of
Description of Period Expenses Description Amount Period
- ----------- ---------- ---------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
NOTES & ACCOUNTS
RECEIVABLE:
Fiscal Year Ended 1998.. $ 556 $ 243 Write-offs & Adjustments...... $ 197 $ 602
======= ======= ======= =======
Fiscal Year Ended 1997.. $ 439 $ 958 Write-offs & Adjustments...... $ 841 $ 556
======= ======= ======= =======
Fiscal Year Ended 1996.. $ 442 $ 44 Write-offs & Adjustments...... $ 47 $ 439
======= ======= ======= =======
ESTIMATED LIABILITY FOR
PRODUCT WARRANTY:
Fiscal Year Ended 1998.. $16,948 $31,813 Actual Warranty Expenditures.. $27,326 $21,435
======= ======= ======= =======
Fiscal Year Ended 1997.. $30,234 $17,883 Actual Warranty Expenditures.. $31,169(1) $16,948
======= ======= ======= =======
Fiscal Year Ended 1996.. $28,596 $30,001 Actual Warranty Expenditures.. $28,363 $30,234
======= ======= ======= =======
</TABLE>
- -------
(1) Includes a $5,226 deduction due to the sale of Thin Film Systems.
S-II
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
Varian Semiconductor Equipment
Associates, Inc.
/s/ Joseph B. Phair
By______________________________________
Name: Joseph B. Phair
Title: Secretary
Date: March 8, 1999
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Distribution Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of
January 14, 1999.+
3.1 Form of Restated Certificate of Incorporation of Varian Semiconductor
Equipment Associates, Inc. to be in effect upon the effectiveness of
the Distribution.+
3.2 Form of By-Laws of Varian Semiconductor Equipment Associates, Inc. to
be in effect upon the effectiveness of the Distribution.*
4.1 Specimen Common Stock Certificate.*
4.2 Rights Agreement dated February 19, 1999.*
10.1 Form of Employee Benefits Allocation Agreement among Varian
Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and
Varian, Inc.+
10.2 Form of Intellectual Property Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.3 Form of Tax Sharing Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.4 Form of Transition Services Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.+
10.5 Form of Change in Control Agreement for CEO.*
10.6 Form of Change in Control Agreement for Chief Financial Officer.*
10.7 Form of Change in Control Agreement for Senior Executives.*
10.8 Form of Indemnity Agreement with Directors and Officers.*
10.9 Varian Semiconductor Equipment Associates, Inc. Omnibus Stock Plan.+
Varian Semiconductor Equipment Associates, Inc. Management Incentive
10.10 Plan.+
10.11 Agreement, dated as of July 24, 1998, between Varian Associates, Inc.
and High Voltage Engineering Europa B.V.+
10.12 Supplemental Retirement Plan adopted on February 19, 1999.*
21 Subsidiaries of the Registrant.*
27 Financial Data Schedule.*
</TABLE>
- -------
+ Filed by Registrant with its Form 10 Registration Statement filed on February
12, 1999.
* Filed herewith.
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
A Delaware Corporation
As adopted on February 19, 1999, to be effective on April __, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I OFFICES........................................................................ 1
Section 1. Registered Office........................................................ 1
Section 2. General Office and Other Offices......................................... 1
ARTICLE II STOCKHOLDERS' MEETINGS......................................................... 1
Section 3. Annual Meeting........................................................... 1
Section 4. Business to be Conducted at Annual Meeting............................... 1
Section 5. Special Meetings......................................................... 2
Section 6. Place of Meetings........................................................ 2
Section 7. Notice of Meetings....................................................... 2
Section 8. Nominations of Directors................................................. 3
Section 9. List of Stockholders..................................................... 4
Section 10. Quorum................................................................... 4
Section 11. Voting and Required Vote................................................. 5
Section 12. Proxies.................................................................. 5
Section 13. Inspectors of Election; Polls............................................ 5
Section 14. Organization............................................................. 5
Section 15. No Stockholder Action by Written Consent................................. 5
ARTICLE III BOARD OF DIRECTORS............................................................. 6
Section 16. General Powers, Number, Term of Office................................... 6
Section 17. Vacancies................................................................ 6
Section 18. Chairman of the Board.................................................... 6
Section 19. Regular Meetings......................................................... 7
Section 20. Special Meetings......................................................... 7
Section 21. Notices.................................................................. 7
Section 22. Conference Telephone Meetings............................................ 7
Section 23. Quorum................................................................... 7
Section 24. Organization............................................................. 8
Section 25. Resignations............................................................. 8
Section 26. Removal.................................................................. 8
Section 27. Action Without a Meeting................................................. 8
Section 28. Location of Books........................................................ 8
Section 29. Dividends................................................................ 8
</TABLE>
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 30. Compensation of Directors................................................. 8
Section 31. Additional Powers......................................................... 9
ARTICLE IV COMMITTEES OF DIRECTORS......................................................... 9
Section 32. Designation, Power, Alternate Members..................................... 9
Section 33. Quorum, Manner of Acting.................................................. 9
Section 34. Minutes................................................................... 9
ARTICLE V ADVISORY DIRECTORS.............................................................. 9
Section 35. Advisory Directors........................................................ 9
ARTICLE VI OFFICERS........................................................................ 10
Section 36. Designation............................................................... 10
Section 37. Election and Term......................................................... 10
Section 38. Removal................................................................... 10
Section 39. Resignations.............................................................. 10
Section 40. Vacancies................................................................. 10
Section 41. Chief Executive Officer................................................... 10
Section 42. President................................................................. 11
Section 43. Chief Operating and Technology Officer.................................... 11
Section 44. Vice Presidents........................................................... 11
Section 45. Secretary................................................................. 11
Section 46. Assistant Secretaries..................................................... 11
Section 47. Chief Financial Officer................................................... 11
Section 48. Treasurer................................................................. 11
Section 49. Assistant Treasurers...................................................... 12
Section 50. Controller................................................................ 12
Section 51. Assistant Controllers..................................................... 12
ARTICLE VII CONTRACTS, INSTRUMENTS AND PROXIES.............................................. 12
Section 52. Contracts and Other Instruments........................................... 12
Section 53. Proxies................................................................... 12
ARTICLE VIII CAPITAL STOCK................................................................... 13
Section 54. Stock Certificates; Book-Entry Accounts................................... 13
Section 55. Record Ownership.......................................................... 13
Section 56. Record Dates.............................................................. 13
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 57. Transfer of Stock........................................................ 13
Section 58. Lost, Stolen or Destroyed Certificates................................... 13
Section 59. Terms of Preferred Stock................................................. 14
ARTICLE IX INDEMNIFICATION................................................................ 14
Section 60. Right of Indemnification Generally....................................... 14
Section 61. Written Request; Determination of Entitlement............................ 15
Section 62. Recovery of Unpaid Claim................................................. 15
Section 63. Exclusivity; Subsequent Modification..................................... 15
Section 64. Insurance................................................................ 15
Section 65. Other Indemnification Rights............................................. 16
Section 66. Illegality; Unenforceability............................................. 16
Section 67. Form and Delivery of Communications...................................... 16
ARTICLE X MISCELLANEOUS.................................................................. 16
Section 68. Corporate Seal........................................................... 16
Section 69. Fiscal Year.............................................................. 16
Section 70. Auditors................................................................. 16
Section 71. Waiver of Notice......................................................... 17
ARTICLE XI AMENDMENT TO BY-LAWS........................................................... 17
Section 72. Amendments............................................................... 17
</TABLE>
<PAGE>
BY-LAWS
OF
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
A Delaware Corporation
As adopted on February 19, 1999, to be effective on April __, 1999
ARTICLE I
OFFICES
Section 1. Registered Office. The name of the registered agent of Varian
-----------------
Semiconductor Equipment Associates, Inc. (the "Corporation") is The Corporation
Trust Company and the registered office of the Corporation shall be located in
the City of Wilmington, County of New Castle, State of Delaware.
Section 2. General Office and Other Offices. The Corporation shall have
--------------------------------
its General Offices in the City of Gloucester, State of Massachusetts (the
"General Offices"), and may also have offices at such other places in or outside
the State of Delaware as the Board of Directors of the Corporation (the "Board
of Directors") may from time to time designate or the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS' MEETINGS
Section 3. Annual Meeting. An annual meeting of stockholders shall be
--------------
held on such day and at such time as may be designated by the Board of Directors
for the purpose of electing directors and for the transaction of such other
business as properly may come before such meeting. Any previously scheduled
annual meeting of the stockholders may be postponed by resolution of the Board
of Directors upon public notice given on or prior to the date previously
scheduled for such annual meeting of stockholders.
Section 4. Business to be Conducted at Annual Meeting.
------------------------------------------
(a) At an annual meeting of stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) pursuant to the
Corporation's notice of the meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the Corporation who is a stockholder of
record at the time of giving of the notice provided for in this By-Law, who
shall be entitled to vote at such meeting and who shall have complied with the
notice procedures set forth in this By-Law.
(b) For business to be properly brought before an annual meeting by a
stockholder pursuant to Section (a)(iii) of this By-Law, notice in writing must
be delivered or mailed to the Secretary and received at the General Offices, not
less than 60 days nor more than 90 days prior to the first anniversary of the
date on which the Corporation first mailed its proxy materials for the preceding
year's annual meeting of stockholders; provided, however, that in the
<PAGE>
event that the date of the meeting is advanced by more than 30 days or delayed
by more than 60 days from such meeting's anniversary date, notice by the
stockholder must be received not earlier than the 90/th/ day prior to such date
of mailing of proxy materials and not later than the close of business on the
later of the 60/th/ day prior to such date of mailing of proxy materials or the
10/th/ day following the day on which public announcement of the date of the
annual meeting is first made. Such stockholder's notice shall set forth as to
each matter the stockholder proposes to bring before the annual meeting (i) a
brief description of the business to be brought before the annual meeting and
the reasons for conducting such business at such meeting; (ii) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business, and the name and address of the beneficial owner, if any, on
whose behalf the proposal is made; (iii) the class and number of shares of the
Corporation's stock which are beneficially owned by the stockholder, and by the
beneficial owner, if any, on whose behalf the proposal is made; and (iv) any
material interest of the stockholder, and of the beneficial owner, if any, on
whose behalf the proposal is made, in such business. For purposes of these By-
Laws, "public announcement" shall mean disclosure in a press release reported by
the Dow Jones News Service, Associated Press or comparable news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(c) Notwithstanding anything in these By-Laws to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this By-Law. The chairman of the meeting may, if the
facts warrant, determine that the business was not properly brought before the
meeting in accordance with the provisions of this By-Law; and if the chairman
should so determine, the chairman shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this By-Law, a stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this By-Law.
Nothing in this By-Law shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act, and any such proposal so included shall be
deemed timely given for purposes of this By-Law.
Section 5. Special Meetings. Special meetings of stockholders for any
----------------
proper purpose or purposes, unless otherwise provided by the General Corporation
Law of the State of Delaware, may be called by the Chairman of the Board or the
Chief Executive Officer, or in the absence of each of them, by the Secretary at
the written request of a majority of the directors. Business transacted at a
special meeting of stockholders shall be confined to the purpose or purposes of
the meeting as stated in the notice of the meeting. Any previously scheduled
special meeting of the stockholders may be postponed by resolution of the Board
of Directors upon notice by public announcement given on or prior to the date
previously scheduled for such special meeting of stockholders.
Section 6. Place of Meetings. All meetings of stockholders shall be held
-----------------
at such place as may be determined by resolution of the Board of Directors.
Section 7. Notice of Meetings. Except as otherwise required by applicable
------------------
law, notice of each meeting of the stockholders, whether annual or special,
shall, at least 10 days but
2
<PAGE>
not more than 60 days before the date of the meeting, be given to each
stockholder of record entitled to vote at the meeting by mailing such notice in
the U.S. mail, postage prepaid, addressed to such stockholder at such
stockholder's address as the same appears on the records of the Corporation.
Such notice shall state the place, date and hour of the meeting, and in the case
of a special meeting, shall also state the purpose or purposes thereof.
Section 8. Nominations of Directors.
------------------------
(a) Only persons who are nominated in accordance with the procedures
set forth in these By-Laws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors may be made at a
meeting of stockholders (i) by or at the direction of the Board of Directors or
(ii) by any stockholder of the Corporation who is a stockholder of record at the
time of giving of the notice provided for in this By-Law, who shall be entitled
to vote for the election of directors at the meeting and who complies with the
notice procedures set forth in this By-Law.
(b) Nominations by stockholders shall be made pursuant to notice in
writing, delivered or mailed to the Secretary and received at the General
Offices (i) in the case of an annual meeting, not less than 60 days nor more
than 90 days prior to the first anniversary of the date on which the Corporation
first mailed its proxy materials for the preceding year's annual meeting of
stockholders, provided, however, that in the event that the date of the meeting
is advanced by more than 30 days or delayed by more than 60 days from such
anniversary date, notice by the stockholder must be received not earlier than
the 90/th/ day prior to such date of mailing of proxy materials and not later
than the close of business on the later of the 60/th/ day prior to such date of
mailing of proxy materials or the 10/th/ day following the day on which public
announcement of the date of the meeting is first made; or (ii) in the case of a
special meeting at which directors are to be elected, not earlier than the
90/th/ day prior to such special meeting and not later than the close of
business on the later of the 60/th/ day prior to such special meeting or the
10/th/ day following the day on which public announcement of the date of the
meeting and of the nominees proposed by the Board of Directors to be elected at
such meeting is first made. In the case of a special meeting of stockholders at
which directors are to be elected, stockholders may nominate a person or persons
(as the case may be) for election only to such position(s) as are specified in
the Corporation's notice of meeting as being up for election at such meeting.
Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a Director, all
information relating to such person that would be required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act (including such
person's written consent to being named as a nominee and to serving as a
Director if elected); (ii) as to the stockholder giving the notice, the name and
address, as they appear on the Corporation's books, of such stockholder and the
class and number of shares of the Corporation's stock which are beneficially
owned by such stockholder; and (iii) as to any beneficial owner on whose behalf
the nomination is made, the name and address of such person and the class and
number of shares of the Corporation's stock which are beneficially owned by such
person. At the request of the Board of Directors, any person nominated by the
Board of Directors for election as a Director shall furnish to the Secretary
that information required to be set forth in a stockholder's notice of
nomination that pertains to the nominee. Notwithstanding anything in this By-
Law to the contrary, in the event that the number of directors to be elected to
3
<PAGE>
the Board of Directors of the Corporation is increased and there is no public
statement naming all the nominees for Director or specifying the size of the
increased Board of Directors made by the Corporation at least 70 days prior to
the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this By-Law shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it shall
be delivered to the Secretary at the General Offices not later than the close of
business on the 10/th/ day following the day on which such public announcement
is first made by the Corporation.
(c) No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth in
these By-Laws. The chairman of the meeting may, if the facts warrant, determine
that a nomination was not made in accordance with the procedures prescribed in
this By-Law; and if the chairman should so determine, the chairman shall so
declare to the meeting, and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this By-Law, a stockholder shall
also comply with all applicable requirements of the Exchange Act, and the rules
and regulations thereunder with respect to the matters set forth in this By-Law.
Section 9. List of Stockholders.
--------------------
(a) The Secretary of the Corporation shall prepare, at least 10 days
before each meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
(b) The stock ledger of the Corporation shall be the only evidence as
to the identity of the stockholders entitled (i) to vote in person or by proxy
at any meeting of stockholders, or (ii) to exercise the rights in accordance
with applicable law to examine the stock ledger, the list required by this By-
Law or the books and records of the Corporation.
Section 10. Quorum. The holders of a majority of the stock issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum for the transaction of any business at all
meetings of the stockholders, except as otherwise provided by applicable law, by
the Certificate of Incorporation or by these By-Laws. The stockholders present
at any duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of sufficient stockholders to render
the remaining stockholders less than a quorum. Whether or not a quorum is
present, either the Chairman of the meeting or a majority of the stockholders
entitled to vote thereat, present in person or by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. At such
4
<PAGE>
adjourned meeting at which the requisite amount of voting stock shall be present
or represented, any business may be transacted which might have been transacted
at the meeting as originally noticed.
Section 11. Voting and Required Vote. Subject to the provisions of the
------------------------
Certificate of Incorporation, each stockholder shall, at every meeting of
stockholders, be entitled to one vote for each share of capital stock held by
such stockholder. Subject to the provisions of the Certificate of Incorporation
and applicable law, directors shall be chosen by the vote of a plurality of the
shares present in person or represented by proxy at the meeting; and all other
questions shall be determined by the affirmative vote of the majority of shares
present in person or represented by proxy at the meeting. Elections of
directors shall be by written ballot.
Section 12. Proxies. Each stockholder entitled to vote at a meeting of
-------
stockholders may authorize another person or persons to act for such stockholder
by proxy, provided the instrument authorizing such proxy to act shall have been
executed in writing in the manner prescribed by applicable law. No proxy shall
be voted or acted upon after three years from its date, unless the proxy
provides for a longer period.
Section 13. Inspectors of Election; Polls. Before each meeting of
-----------------------------
stockholders, the Chairman of the Board or another officer of the Corporation
designated by resolution of the Board of Directors shall appoint one or more
inspectors of election for the meeting and may appoint one or more inspectors to
replace any inspector unable to act. If any of the inspectors appointed shall
fail to attend, or refuse or be unable to serve, substitutes shall be appointed
by the chairman of the meeting. Each inspector shall have such duties as are
provided by applicable law, and shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of such person's ability. The chairman of the meeting shall fix and
announce at the meeting the date and time of the opening and closing of the
polls for each matter upon which the stockholders will vote at the meeting.
Section 14. Organization. The Chairman of the Board of Directors, or in
------------
the Chairman's absence, (i) the Chief Executive Officer, (ii) the President, or
(iii) in the absence of each of them, a chairman chosen by a majority of the
directors present, shall act as chairman of the meetings of the stockholders,
and the Secretary or, in the Secretary's absence, an Assistant Secretary or any
employee of the Corporation appointed by the chairman of the meeting, shall act
as secretary of the meeting. The order of business and the procedure at any
meeting of stockholders shall be determined by the chairman of the meeting.
Section 15. No Stockholder Action by Written Consent. Any action required
----------------------------------------
or permitted to be taken by the stockholders of the Corporation must be effected
at a duly called annual or special meeting of stockholders of the Corporation
and may not be effected by any consent in writing in lieu of a meeting of such
stockholders.
5
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
Section 16. General Powers, Number, Term of Office. The business of the
--------------------------------------
Corporation shall be managed under the direction of its Board of Directors.
Subject to the rights of the holders of any series of preferred stock, $0.01 par
value per share, of the Corporation ("Preferred Stock") to elect additional
directors under specified circumstances, the number of directors of the
Corporation shall be fixed from time to time exclusively by resolution of a
majority of the then authorized number of directors of the Corporation (the
number of then authorized directors of the Corporation is referred to herein as
the "Whole Board"), but in no event shall the number of directors be fewer than
three. The directors, other than those who may be elected solely by the holders
of any series of Preferred Stock (unless the relevant Certificate of Designation
for such Preferred Stock so provides), shall be divided into three classes, as
nearly equal in number as possible, designated "Class I," "Class II" and "Class
III." Directors of each class shall serve for a term ending on the third annual
meeting of stockholders following the annual meeting at which such class was
elected, except that the term of office of the initial Class I director shall
expire on the date of the annual meeting in 2000, the term of office of the
initial Class II directors shall expire on the date of the annual meeting in
2001 and the term of office of the initial Class III directors shall expire on
the date of the annual meeting in 2002. The foregoing notwithstanding, each
director shall serve until his or her successor shall have been duly elected and
qualified, unless such director shall die, resign, retire or be disqualified or
removed. At all elections of directors, the directors chosen to succeed those
directors whose terms then expire shall be identified as being of the same class
as the directors they succeed. If for any reason the number of directors in the
various classes shall not be as nearly equal as possible, the Board of Directors
may redesignate any director into a different class in order that the balance of
directors in such classes shall be as nearly equal as possible.
Section 17. Vacancies. Subject to the rights of the holders of any series
---------
of Preferred Stock to elect additional directors under specified circumstances,
and unless the Board of Directors otherwise determines, vacancies resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, and newly created directorships resulting from any increase in the
authorized number of directors, may be filled only by the affirmative vote of a
majority of the remaining directors, though less than a quorum of the Board of
Directors, or by a sole remaining director, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been elected expires and until
such director's successor shall have been duly elected and qualified. No
decrease in the number of authorized directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 18. Chairman of the Board. The Chairman of the Board of Directors
---------------------
shall be chosen from among the directors. The Chairman of the Board shall
preside at all meetings of the stockholders and of the Board of Directors,
except as may be otherwise required under applicable law. The Chairman shall act
in an advisory capacity with respect to matters of policy and other matters of
importance pertaining to the affairs of the Corporation. The Chairman, alone or
with the Chief Executive Officer, the President and/or the Secretary shall sign
and send out reports and other messages which are to be sent to stockholders
from time to time. The
6
<PAGE>
Chairman shall also perform such other duties as may be assigned to the Chairman
by these By-Laws or the Board of Directors.
Section 19. Regular Meetings. Following the annual meeting of
----------------
stockholders, the first meeting of each newly elected Board of Directors may be
held, without notice, on the same day and at the same place as such
stockholders' meeting. The Board of Directors by resolution may provide for the
holding of regular meetings and may fix the times and places at which such
meetings shall be held. Notice of regular meetings shall not be required
provided that whenever the time or place of regular meetings shall be fixed or
changed, notice of such action shall be given promptly to each director, as
provided in Section 21 below, who was not present at the meeting at which such
action was taken.
Section 20. Special Meetings. Special meetings of the Board of Directors
----------------
shall be held whenever called by the Chairman of the Board of Directors, the
Chief Executive Officer, the President or in the absence of each of them, by the
Secretary at the written request of a majority of the directors.
Section 21. Notices. Notice of any special meeting of the Board of
-------
Directors shall be addressed to each Director at such Director's residence or
business address and shall be sent to such Director by mail, electronic mail,
telecopier, telegram or telex or telephoned or delivered to such Director
personally. If such notice is sent by mail, it shall be sent not later than
three days before the day on which the meeting is to be held. If such notice is
sent by electronic mail, telecopier, telegram or telex, it shall be sent not
later than 24 hours before the time at which the meeting is to be held. If such
notice is delivered personally, it shall be received not later than 24 hours
before the time at which the meeting is to be held. If such notice is
telephoned, it shall be to such telephone number or numbers of which the
director from time to time shall advise the Secretary for receiving such notice.
If given by telephone call, notice shall be deemed given to a director when a
message stating the time, place and purpose of the meeting is left with a person
answering the telephone at any such number with a request that the director be
so informed, or if no such telephone number is answered, then when at least two
attempts have been made to reach each telephone number designated by the
director for receiving telephonic notice, with an interval of not less than one
hour. A certification shall be prepared and filed with the minutes stating the
date, time and results of telephonic notice given to any director not present at
a meeting with respect to which his waiver of notice of meeting is not filed
with the minutes. In all cases, such notice shall state the time, place and
purpose or purposes of the meeting.
Section 22. Conference Telephone Meetings. Members of the Board of
-----------------------------
Directors or any committee thereof, may participate in a meeting of the Board of
Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
Section 23. Quorum. One-half of the total number of directors constituting
------
the Whole Board, but not less than two, shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors, but if less
than such required number of directors for a quorum is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice. Except as otherwise specifically provided by applicable
law,
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the Certificate of Incorporation or these By-Laws, the act of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
Section 24. Organization. At each meeting of the Board of Directors, the
------------
Chairman of the Board or, in the Chairman's absence, (i) the Chief Executive
Officer, if a member of the Board of Directors, (ii) the President, if a member
of the Board of Directors, or (iii) in the absence of each of them, a chairman
chosen by a majority of the directors present, shall act as chairman of the
meeting, and the Secretary or, in the Secretary's absence, an Assistant
Secretary or any employee of the Corporation appointed by the chairman of the
meeting, shall act as secretary of the meeting.
Section 25. Resignations. Any Director may resign at any time by giving
------------
written notice to the Chairman of the Board, the Chief Executive Officer or the
Secretary of the Corporation. Such resignation shall take effect upon receipt
thereof or at any later time specified therein; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 26. Removal. Subject to the rights of the holders of any series of
-------
Preferred Stock to elect additional directors under specified circumstances, any
director may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of at least a majority of the voting power
of the then outstanding Voting Stock, voting together as a single class. For
purposes of these By-Laws, "Voting Stock" shall mean the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors.
Section 27. Action Without a Meeting. Unless otherwise restricted by the
------------------------
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 28. Location of Books. Except as otherwise provided by resolution
-----------------
of the Board of Directors and subject to applicable law, the books of the
Corporation may be kept at the General Offices and at such other places as may
be necessary or convenient for the business of the Corporation.
Section 29. Dividends. Subject to the provisions of the Certificate of
---------
Incorporation and applicable law, dividends upon the capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting. Dividends may be paid in cash, in property, or in shares of the
Corporation's capital stock.
Section 30. Compensation of Directors. Directors shall receive such
-------------------------
compensation and benefits as may be determined by resolution of the Board of
Directors for their services as members of the Board of Directors and
committees. Directors shall also be reimbursed for their expenses of attending
Board of Directors and committee meetings. Nothing contained herein shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
8
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Section 31. Additional Powers. In addition to the powers and authorities
-----------------
by these By-Laws expressly conferred upon it, the Board of Directors may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders.
ARTICLE IV
COMMITTEES OF DIRECTORS
Section 32. Designation, Power, Alternate Members. The Board of Directors
-------------------------------------
may, by resolution or resolutions passed by a majority of the Whole Board,
designate an Executive Committee and one or more additional committees, each
committee to consist of one or more of the directors of the Corporation. Any
such committee, to the extent provided in said resolution or resolutions and
subject to any limitations provided by applicable law, shall have and may
exercise the powers of the Board of Directors in the management of the business
and affairs of the Corporation. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. If at a meeting of any
committee one or more of the members thereof is absent or disqualified, and if
either the Board of Directors has not so designated any alternate member or
members, or the number of absent or disqualified members exceeds the number of
alternate members who are present at such meeting, then the member or members of
such committee (including alternates) present at any meeting and not
disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another Director to act at the meeting in the place of such
absent or disqualified member. The term of office of the members of each
committee shall be as fixed from time to time by the Board of Directors;
provided, however, that any committee member who ceases to be a member of the
Board of Directors shall automatically cease to be a committee member.
Section 33. Quorum, Manner of Acting. At any meeting of a committee, the
------------------------
presence of one-half of its members then in office shall constitute a quorum for
the transaction of business; and the act of a majority of the members present at
a meeting at which a quorum is present shall be the act of the committee. Each
committee may provide for the holding of regular meetings, make provision for
the calling of special meetings and, except as otherwise provided in these By-
Laws or by resolution of the Board of Directors, make rules for the conduct of
its business.
Section 34. Minutes. The committees shall keep minutes of their
-------
proceedings and report the same to the Board of Directors when required; but
failure to keep such minutes shall not affect the validity of any acts of the
committee or committees.
ARTICLE V
ADVISORY DIRECTORS
Section 35. Advisory Directors. The Board of Directors may, by resolution
------------------
adopted by a majority of the Whole Board, appoint such Advisory Directors as the
Board of Directors
9
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may from time to time determine. The Advisory Directors shall have such advisory
responsibilities as the Chairman of the Board may designate and the term of
office of such Advisory Directors shall be as fixed by the Board of Directors.
ARTICLE VI
OFFICERS
Section 36. Designation. The officers of the Corporation shall be the
-----------
Chief Executive Officer, a President, a Chief Operating and Technology Officer,
a Secretary, a Chief Financial Officer, a Treasurer and a Controller. The Board
of Directors may also elect one or more Executive Vice Presidents, Senior Vice
Presidents, Group Vice Presidents, Vice Presidents, Assistant Secretaries,
Assistant Treasurers, Assistant Controllers and such other officers as it shall
deem necessary. Any number of offices may be held by the same person.
Section 37. Election and Term. At its first meeting after each annual
-----------------
meeting of stockholders, the Board of Directors shall elect the officers of the
Corporation and at any time thereafter the Board of Directors may elect
additional officers of the Corporation, and each such officer shall hold office
until the officer's successor is elected and qualified or until the officer's
earlier death, resignation or removal. Alternatively, at the last regular
meeting of the Board of Directors prior to an annual meeting of stockholders,
the Board of Directors may elect the officers of the Corporation, contingent
upon the election of the persons nominated to be directors by the Board of
Directors; and each such officer so elected shall hold office until the
officer's successor is elected and qualified or until the officer's earlier
death, resignation or removal.
Section 38. Removal. Any officer shall be subject to removal or suspension
-------
at any time, for or without cause, by the affirmative vote of a majority of the
Whole Board.
Section 39. Resignations. Any officer may resign at any time by giving
------------
written notice to the Chairman of the Board, the President or to the Secretary.
Such resignation shall take effect upon receipt thereof or at any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 40. Vacancies. A vacancy in any office because of death,
---------
resignation, removal or any other cause may be filled for the unexpired portion
of the term by the Board of Directors.
Section 41. Chief Executive Officer. The Chief Executive Officer shall
-----------------------
have the general and active management and supervision of the business of the
Corporation. The Chief Executive Officer, if a member of the Board of Directors,
shall, in the absence of the Chairman of the Board, preside at all meetings of
the stockholders and of the Board of Directors. The Chief Executive Officer
shall see that all orders and resolutions of the Board of Directors are carried
into effect. The Chief Executive Officer shall also perform such other duties as
may be assigned to the Chief Executive Officer by these By-Laws or the Board of
Directors. The Chief Executive Officer shall designate who shall perform the
duties of the Chief Executive Officer in the Chief Executive Officer's absence.
10
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Section 42. President. The President shall perform such duties as may be
---------
assigned to the President by these By-Laws, the Board of Directors or, if
applicable, the Chief Executive Officer.
Section 43. Chief Operating and Technology Officer. The Chief Operating
--------------------------------------
and Technology Officer shall perform such duties as may be assigned to the Chief
Operating and Technology Officer by these By-Laws, the Board of Directors, the
Chief Executive Officer or the President.
Section 44. Vice Presidents. Each Executive Vice President, Senior Vice
---------------
President, Group Vice President and each other Vice President shall perform the
duties and functions and exercise the powers assigned to such officer by these
By-Laws, the Board of Directors, the Chief Executive Officer or the President.
Section 45. Secretary. The Secretary shall attend all meetings of the
---------
Board of Directors and of the stockholders and record all votes and the minutes
of all proceedings in a book to be kept for that purpose. The Secretary shall
give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors and, when appropriate, shall cause
the corporate seal to be affixed to any instruments executed on behalf of the
Corporation. The Secretary shall also perform all duties incident to the office
of Secretary and such other duties as may be assigned to the Secretary by these
By-Laws, the Board of Directors, the Chairman of the Board, the Chief Executive
Officer or the President.
Section 46. Assistant Secretaries. The Assistant Secretaries shall, during
---------------------
the absence of the Secretary, perform the duties and functions and exercise the
powers of the Secretary. Each Assistant Secretary shall perform such other
duties as may be assigned to such Assistant Secretary by these By-Laws, the
Board of Directors, the Chairman of the Board, the Chief Executive Officer, the
President or the Secretary.
Section 47. Chief Financial Officer. The Chief Financial Officer shall
-----------------------
have overall responsibility for causing (1) the funds and securities of the
Corporation to be deposited in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors or by any
officer or officers authorized by the Board of Directors to designate such
depositories; (2) the disbursement of funds of the Corporation when properly
authorized by vouchers prepared and approved by the Controller; (3) the
investment of funds of the Corporation when authorized by the Board of Directors
or a committee thereof; and (4) to be kept full and accurate account of receipts
and disbursements in books of the Corporation. The Chief Financial Officer shall
render to the Board of Directors, the Chief Executive Officer, or the President,
whenever requested, an account of all transactions as Chief Financial Officer
and shall also perform all duties incident to the office of Chief Financial
Officer and such other duties as may be assigned to the Chief Financial Officer
by these By-Laws, the Board of Directors, the Chief Executive Officer, or the
President.
Section 48. Treasurer. The Treasurer shall have the custody of the funds
---------
and securities of the Corporation and shall deposit them in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors or by any officer or officers authorized by the Board of Directors
to designate such depositories; disburse
11
<PAGE>
funds of the Corporation when properly authorized by vouchers prepared and
approved by the Controller; and invest funds of the Corporation when authorized
by the Board of Directors or a committee thereof. The Treasurer shall render to
the Board of Directors, the Chief Executive Officer, the President or the Chief
Financial Officer, whenever requested, an account of all transactions as
Treasurer and shall also perform all duties incident to the office of Treasurer
and such other duties as may be assigned to the Treasurer by these By-Laws, the
Board of Directors, the Chief Executive Officer, the President or the Chief
Financial Officer.
Section 49. Assistant Treasurers. The Assistant Treasurers shall, during
--------------------
the absence of the Treasurer, perform the duties and functions and exercise the
powers of the Treasurer. Each Assistant Treasurer shall perform such other
duties as may be assigned to the Assistant Treasurer by these By-Laws, the Board
of Directors, the Chief Executive Officer, the President, the Chief Financial
Officer or the Treasurer.
Section 50. Controller. The Controller shall serve as the principal
----------
accounting officer of the Corporation and shall keep full and accurate account
of receipts and disbursements in books of the Corporation and render to the
Board of Directors, the Chief Executive Officer, the President, the Chief
Financial Officer or the Vice President-Finance, whenever requested, an account
of all transactions as Controller and of the financial condition of the
Corporation. The Controller shall also perform all duties incident to the
office of Controller and such other duties as may be assigned to the Controller
by these By-Laws, the Board of Directors, the Chief Executive Officer or the
President.
Section 51. Assistant Controllers. The Assistant Controllers shall, during
---------------------
the absence of the Controller, perform the duties and functions and exercise the
powers of the Controller. Each Assistant Controller shall perform such other
duties as may be assigned to such officer by the Board of Directors, the Chief
Executive Officer, the President or the Controller.
ARTICLE VII
CONTRACTS, INSTRUMENTS AND PROXIES
Section 52. Contracts and Other Instruments. Except as otherwise required
-------------------------------
by applicable law, the Certificate of Incorporation or these By-Laws, any
contracts or other instruments may be signed by such person or persons as from
time to time may be designated by the Board of Directors or by any officer or
officers authorized by the Board of Directors to designate such signers; and the
Board of Directors or such officer or officers may determine that the signature
of any such authorized signer may be facsimile. Such authority may be general or
confined to specific instances as the Board of Directors or such officer or
officers may determine.
Section 53. Proxies. Except as otherwise provided by resolution of the
-------
Board of Directors, the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Treasurer and any Assistant Treasurer, the
Controller and any Assistant Controller, the Secretary and any Assistant
Secretary of the Corporation, shall each have full power and authority, in
behalf of the Corporation, to exercise any and all rights of the Corporation
with respect to any meeting of stockholders of any corporation in which the
Corporation holds stock,
12
<PAGE>
including the execution and delivery of proxies therefor, and to consent in
writing to action by such corporation without a meeting.
ARTICLE VIII
CAPITAL STOCK
Section 54. Stock Certificates; Book-Entry Accounts. The interest of each
---------------------------------------
stockholder of the Corporation shall be evidenced by (1) certificates signed by,
or in the name of the Corporation by, the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President, the Chief Financial
Officer or the Treasurer, and by the Secretary or any Assistant Secretary of the
Corporation, certifying the number of shares owned by such holder in the
Corporation, or (2) registration in book-entry accounts without certificates for
shares of stock in such form as the appropriate officers of the Corporation may
from time to time prescribe. Any of or all the signatures on a stock
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
Section 55. Record Ownership. The Corporation shall be entitled to treat
----------------
the person in whose name any share, right or option is registered as the owner
thereof, for all purposes, and shall not be bound to recognize any equitable or
other claim to or interest in such share, right or option on the part of any
other person, whether or not the Corporation shall have notice thereof, except
as otherwise provided by applicable law.
Section 56. Record Dates. In order that the Corporation may determine the
------------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors and which shall not be more than 60 nor less than 10
days before the date of such meeting, nor more than 60 days prior to any other
action.
Section 57. Transfer of Stock. Transfers of shares of stock of the
-----------------
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by the registered holder's attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or a transfer agent
of the Corporation, and on surrender of the certificate or certificates for such
shares properly endorsed and the payment of all taxes thereon, or by appropriate
book-entry procedures.
Section 58. Lost, Stolen or Destroyed Certificates. The Board of Directors
--------------------------------------
may authorize a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of the fact
by the person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the Board of
13
<PAGE>
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or the owner's legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against the
Corporation on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate.
Section 59. Terms of Preferred Stock. The provisions of these By-Laws,
------------------------
including those pertaining to voting rights, election of directors and calling
of special meetings of stockholders, are subject to the terms, preferences,
rights and privileges of any then outstanding class or series of Preferred Stock
as set forth in the Certificate of Incorporation and in any resolutions of the
Board of Directors providing for the issuance of such class or series of
Preferred Stock; provided, however, that the provisions of any such Preferred
Stock shall not affect or limit the authority of the Board of Directors to fix,
from time to time, the number of directors which shall constitute the Whole
Board as provided in Section 16 above, subject to the right of the holders of
any class or series of Preferred Stock to elect additional directors as and to
the extent specifically provided by the provisions of such Preferred Stock.
ARTICLE IX
INDEMNIFICATION
Section 60. Right of Indemnification Generally.
----------------------------------
(a) Directors, Officers, Employees and Agents. Each person who was or
is made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
or a person of whom he or she is the legal representative is or was a director,
officer, employee or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, limited liability company, partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted by the General Corporation Law of the State of Delaware as the same
exists or may hereafter be amended (but, if permitted by applicable law, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), and any other applicable
laws as presently or hereafter in effect, against all expense, liability and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith; provided, however, that except
as provided in Section 60 below, the Corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors.
(b) Contract Right. The right to indemnification conferred in this
Article IX shall be a contract right.
14
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Section 61. Written Request; Determination of Entitlement. To obtain
---------------------------------------------
indemnification under this Article IX, a claimant shall submit to the
Corporation a written request, including therein or therewith such documentation
and information as is reasonably available to the claimant and is reasonably
necessary to determine whether and to what extent the claimant is entitled to
indemnification. Any determination regarding whether indemnification of any
person is proper in the circumstances because such person has met the applicable
standard of conduct set forth in the General Corporation Law of the State of
Delaware shall be made at the option of the person seeking indemnification, by
the directors as set forth in the General Corporation Law of the State of
Delaware or by independent legal counsel selected by such person with the
consent of the Corporation (which consent shall not unreasonably be withheld).
Section 62. Recovery of Unpaid Claim. If a claim under Section 60 above is
------------------------
not paid in full by the Corporation within 60 days after a written claim
pursuant to Section 61 above has been received by the Corporation, the claimant
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
shall be entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than actions brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standard of
conduct which makes it permissible under the General Corporation Law of the
State of Delaware for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its directors, independent
legal counsel or stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an actual
determination by the Corporation (including its directors, independent legal
counsel or stockholders) that the claimant has not met such applicable standard
of conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
Section 63. Exclusivity; Subsequent Modification. The right to
------------------------------------
indemnification conferred in this Article IX shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, By-Laws, agreement, vote of
stockholders or directors or otherwise. No repeal or modification of this
Article IX shall in any way diminish or adversely affect the rights hereunder of
any director, officer, employee or agent in respect of any occurrence or matter
arising prior to any such repeal or modification.
Section 64. Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, limited liability company, partnership,
joint venture, trust or other enterprise against any expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the General Corporation Law of the
State of Delaware or otherwise. To the extent that the Corporation maintains any
policy or policies providing such insurance, each such director, officer,
employee or agent shall be covered
15
<PAGE>
by such policy or policies in accordance with its or their terms to the maximum
extent of the coverage thereunder for any such director, officer, employee or
agent.
Section 65. Other Indemnification Rights. The Corporation may, to the
----------------------------
extent authorized from time to time by the Board of Directors, grant additional
rights to indemnification, including rights to be paid by the Corporation the
expenses incurred in defending any proceeding in advance of its final
disposition, to any agent of the Corporation to the fullest extent permitted by
the General Corporation Law of the State of Delaware as the same exists or may
hereafter be amended (but, if permitted by applicable law, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment).
Section 66. Illegality; Unenforceability. If any provision or provisions
----------------------------
of this Article IX shall be held to be invalid, illegal or unenforceable for any
reason whatsoever: (1) the validity, legality and enforceability of the
remaining provisions of this Article IX (including, without limitation, each
portion of any Section or subsection of this Article IX containing any such
provision held to be invalid, illegal or unenforceable, that is not itself held
to be invalid, illegal or unenforceable) shall not in any way be affected or
impaired thereby; and (2) to the fullest extent possible, the provisions of this
Article IX (including, without limitation, each such portion of any Section or
subsection of this Article IX containing any such provision held to be invalid,
illegal or unenforceable that is not itself held to be invalid, illegal or
unenforceable) shall be construed so as give effect to the intent manifested by
the provision held invalid, illegal or unenforceable.
Section 67. Form and Delivery of Communications. Any notice, request or
-----------------------------------
other communication required or permitted to be given to the Corporation under
this Article IX shall be in writing and either delivered in person or sent by
telecopy, telex, telegram, overnight mail or courier service, or certified or
registered mail, postage prepaid, return receipt requested, to the Secretary of
the Corporation.
ARTICLE X
MISCELLANEOUS
Section 68. Corporate Seal. The seal of the Corporation shall be circular
--------------
in form, containing the words "Varian Semiconductor Equipment Associates, Inc."
and the word "Delaware" on the circumference surrounding the word "Seal." Said
seal may be used by causing it or a facsimile thereof to be impressed or affixed
or in any other manner reproduced.
Section 69. Fiscal Year. The fiscal year of the Corporation is the 51- to
-----------
53-week period that ends on the Friday nearest September 30.
Section 70. Auditors. The Board of Directors shall select certified public
--------
accountants to audit the books of account and other appropriate corporate
records of the Corporation annually and at such other times as the Board of
Directors shall determine by resolution.
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Section 71. Waiver of Notice. Whenever notice is required to be given
----------------
pursuant to applicable law, the Certificate of Incorporation or these By-Laws, a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting of stockholders or the Board of Directors or
a committee thereof shall constitute a waiver of notice of such meeting, except
when the stockholder or Director attends such meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders or the Board of Directors or committee thereof need be specified in
any written waiver of notice unless so required by the Certificate of
Incorporation or by these By-Laws.
ARTICLE XI
AMENDMENT TO BY-LAWS
Section 72. Amendments. These By-Laws may be amended or repealed, or new
----------
By-Laws may be adopted, at any meeting of the Board of Directors or of the
stockholders, provided notice of the proposed change was given in the notice of
the meeting and, in the case of a meeting of the Board of Directors, in a notice
given not less than 24 hours prior to the meeting; provided, however, that in
the case of amendment, repeal or adoption by stockholders, notwithstanding any
other provisions of these By-Laws or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of at least 66?% of the voting power of all the then outstanding shares
of the Voting Stock, voting together as a single class, shall be required for
the stockholders to adopt, amend or repeal any provision of these By-Laws.
17
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[CERTIFICATE OF VARIAN SEMICONDUCTOR EQUIPMENT COMMON STOCK APPEARS HERE]
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights are established, from time to time, by the Restated Certificate of
Incorporation and by any certificate of determination, the number of shares
constituting each class and series, and the designations thereof may be obtained
by the holder hereof upon request and without charge from the Secretary of the
Corporation at the principal office of the Corporation.
Until the Separation Time (as defined in the Rights Agreement referred to
below), this certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement, dated as of February 18, 1999
(as such may be amended from time to time, the "Rights Agreement"), between
Varian Semiconductor Equipment Associates, Inc. (the "Company") and First
Chicago Trust Company of New York, as Rights Agent, the terms of which are
hereby incorporated herein by reference and a copy of which is on file at the
principal executive offices of the Company. Under certain circumstances, as set
forth in the Rights Agreement, such Rights may be redeemed, may be exchanged for
shares of Common Stock or other securities or assets of the Company or a
Subsidiary of the Company, may expire, may become void (if they are
"Beneficially Owned" by an "Acquiring Person" or an Affiliate or Associate
thereof, as such terms are defined in the Rights Agreement, or by any transferee
of any of the foregoing) or may be evidenced by separate certificates and may no
longer be evidenced by this certificate. The Company will mail or arrange for
the mailing of a copy of the Rights Agreement to the holder of this certificate
without charge within five days after the receipt of a written request therefor.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations;
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ..................... Custodian .....................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
supervisorship and not as tenants Act .................................................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint______________________________________________
_________________________________________ Attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution in the
premises.
Dated ____________________________
X _____________________________________
X _____________________________________
THE SIGNATURES TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAMES AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATSOEVER.
Signature(s) Guaranteed
By ________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS STOCKHOLDERS SAVINGS AND LOAN ASSOCIATES AND
LOAN ASSOCIATES AND CREDIT LINKING WITH MEMBERSHIP BY AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO SEC.
RULE 17 ACT-15.
<PAGE>
EXHIBIT 4.2
================================================================================
RIGHTS AGREEMENT
dated as of
February 19, 1999
between
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
and
FIRST CHICAGO TRUST COMPANY OF NEW YORK
as Rights Agent
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I CERTAIN DEFINITIONS................................................ 2
1.1 Certain Definitions.................................................... 2
ARTICLE II THE RIGHTS......................................................... 10
2.1 Summary of Rights...................................................... 10
2.2 Legend on Common Stock Certificates.................................... 10
2.3 Exercise of Rights; Separation of Rights............................... 11
2.4 Adjustments to Exercise Price; Number of Rights........................ 14
2.5 Date on Which Exercise is Effective.................................... 16
2.6 Execution, Authentication, Delivery and Dating of Rights Certificates.. 17
2.7 Registration, Registration of Transfer and Exchange.................... 17
2.8 Mutilated, Destroyed, Lost and Stolen Rights Certificates.............. 19
2.9 Persons Deemed Owners.................................................. 20
2.10 Delivery and Cancellation of Certificates.............................. 20
2.11 Agreement of Rights Holders............................................ 21
ARTICLE III ADJUSTMENTS TO THE RIGHTS IN THE EVENT OF CERTAIN TRANSACTIONS..... 22
3.1 Flip-in................................................................ 22
3.2 Flip-over.............................................................. 25
ARTICLE IV THE RIGHTS AGENT................................................... 27
4.1 General................................................................ 27
4.2 Merger or Consolidation or Change of Name of Rights Agent.............. 28
4.3 Duties of Rights Agent................................................. 29
4.4 Change of Rights Agent................................................. 32
ARTICLE V MISCELLANEOUS...................................................... 33
5.1 Redemption............................................................. 33
5.2 Expiration............................................................. 34
5.3 Issuance of New Rights Certificates.................................... 34
5.4 Supplements and Amendments............................................. 35
5.5 Fractional Rights and Fractional Shares................................ 36
5.6 Rights of Action....................................................... 37
5.7 Holder of Rights Not Deemed a Stockholder.............................. 38
5.8 Notice of Proposed Actions............................................. 38
5.9 Notices................................................................ 39
5.10 Suspension of Exercisability........................................... 40
5.11 Costs of Enforcement................................................... 40
5.12 Successors............................................................. 41
5.13 Benefits of this Agreement............................................. 41
5.14 Determination and Actions by the Board of Directors, Etc............... 41
5.15 Descriptive Headings................................................... 42
5.16 Governing Law.......................................................... 42
5.17 Counterparts........................................................... 42
</TABLE>
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
<S> <C>
5.18 Severability........................................................... 42
5.19 Book-Entry Account Statements.......................................... 42
EXHIBIT A Form of Rights Certificate
(Together with Form of Election to Exercise)...................... A-1
EXHIBIT B Form of Certificate of Designation and Terms of Participating
Preferred Stock of Varian Semiconductor Equipment Associates,
Inc. ............................................................. B-1
</TABLE>
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT (as amended from time to time, this "Agreement"),
dated as of February 19, 1999, between Varian Semiconductor Equipment
Associates, Inc., a Delaware corporation (the "Company"), and First Chicago
Trust Company of New York, as Rights Agent (the "Rights Agent," which term shall
include any successor Rights Agent hereunder).
WITNESSETH:
WHEREAS, the Board of Directors of the Company has (a) authorized and
declared a dividend of one right ("Right") in respect of each outstanding share
of Common Stock (as hereinafter defined) held of record as of 5:00 p.m.,
California time, on April 2, 1999 (the "Record Time") and (b) authorized the
issuance of one Right in respect of each share of Common Stock issued after the
Record Time and prior to the Separation Time (as hereinafter defined) and, to
the extent provided in Section 5.3, each share of Common Stock issued after the
Separation Time;
WHEREAS, subject to the terms hereof, each Right entitles the holder
thereof, after the Separation Time, to purchase securities of the Company (or,
in certain cases, of certain other entities) pursuant to the terms and subject
to the conditions set forth herein; and
WHEREAS, the Company desires to appoint the Rights Agent to act on
behalf of the Company, and the Rights Agent is willing so to act, in connection
with the issuance, transfer, exchange and replacement of Rights Certificates (as
hereinafter defined), the exercise of Rights and other matters referred to
herein;
<PAGE>
NOW THEREFORE, in consideration of the premises and the respective
agreements set forth herein, the parties hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.1 Certain Definitions. For purposes of this Agreement, the following
-------------------
terms have the meanings indicated:
"Acquiring Person" shall mean any Person who is Beneficial Owner (as
hereinafter defined) of 15% or more of the outstanding shares of Voting Stock
(as hereinafter defined); provided, however, that the term "Acquiring Person"
shall not include (i) any Person who is the Beneficial Owner of 15% or more of
the outstanding shares of Common Stock on the date of this Agreement or who
shall become the Beneficial Owner of 15% or more of the outstanding shares of
Voting Stock solely as a result of an acquisition by the Company of shares of
Voting Stock, until such time hereafter or thereafter as any of such Persons
shall become the Beneficial Owner (other than by means of a stock dividend or
stock split) of any additional shares of Voting Stock, (ii) any Person who
Beneficially Owns shares of Voting Stock consisting solely of one or more of (A)
shares of Voting Stock Beneficially Owned pursuant to the grant or exercise of
an option granted to such Person by the Company in connection with an agreement
to merge with, or acquire, the Company at a time at which there is no Acquiring
Person, (B) shares of Voting Stock (or securities convertible into, exchangeable
into or exercisable for Voting Stock), Beneficially Owned by such Person or its
Affiliates (as hereinafter defined) or Associates (as hereinafter defined) at
the time of grant of such option or (C) shares of Voting Stock (or securities
convertible into, exchangeable into or exercisable for Voting Stock) acquired by
Affiliates or Associates
2
<PAGE>
of such Person after the time of such grant, which, in the aggregate, amount to
less than 1% of the outstanding shares of Voting Stock, (iii) the Company, any
wholly owned Subsidiary (as hereinafter defined) of the Company, and any
employee stock ownership or other employee benefit plan of the Company or a
wholly owned Subsidiary of the Company or (iv) before the distribution of the
Company's outstanding stock to the stockholders of Varian Associates, Inc.,
Varian Associates, Inc. Notwithstanding the foregoing, if the Board of Directors
of the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
definition of "Acquiring Person," has become such inadvertently, and such Person
divests as promptly as practicable a sufficient number of shares of Common Stock
so that such Person would no longer be an "Acquiring Person," as defined
pursuant to such foregoing provisions of this definition of "Acquiring Person,"
then such Person shall not be deemed to be an "Acquiring Person" for any
purposes of this Agreement.
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934,
as such Rule is in effect on the date of this Agreement.
A Person shall be deemed the "Beneficial Owner," and to have
"Beneficial Ownership" of, and to "Beneficially Own," any securities as to which
such Person or any of such Person's Affiliates or Associates is or may be deemed
to be the beneficial owner pursuant to Rule 13d-3 and 13d-5 under the Securities
Exchange Act of 1934, as such Rules are in effect on the date of this Agreement,
as well as any securities as to which such Person or any of such Person's
Affiliates or Associates has the right to become the
3
<PAGE>
Beneficial Owner (whether such right is exercisable immediately or only after
the passage of time or the occurrence of conditions) pursuant to any agreement,
arrangement or understanding, or upon the exercise of conversion rights,
exchange rights, rights (other than the Rights), warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the "Beneficial
Owner," or to have "Beneficial Ownership" of, or to "Beneficially Own," any
security (i) solely because such security has been tendered pursuant to a tender
or exchange offer made by such Person or any of such Person's Affiliates or
Associates until such tendered security is accepted for payment or exchange or
(ii) solely because such Person or any of such Person's Affiliates or Associates
has or shares the power to vote or direct the voting of such security pursuant
to a revocable proxy given in response to a public proxy or consent solicitation
made to holders of shares of a class of stock of the Company registered under
Section 12 of the Securities Exchange Act of 1934, and pursuant to, and in
accordance with, the applicable rules and regulations under the Securities
Exchange Act of 1934, except if such power, (or the arrangements relating
thereto) is then reportable under Item 6 of Schedule 13D under the Securities
Exchange Act of 1934 (or any similar provision of a comparable or successor
report). For purposes of the Agreement, in determining the percentage of the
outstanding shares of Voting Stock with respect to which a Person is the
Beneficial Owner, all shares as to which such Person is deemed the Beneficial
Owner shall be deemed outstanding.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the City of New York are generally
authorized or obligated by law or executive order to close.
4
<PAGE>
"Close of Business" on any given date shall mean 5:00 P.M.,
Massachusetts time, on such date or, if such date is not a Business Day, 5:00
P.M., Massachusetts time, on the next succeeding Business Day.
"Common Stock" shall mean the shares of Common Stock, par value $0.01
per share, of the Company.
"Control" or "control" shall mean the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
"Exchange Time" shall mean the time at which the right to exercise the
Rights shall terminate pursuant to Section 3.1(c) hereof.
"Exercise Price" shall mean, as of any date, the price at which a
holder may purchase the securities issuable upon exercise of one whole Right.
Until adjustment thereof in accordance with the terms hereof, the Exercise Price
shall equal $120.00.
"Expiration Time" shall mean the earliest of (i) the Exchange Time,
(ii) the Redemption Time (as hereinafter defined), (iii) the Close of Business
on the tenth-year anniversary of the Record Time and (iv) upon the merger of the
Company into another corporation pursuant to an agreement entered into when
there is no Acquiring Person.
"Flip-in Date" shall mean any Stock Acquisition Date (as hereinafter
defined) or such earlier or later date as the Board of Directors of the Company
may from time to time fix by resolution adopted prior to the Flip-in Date that
would otherwise have occurred.
5
<PAGE>
"Flip-over Entity" shall mean (i) in the case of Flip-over Transaction
or Event (as hereinafter defined) described in clause (i) of the definition
thereof, the Person issuing any securities into which shares of Common Stock are
being converted or exchanged and, if no such securities are being issued, the
other party to such Flip-over Transaction or Event and (ii) in the case of Flip-
over Transaction or Event referred to in clause (ii) of the definition thereof,
the Person receiving the greatest portion of the assets or earning power being
transferred in such Flip-over Transaction or Event, provided in all cases if
such Person is a Subsidiary of a corporation, the parent corporation shall be
the Flip-over Entity.
"Flip-over Stock" shall mean the class of capital stock (or similar
equity interest) with the greatest voting power in respect of the election of
directors (or other persons similarly responsible for direction of the business
and affairs) of the Flip-over Entity.
"Flip-over Transaction or Event" shall mean a transaction or series of
transactions after the time when an Acquiring Person has become such in which,
directly or indirectly, (i) the Company shall consolidate or merge or
participate in a share exchange with any other Person if, at the time of the
consolidation, merger or share exchange or at the time the Company enters into
any agreement with respect to any such consolidation, merger or share exchange,
the Acquiring Person controls the Board of Directors of the Company, or (ii) the
Company shall sell or otherwise transfer (or one or more of its Subsidiaries
shall sell or otherwise transfer) directly or by sale of stock, assets or
control of assets (A) aggregating more than 50% of the assets (measured by
either book value or fair market value) as of the end of the more recently
completed fiscal year
6
<PAGE>
or (B) generating more than 50% of the operating income or cash flow during the
more recently completed fiscal year, of the Company and its Subsidiaries (taken
as a whole) to any Person (other than the Company or one or more of its wholly
owned Subsidiaries) or to two or more such Persons which are Affiliates or
Associates or otherwise acting in concert, if, at the time of the entry by the
Company (or any such Subsidiary) into an agreement with respect to such sale or
transfer of assets, the Acquiring Person controls the Board of Directors of the
Company. For purposes of the foregoing description, the term "Acquiring Person"
shall include any Acquiring Person and its Affiliates and Associates and others
acting directly or indirectly on behalf of or in concert with any such Acquiring
Person, Affiliate or Associate, counted together as a single Person.
"Market Price" per share of any securities on any date shall mean the
average of the daily closing prices per share of such securities (determined as
described below) on each of the 20 consecutive Trading Days (as hereinafter
defined) through and including the Trading Day immediately preceding such date;
provided, however, that if a type of event analogous to any of the events
described in Section 2.4 hereof shall have caused the closing prices used to
determine the Market Price on any Trading Days during such period of 20 Trading
Days not to be fully comparable with the closing price on such date because of
stock exchange or other trading adjustments, each such closing price so used
shall be appropriately adjusted in order to make it fully comparable with the
closing price on such date. The closing price per share of any securities on any
date shall be the last reported sale price, regular way, or, in case no such
sale takes place or is quoted on such date, the average of the closing bid and
asked prices, regular way, for each share of such securities, in either case as
reported in the principal consolidated transaction
7
<PAGE>
reporting system with respect to securities listed on the principal national
securities exchange on which the securities are listed or admitted to trading
or, if the securities are not listed or admitted to trading on any national
securities exchange, as reported by the Nasdaq Stock Market or any similar
quotation system, or, if on any such date the securities are not listed or
admitted to trading on any national securities exchange or quoted by any such
organization or system, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the securities
selected by the Board of Directors of the Company; provided, however, that if on
any such date the securities are not listed or admitted to trading on a national
securities exchange or quoted in the over-the-counter market, the closing price
per share of such securities on such date as determined in good faith by the
Board of Directors of the Company, after consultation with a nationally
recognized investment banking firm, and set forth in a certificate delivered to
the Rights Agent.
"Person" shall mean any individual, firm, partnership, limited
liability company, association, group (as such term is used in Rule 13d-5 under
the Securities Exchange Act of 1934, as such Rule is in effect on the date of
the Agreement), corporation or other entity.
"Preferred Stock" shall mean the series of Participating Preferred
Stock, par value $0.01 per share, of the Company created by a Certificate of
Designation and Terms in substantially the form set forth in Exhibit B hereto
appropriately completed.
"Redemption Price" shall mean an amount equal to $0.001 per Right, as
such amount may be appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof.
8
<PAGE>
"Redemption Time" shall mean the time at which the right to exercise
the Rights shall terminate pursuant to Section 5.1 hereof.
"Separation Time" shall mean the Close of Business on the earlier of
(i) the tenth Business Day (or such later date as the Board of Directors of the
Company may from time to time fix by resolution adopted prior to the Separation
Time that would otherwise have occurred) after the date on which any Person
commences a tender or exchange offer which, if consummated, would result in such
Person's becoming an Acquiring Person and (ii) the Flip-in Date; provided, that
if the foregoing results in the Separation Time being prior to the Record Time,
the Separation Time shall be the Record Time and provided further, that if any
tender or exchange offer referred to in clause (i) of this paragraph is
cancelled, terminated or otherwise withdrawn prior to the Separation Time
without the purchase of any shares of Voting Stock pursuant thereto, such offer
shall be deemed, for purposes of this paragraph, never to have been made.
"Stock Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person (by any means) that an
Acquiring Person has become such, provided such Person otherwise comes within
the definition of an "Acquiring Person" hereinabove set forth.
"Stockholder" shall mean a holder of capital stock of the Company.
"Subsidiary" of any specified Person shall mean any corporation or
other entity of which a majority of the voting power of the equity securities or
a majority of the equity interest is Beneficially Owned, directly or indirectly,
by such Person.
"Trading Day," when used with respect to any securities, shall mean a
day on which the principal national securities exchange or quotation system on
which such
9
<PAGE>
securities are listed or traded is open for the transaction of business or, if
such securities are not listed or traded on any national securities exchange or
quotation system, a Business Day.
"Voting Stock" means shares of capital stock of the Company entitled
to vote generally in the election of directors.
ARTICLE II
THE RIGHTS
2.1 Summary of Rights. As soon as practicable after the Record Time, the
-----------------
Company will mail a letter summarizing the terms of the Rights to each holder of
record of Common Stock as of the Record Time, at such holder's address as shown
by the records of the Company.
2.2 Legend on Common Stock Certificates. Certificates for the Common Stock
-----------------------------------
issued after the Record Time but prior to the Separation Time shall evidence one
Right for each share of Common Stock represented thereby and shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
"Until the Separation Time (as defined in the Rights Agreement
referred to below), this certificate also evidences and entitles
the holder hereof to certain Rights as set forth in a Rights
Agreement, dated as of February 19, 1999 (as such may be amended
from time to time, the "Rights Agreement"), between Varian
Semiconductor Equipment Associates, Inc. (the "Company") and
First Chicago Trust Company of New York, as Rights Agent, the
terms of which are hereby incorporated herein by reference and a
copy of which is on file at the principal executive offices of
the Company. Under certain circumstances, as set forth in the
Rights Agreement, such Rights may be redeemed, may be exchanged
for shares of Common Stock or other securities or assets of the
Company or a Subsidiary of the Company, may expire, may become
void (if they are "Beneficially Owned" by an "Acquiring Person"
or an Affiliate or Associate thereof, as such terms are defined
in the Rights Agreement, or by any transferee of any of the
foregoing) or may be evidenced by separate certificates and may
no longer be evidenced by this certificate. The Company will mail
or arrange for the mailing of a copy of the Rights
10
<PAGE>
Agreement to the holder of this certificate without charge within
five days after the receipt of a written request therefor."
Certificates representing shares of Common Stock that are issued and
outstanding at the Record Time shall evidence one Right for each share of Common
Stock evidenced thereby notwithstanding the absence of the foregoing legend.
2.3 Exercise of Rights; Separation of Rights.
----------------------------------------
(a) Subject to Sections 3.1, 5.1 and 5.10 and subject to adjustment
as herein set forth, each Right will entitle the holder thereof, after the
Separation Time and prior to the Expiration Time, to purchase, for the Exercise
Price, one one-thousandth of a share of Preferred Stock.
(b) Until the Separation Time, (i) no Right may be exercised and (ii)
each Right will be evidenced by the certificate for the associated share of
Common Stock (together, in the case of certificates issued prior to the Record
Time, with the letter mailed to the record holder thereof pursuant to Section
2.1) and will be transferable only together with, and will be transferred by a
transfer (whether with or without such letter) of, such associated share.
(c) Subject to the terms hereof, after the Separation Time and prior
to the Expiration Time, the Rights (i) may be exercised and (ii) may be
transferred independent of shares of Common Stock. Promptly following the
Separation Time, the Rights Agent will mail to each holder of record of Common
Stock as of the Separation Time (other than any Person whose Rights have become
void pursuant to Section 3.1(b)), at such holder's address as shown by the
records of the Company (the Company hereby agreeing to furnish copies of such
records to the Rights Agent for this purpose), (x) a certificate (a "Rights
Certificate") in substantially the form of Exhibit A hereto
11
<PAGE>
appropriately completed, representing the number of Rights held by such holder
at the Separation Time and having such marks of identification or designation
and such legends, summaries or endorsements printed thereon as the Company may
deem appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any national
securities exchange or quotation system on which the Rights may from time to
time be listed or traded, or to conform to usage, and (y) a disclosure statement
describing the Rights. The Company shall make the necessary and appropriate
rounding adjustments (in accordance with Section 5.5 hereof) so that Rights
Certificates evidencing only whole numbers of Rights are distributed and cash is
paid in lieu of fractional Rights.
(d) Subject to the terms hereof, Rights may be exercised on any
Business Day after the Separation Time and prior to the Expiration Time by
submitting to the Rights Agent the Rights Certificate evidencing such Rights
with an Election to Exercise (an "Election to Exercise") substantially in the
form attached to the Rights Certificate duly completed, accompanied by payment
in cash, or by certified or official bank check or money order payable to the
order of the Company, of a sum equal to the Exercise Price multiplied by the
number of Rights being exercised and a sum sufficient to cover any transfer tax
or charge which may be payable in respect of any transfer involved in the
transfer or delivery of Rights Certificates or the issuance or delivery of
certificates for shares or depositary receipts (or both) in a name other than
that of the holder of the Rights being exercised.
12
<PAGE>
(e) Upon receipt of a Rights Certificate, with an Election to
Exercise accompanied by payment as set forth in Section 2.3(d), and subject to
the terms hereof, the Rights Agent will thereupon promptly (i)(A) requisition
from a transfer agent stock certificates evidencing such number of shares or
other securities to be purchased (the Company hereby irrevocably authorizing its
transfer agents to comply with all such requisitions) and (B) if the Company
elects pursuant to Section 5.5 not to issue certificates representing fractional
shares, requisition from the depositary selected by the Company depositary
receipts representing the fractional share to be purchased or requisition from
the Company the amount of cash to be paid in lieu of fractional shares in
accordance with Section 5.5 and (ii) after receipt of such certificates,
depositary receipts and/or cash, deliver the same to or upon the order of the
registered holder of such Rights Certificate, registered (in the case of
certificates or depositary receipts) in such name or names as may be designated
by such holder.
(f) In case the holder of any Rights shall exercise less than all the
Rights evidenced by such holder's Rights Certificate, a new Rights Certificate
evidencing the Rights remaining unexercised will be issued by the Rights Agent
to such holder or to such holder's duly authorized assigns.
(g) The Company covenants and agrees that it will (i) take all such
action as may be necessary to ensure that all shares delivered upon exercise of
Rights shall, at the time of delivery of the certificates for such shares
(subject to payment of the Exercise Prices), be duly and validly authorized,
executed, issued and delivered and fully paid and nonassessable; (ii) take all
such action as may be necessary to comply with any applicable requirements of
the Securities Act of 1933 or the Securities Exchange Act of
13
<PAGE>
1934, and the rules and regulations thereunder, and any other applicable law,
rule or regulation, in connection with the issuance of any shares upon exercise
of Rights; and (iii) pay when due and payable any and all federal and state
transfer taxes and charges which may be payable in respect of the original
issuance or delivery of the Rights Certificates or of any shares issued upon the
exercise of Rights, provided that the Company shall not be required to pay any
transfer tax or charge which may be payable in respect of any transfer involved
in the transfer of delivery of Rights Certificates or the issuance or delivery
of certificates for shares in a name other than that of the holder of the Rights
being transferred or exercised.
2.4 Adjustments to Exercise Price; Number of Rights.
-----------------------------------------------
(a) In the event the Company shall at any time after the Record Time
and prior to the Separation Time (i) declare or pay a dividend on Common Stock
payable in Common Stock, (ii) subdivide the outstanding Common Stock or (iii)
combine the outstanding Common Stock into a smaller number of shares of Common
Stock, (x) the Exercise Price in effect after such adjustment will be equal to
the Exercise Price in effect immediately prior to such adjustment divided by the
number of shares of Common Stock (the "Expansion Factor") that a holder of one
share of Common Stock immediately prior to such dividend, subdivision or
combination would hold thereafter as a result thereof and (y) each Right held
prior to such adjustment will become that number of Rights equal to the
Expansion Factor, and the adjusted number of Rights will be deemed to be
distributed among the shares of Common Stock with respect to which the original
Rights were associated (if they remain outstanding) and the shares issued in
respect of such dividend, subdivision or combination, so that each such share of
Common Stock will have exactly
14
<PAGE>
one Right associated with it. Each adjustment made pursuant to this paragraph
shall be made as of the payment or effective date for the applicable dividend,
subdivision or combination.
In the event the Company shall at any time after the Record Time and
prior to the Separation Time issue any shares of Common Stock otherwise than in
a transaction referred to in the preceding paragraph, each such share of Common
Stock so issued shall automatically have one new Right associated with it, which
Right shall be evidenced by the certificate representing such share. To the
extent provided in Section 5.3, Rights shall be issued by the Company in respect
of shares of Common Stock that are issued or sold by the Company after the
Separation Time.
(b) In the event the Company shall at any time after the Record Time
and prior to the Separation Time issue or distribute any securities or assets in
respect of, in lieu of or in exchange for Common Stock (other than pursuant to a
regular periodic cash dividend or a dividend paid solely in Common Stock)
whether by dividend, in a reclassification or recapitalization (including any
such transaction involving a merger, consolidation or share exchange), or
otherwise, the Company shall make such adjustments, if any, in the Exercise
Price, number of Rights and/or securities or other property purchasable upon
exercise of Rights as the Board of Directors of the Company, in its sole
discretion, may deem to be appropriate under the circumstances in order
adequately to protect the interests of holders of Rights generally, and the
Company and the Rights Agent shall amend this Agreement as necessary to provide
for such adjustments.
15
<PAGE>
(c) Each adjustment to the Exercise Price made pursuant to this
Section 2.4 shall be calculated to the nearest cent. Whenever an adjustment to
the Exercise Price is made pursuant to this Section 2.4, the Company shall (i)
promptly prepare a certificate setting forth such adjustment and a brief
statement of the facts accounting for such adjustment, (ii) promptly file with
the Rights Agent and with each transfer agent for the Common Stock a copy of
such certificate and (iii) mail a brief summary thereof to each holder of
Rights.
(d) Irrespective of any adjustment or change in the securities
purchase upon exercise of the Rights, the Rights Certificates theretofore and
thereafter issued may continue to express the securities so purchasable which
were expressed in the initial Rights Certificates issued hereunder.
2.5 Date on Which Exercise is Effective. Each Person in whose name any
-----------------------------------
certificate for shares is issued upon the exercise of Rights shall for all
purposes be deemed to have become the holder of record of the shares represented
thereby on, and such certificate shall be dated, the date upon which the Rights
Certificate evidencing such Rights was duly surrendered and payment of the
Exercise Price for such Rights (and any applicable taxes and other governmental
charges payable by the exercising holder hereunder) was made; provided, however,
that if the date of such surrender and payment is a date upon which the stock
transfer books of the Company are closed, such Person shall be deemed to have
become the record holder of such shares on, and such certificates shall be
dated, the next succeeding Business Day on which the stock transfer books of the
Company are open.
16
<PAGE>
2.6 Execution, Authentication, Delivery and Dating of Rights Certificates.
---------------------------------------------------------------------
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its Chief Executive Officer, its
President, any of its Vice Presidents, its Chief Financial Officer or its
Treasurer under its corporate seal reproduced thereon attested by its Secretary
or one of its Assistant Secretaries. The signature of any of these officers on
the Rights Certificates may be manual or facsimile.
Rights Certificates bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such officer prior to the countersignature and delivery of such Rights
Certificates.
Promptly after the Company learns of the Separation Time, the Company
will notify the Rights Agent of such Separation Time and will deliver Rights
Certificates executed by the Company to the Rights Agent for countersignature,
and, subject to Section 3.1(b), the Rights Agent shall manually countersign and
deliver such Rights Certificates to the holders of the Rights pursuant to
Section 2.3(c) hereof. No Rights Certificate shall be valid for any purpose
unless manually countersigned by the Rights Agent.
(b) Each Rights Certificate shall be dated the date of
countersignature thereof.
2.7 Registration, Registration of Transfer and Exchange.
---------------------------------------------------
(a) After the Separation Time, the Company will cause to be kept a
register (the "Rights Register") in which, subject to such reasonable
regulations as it may prescribe, the Company will provide for the registration
and transfer of Rights. The
17
<PAGE>
Rights Agent is hereby appointed "Rights Registrar" for the purpose of
maintaining the Rights Register for the Company and registering Rights and
transfers of Rights after the Separation Time as herein provided. In the event
that the Rights Agent will have the right to examine the Rights Register at all
reasonable times after the Separation Time.
After the Separation Time and prior to the Expiration Time, upon
surrender for registration of transfer or exchange of any Rights Certificate,
and subject to the provisions of Section 2.7(c) and (d), the Company will
execute, and the Rights Agent will countersign and deliver, in the name of the
holder or the designated transferee or transferees, as required pursuant to the
holder's instructions, one or more new Rights Certificates evidencing the same
aggregate number of Rights as did the Rights Certificate so surrendered.
(b) Except as otherwise provided in Section 3.1(b), all Rights issued
upon any registration of transfer or exchange of Rights Certificates shall be
the valid obligations of the Company, and such Rights shall be entitled to the
same benefits under this Agreement as the Rights surrendered upon such
registration of transfer or exchange.
(c) Every Rights Certificate surrendered for registration of transfer
or exchange shall be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Company or the Rights Agent, as the case
may be, duly executed by the holder thereof or such holder's attorney duly
authorized in writing. As a condition to the issuance of any new Rights
Certificate under this Section 2.7, the Company may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto.
18
<PAGE>
(d) The Company shall not be required to register the transfer or
exchange of any Rights after such Rights have become void under Section 3.1(b),
been exchanged under Section 3.1(c) or been redeemed or terminated under Section
5.1.
2.8 Mutilated, Destroyed, Lost and Stolen Rights Certificates.
---------------------------------------------------------
(a) If any mutilated Rights Certificate is surrendered to the Rights
Agent prior to the Expiration Time, then, subject to Section 3.1(b) and 5.1, the
Company shall execute and the Rights Agent shall countersign and deliver in
exchange therefor a new Rights Certificate evidencing the same number of Rights
as did the Rights Certificate so surrendered.
(b) If there shall be delivered to the Company and the Rights Agent
prior to the Expiration Time (i) evidence to their satisfaction of the
destruction, loss or theft of any Rights Certificate and (ii) such security or
indemnity as may be required by them to save each of them and any of their
agents harmless, then, subject to Section 3.1(b) and 5.1 and in the absence of
notice to the Company or the Rights Agent that such Rights Certificate has been
acquired by a bona fide purchaser, the Company shall execute and upon its
request the Rights Agent shall countersign and deliver, in lieu of any such
destroyed, lost or stolen Rights Certificate, a new Rights Certificate so
destroyed, lost or stolen.
(c) As a condition to the issuance of any new Rights Certificate
under this Section 2.8, the Company may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Rights
Agent) connected therewith.
19
<PAGE>
(d) Every new Rights Certificate issued pursuant to this Section 2.8
in lieu of any destroyed, lost or stolen Rights Certificate shall evidence an
original additional contractual obligation of the Company, whether or not the
destroyed, lost or stolen Rights Certificate shall be at any time enforceable by
anyone, and shall be entitled to all the benefits of this Agreement equally and
proportionately with any and all other Rights duly issued hereunder.
2.9 Persons Deemed Owners. Prior to due presentment of a Rights
---------------------
Certificate (or, prior to the Separation Time, the associated Common Stock
certificate) for registration of transfer, the Company, the Rights Agent and any
agent of the Company or the Rights Agent may deem and treat the Person in whose
name such Rights Certificate (or, prior to the Separation Time, such Common
Stock certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby for all purposes whatsoever, including the payment of the
Redemption Price, and neither the Company nor the Rights Agent shall be affected
by any notice to the contrary. As used in the Agreement, unless the context
otherwise requires, the term "holder" of any Rights shall mean the registered
holder of such Rights (or, prior to the Separation Time, the associated shares
of Common Stock).
2.10 Delivery and Cancellation of Certificates. All Rights Certificates
-----------------------------------------
surrendered upon exercise or for registration of transfer or exchange shall, if
surrendered to any Person other than the Rights Agent, be delivered to the
Rights Agent and, in any case, shall be promptly cancelled by the Rights Agent.
The Company may at any time deliver to the Rights Agent for cancellation any
Rights Certificate previously countersigned and delivered hereunder which the
Company may have acquired in any
20
<PAGE>
manner whatsoever, and all Rights Certificate so delivered shall be promptly
cancelled by the Rights Agent. No Rights Certificate shall be countersigned in
lieu of or in exchange for any Rights Certificate cancelled as provided in this
Section 2.10, except as expressly permitted by this Agreement. The Rights Agent
shall destroy all cancelled Rights Certificates and deliver a certificate of
destruction to the Company.
2.11 Agreement of Rights Holders. Every holder of Rights by accepting the
---------------------------
same consents and agrees with the Company and the Rights Agent and with every
other holder of Rights that:
(a) Prior to the Separation Time, each Right will be transferable
only together with, and will be transferred by a transfer of, the associated
share of Common Stock;
(b) After the Separation Time, the Rights Certificate will be
transferable only on the Rights Register as provided herein;
(c) Prior to due presentment of a Rights Certificate (or, prior to
the Separation Time, the associated Common Stock certificate) for registration
of transfer, the Company, the Rights Agent and any agent of the Company or the
Rights Agent may deem and treat the Person in whose name the Rights Certificate
(or, prior to the Separation Time, the associated Common Stock certificate) is
registered as the absolute owner thereof and of the Rights evidenced thereby for
all purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary;
(d) Rights Beneficially Owned by certain Persons will, under the
circumstances set forth in Section 3.1(b), become void; and
21
<PAGE>
(e) This Agreement may be supplemented or amended from time to time
pursuant to Section 2.4(b) or 5.4 hereof.
ARTICLE III
ADJUSTMENTS TO THE RIGHTS IN
THE EVENT OF CERTAIN TRANSACTIONS
3.1 Flip-in.
-------
(a) In the event that prior to the Expiration Time a Flip-in Date
shall occur, the Company shall take such action as shall be necessary to ensure
and provide that, except as provided in this Section 3.1, each Right shall
constitute the right to purchase from the Company, upon exercise thereof in
accordance with the terms hereof (but subject to Section 5.10), that number of
shares of Common Stock having an aggregate Market Price on the Stock Acquisition
Date equal to twice the Exercise Price for an amount in cash equal to the
Exercise Price (such right to be appropriately adjusted in order to protect the
interests of the holders of Rights generally in the event that on or after such
Stock Acquisition Date an event of a type analogous to any of the events
described in Section 2.4(a) or (b) shall have occurred with respect to the
Common Stock).
(b) Notwithstanding the foregoing, any Rights that are or were
Beneficially Owned on or after the Stock Acquisition Date by an Acquiring Person
or an Affiliate or Associate thereof or by any transferee, direct or indirect,
of any of the foregoing shall become void and any holder of such Rights
(including transferees) shall thereafter have no right to exercise or transfer
such Rights under any provision of this Agreement. If any Rights Certificate is
presented for assignment or exercise and the Person presenting the same will not
complete the certification set forth at the end of the form or assignment or
notice of election to exercise and provide such additional evidence
22
<PAGE>
of the identity of the Beneficial Owner and its Affiliates and Associates (or
former Beneficial Owners and their Affiliates and Associates) as the Company
shall reasonably request, then the Company shall be entitled conclusively to
deem the Beneficial Owner thereof to be an Acquiring Person or an Affiliate or
Associate thereof or a transferee of any of the foregoing and accordingly will
deem the Rights evidenced thereby to be void and not transferable or
exercisable.
(c) The Board of Directors of the Company may, at its option, at any
time after a Flip-in Date and prior to the time that an Acquiring Person becomes
the Beneficial Owner of more than 50% of the outstanding shares of Voting Stock
elect to exchange all or part of the then outstanding Rights (which shall not
include Rights that have become void pursuant to the provisions of Section
3.1(b)) for shares of Common Stock at an exchange ratio of one share of Common
Stock per Right, appropriately adjusted in order to protect the interests of
holders of Rights generally in the event that after the Separation Time an event
of a type analogous to any of the events described in Section 2.4(a) or (b)
shall have occurred with respect to the Common Stock (such exchange ratio, as
adjusted from time to time, being hereinafter referred to as the "Exchange
Ratio").
Immediately upon the action of the Board of Directors of the Company
electing to exchange the Rights, without any further action and without any
notice, the right to exercise the Rights will terminate and each Right (other
than Rights that have become void pursuant to Section 3.1(b)) will thereafter
represent only the right to receive a number of shares of Common Stock equal to
the Exchange Ratio. Promptly after the action of the Board of Directors electing
to exchange the Rights, the Company shall give
23
<PAGE>
notice thereof (specifying the steps to be taken to receive shares of Common
Stock in exchange for Rights) to the Rights Agent and the holders of the Rights
(other than Rights that have become void pursuant to Section 3.1(b)) outstanding
immediately prior thereto by mailing such notice in accordance with Section 5.9.
Each Person in whose name any certificate for shares is issued upon
the exchange of Rights pursuant to the Section 3.1(c) or Section 3.1(d) shall
for all purposes be deemed to have become the holder of record of the shares
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly surrendered and payment
of any applicable taxes and other governmental charges by the holder was made;
provided, however, that if the date of such surrender and payment is a date upon
which the stock transfer books of the Company are closed, such Person shall be
deemed to have become the record holder of such shares on, and such certificate
shall be dated, the next succeeding Business Day on which the stock transfer
books of the Company are open.
(d) Whenever the Company shall become obligated under Section 3.1(a)
or (c) to issue shares of Common Stock upon exercise of or in exchange for
Rights, the Company, at its option, may substitute therefor shares of Preferred
Stock, at a ratio of one-thousandth of a share of Preferred Stock for each share
of Common Stock so issuable, appropriately adjusted to protect interests of the
holders of the Rights generally to reflect any event of this type analogous to
any of the events described in Section 2.4 (a) or (b) which may have occurred
with respect to the Common Stock.
(e) In the event that there shall not be sufficient treasury shares
or authorized but unissued shares of Common Stock or Preferred Stock of the
Company to
24
<PAGE>
permit the exercise or exchange in full of the Rights in accordance with Section
3.1(a) or (c), the Company shall either (i) call a meeting of Stockholders
seeking approval to cause sufficient additional shares to be authorized
(provided that if such approval is not obtained the Company will take the action
specified in clause (ii) of this sentence) or (ii) take such action as shall be
necessary to ensure and provide, to the extent permitted by applicable law and
any agreements or instruments in effect on the Stock Acquisition Date to which
it is a party, that each Right shall thereafter constitute the right to receive,
(x) at the Company's option, either (A) in return for the Exercise Price, debt
or equity securities or other assets (or a combination thereof) having a fair
value equal to twice the Exercise Price, or (B) without payment of consideration
(except as otherwise required by applicable law), debt or equity securities or
other assets (or a combination thereof) having a fair value equal to the
Exercise Price, or (y) if the Board of Directors of the Company elects to
exchange the Rights in accordance with Section 3.1(c), debt or equity securities
or other assets (or a combination thereof) having a fair value equal to the
product of the Market Price of a share of Common Stock on the Flip-in Date times
the Exchange Ratio in effect on the Flip-in Date, where in any case set forth in
(x) or (y) above the fair value of such debt or equity securities or other
assets shall be as determined in good faith by the Board of Directors of the
Company, after consultation with a nationally recognized investment banking
firm.
3.2 Flip-over.
---------
(a) Prior to the Expiration Time, the Company shall not enter into
any agreement with respect to, or consummate or permit to occur, any Flip-over
Transaction or Event unless and until it shall have duly entered into a binding
and enforceable
25
<PAGE>
supplemental agreement with the Flip-over Entity, for the benefit of the holders
of the Rights, providing that, upon consummation or occurrence or the Flip-over
Transaction or Event (i) each Right shall thereafter constitute the right to
purchase from the Flip-over Entity, upon exercise thereof in accordance with the
terms hereof, that number of shares of Flip-over Stock of the Flip-over Entity
having an aggregate Market Price on the date of consummation or occurrence of
such Flip-over Transaction or Event Equal to twice the Exercise Price for an
amount in cash equal to the Exercise Price (such right to be appropriately
adjusted in order to protect the interests of the holders of Rights generally in
the event that after such date of consummation or occurrence an event of a type
analogous to any of the events described in Section 2.4(a) or (b) shall have
occurred with respect to the Flip-over Stock) and (ii) the Flip-over Entity
shall thereafter be liable for, and shall assume, by virtue of such Flip-over
Transaction or Event and such supplemental agreement, all the obligations and
duties of the Company pursuant to this Agreement, but the Company's obligations
under this Agreement shall not be discharged and shall continue in full. The
provisions of this Section 3.2 shall apply to successive Flip-over Transactions
or Events.
(b) Prior to the Expiration Time, the Company shall not enter into
any agreement with respect to, or consummate or permit to occur, any Flip-over
Transaction or Event if at the time thereof there are any rights, warrants or
securities outstanding or any other arrangements, agreements or instruments that
would eliminate or otherwise diminish in any material respect the benefits
intended to be afforded by this Rights Agreement to the holders of Rights upon
consummation of such transaction.
26
<PAGE>
ARTICLE IV
THE RIGHTS AGENT
4.1 General.
-------
(a) The Company hereby appoints the Rights Agent to act as agent for
the Company in accordance with the terms and conditions hereof, and the Rights
Agent hereby accepts such appointment. The Company agrees to pay to the Rights
Agent reasonable compensation for all services rendered by it hereunder and,
from time to time, on demand of the Rights Agent, its reasonable expenses and
counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted to be done by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any certificate for
securities purchasable upon exercise of Rights, Rights Certificate, certificate
for other securities of the Company, instrument of assignment or transfer, power
of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper Person or Persons.
27
<PAGE>
4.2 Merger or Consolidation or Change of Name of Rights Agent.
---------------------------------------------------------
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent is a party, or any corporation succeeding to the
stockholder services business of the Rights Agent or any successor Rights Agent,
will be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 4.4 hereof. In case,
at the time such successor Rights Agent succeeds to the agency created by this
Agreement, any of the Rights Certificates have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at that time any of the Rights Certificates have not be
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Rights Certificates
will have the full force provided in the Rights Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent is changed and
at such time any of the Rights Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Rights Certificates so countersigned; and in case at that time
any of the Rights Certificates shall not have been countersigned, the Rights
Agent may countersign such Rights Certificates
28
<PAGE>
either in its prior name or in its changed name; and in all such cases such
Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
4.3 Duties of Rights Agent.
----------------------
The Rights Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions, by all of which the Company
and the holders of Rights Certificates, by their acceptance thereof, shall be
bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel will be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent deems it necessary or desirable that any fact or matter be
provided or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively provided and
established by a certificate signed by a person believed by the Rights Agent to
be the Chief Executive Officer, the President, any Vice President, the Chief
Financial Officer or the Treasurer, and by the Secretary or any Assistant
Secretary of the Company and delivered to the Rights Agent; and such certificate
will be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
29
<PAGE>
(c) The Rights Agent will be liable hereunder only for its own
negligence, bad faith or willful misconduct. Anything to the contrary
notwithstanding, in no event shall the Rights Agent be liable for special,
indirect, consequential or incidental loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Rights Agent has been
advised of the likelihood of such damages.
(d) The Rights Agent will not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the
certificates for securities purchasable upon exercise of Rights or the Rights
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and will be deemed to have been
made by the Company only.
(e) The Rights Agent will not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due authorization, execution and delivery hereof by the Rights Agent) or in
respect of the validity or execution of any certificate for securities
purchasable upon exercise of Rights or Rights Certificate (except its
countersignature thereof); nor will it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in any
Rights Certificate; nor will it be responsible for any change in the
exercisability of the Rights (including the Rights becoming void pursuant to
Section 3.1(b) hereof) or any adjustment required under the provisions of
Section 2.4, 3.1 or 3.2 hereof or responsible for the manner, method or amount
of any such adjustment or the ascertaining of the existence of facts that would
require any such adjustment (except with respect to the exercise of Rights after
receipt of the certificate contemplated by Section 2.4 describing any such
adjustment); nor will it by any act hereunder be deemed to make any
30
<PAGE>
representation or warranty as to the authorization or reservation of any
securities purchasable upon exercise of Rights or any Rights or as to whether
any securities purchasable upon exercise of Rights will, when issued, be duly
and validly authorized, executed, issued and delivered and fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
person believed by the Rights Agent to be the Chief Executive Officer, the
President, any Vice President, the Chief Financial Officer, the Treasurer or the
Secretary or any Assistant Secretary of the Company, and to apply to such
persons for advice or instructions in connection with its duties, and it shall
not be liable for any action taken or suffered by it in good faith in accordance
with instructions of any such person.
(h) The Rights Agent and any Stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in Common Stock, Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
31
<PAGE>
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent will not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
4.4 Change of Rights Agent. The Rights Agent may resign and be discharged
----------------------
from its duties under this Agreement upon 90 days' notice (or such lesser notice
as is acceptable to the Company) in writing mailed to the Company and to each
transfer agent of Common Stock by registered or certified mail, and to the
holders of the Rights in accordance with Section 5.9. The Company may remove the
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent and to
each transfer agent of the Common Stock by registered or certified mail, and to
the holders of the Rights in accordance with Section 5.9. If the Rights Agent
should resign or be removed or otherwise become incapable of acting, the Company
will appoint a successor to the Rights Agent. If the Company fails to make such
appointment within a period of 30 days after such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of any Rights (which holder shall,
with such notice, submit such holder's Rights Certificate for inspection by the
Company), then the holder of any Rights may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be (A) a
corporation organized and doing business under the laws of the United States or
of the State of New York or Massachusetts, or of
32
<PAGE>
any other state of the United States so long as such corporation is authorized
to do business as a banking institution in the State of New York or
Massachusetts, which is authorized under such laws to exercise the powers of the
Rights Agent contemplated by this Agreement and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least
$15,000,000 or (B) an Affiliate of a corporation described in clause (A) of this
sentence. After appointment, the successor Rights Agent will be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company will file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock,
and mail a notice thereof in writing to the holders of the Rights. Failure to
give any notice provided for in this Section 4.4, however, or any defect
therein, shall not affect the legality or validity of the resignation or removal
of the Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
ARTICLE V
MISCELLANEOUS
5.1 Redemption.
----------
(a) The Board of Directors of the Company may, at its option, at any
time prior to the Close of Business on the Flip-in Date, elect to redeem all
(but not less than all) the then outstanding Rights at the Redemption Price and
the Company, at its option, may pay the Redemption Price either in cash or
shares of Common Stock or other
33
<PAGE>
securities of the Company deemed by the Board of Directors, in the exercise of
its sole discretion, to be at least equivalent in value to the Redemption Price.
(b) Immediately upon the action of the Board of Directors of the
Company electing to redeem the Rights (or, if the resolution of the Board of
Directors electing to redeem the Rights states that the redemption will not be
effective until the occurrence of a specified future time or event, upon the
occurrence of such future time or event), without any further action and without
any notice, the right to exercise the Rights will terminate and each Right will
thereafter represent only the right to receive the Redemption Price in cash or
securities, as determined by the Board of Directors. Promptly after the Rights
are redeemed, the Company shall give notice of such redemption to the Rights
Agent and the holders of the then-outstanding Rights by mailing such notice in
accordance with Section 5.9.
5.2 Expiration. The Rights and this Agreement shall expire at the
----------
Expiration Time and no Person shall have any rights pursuant to this Agreement
or any Right after the Expiration Time, except as provided in Sections 3.1 and
5.1 hereof, with respect to Rights which the Board of Directors of the Company
have elected to exchange or redeem, and except with respect to any Rights for
which an Election to Exercise has been duly filed with the Rights Agents prior
to the Expiration Time.
5.3 Issuance of New Rights Certificates. Notwithstanding any of the
-----------------------------------
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Rights Certificates evidencing Rights in such form as
may be approved by its Board of Directors to reflect any adjustment or change in
the number or kind or class of shares of stock purchasable upon exercise of
Rights made in accordance with the
34
<PAGE>
provisions of this Agreement. In addition, in connection with the issuance or
sale of shares of Common Stock by the Company following the Separation Time and
prior to the Redemption Time or Expiration Time pursuant to the terms of
securities exercisable, convertible or exchangeable into shares of Common Stock
or pursuant to options exercisable for Common Stock or in connection with the
vesting or payment of securities awarded by the Corporation under any plan or
arrangement, in each case issued, granted or awarded prior to, and outstanding
at, the Separation Time, the Company shall issue to the holders of such shares
of Common Stock, Rights Certificates representing the appropriate number of
Rights in connection with the issuance or sale of such shares of Common Stock;
provided, however, in each case, (i) no such Rights Certificate shall be issued,
if, and to the extent that, the Company shall be advised by counsel that such
issuance would create a significant risk of material adverse tax consequences to
the Company or to the Person to whom such Rights Certificates would be issued,
(ii) no such Rights Certificates shall be issued if, and to the extent that,
appropriate adjustment shall have otherwise been made in lieu of the issuance
thereof, and (iii) the Company shall have no obligation to distribute Rights
Certificates to any Acquiring Person or Affiliate or Associate of an Acquiring
Person or any transferee of any of the foregoing.
5.4 Supplements and Amendments. The Company and the Rights Agent may from
--------------------------
time to time supplement or amend this Agreement without the approval of any
holders of Rights (i) prior to the Close of Business on the Flip-in Date, in any
respect and (ii) after the Close of Business on the Flip-in Date, to make any
changes that the Company may deem necessary or desirable and which shall not
materially adversely affect the interests of the holders of Rights generally
(other than an Acquiring Person or
35
<PAGE>
an Affiliate or Associate of an Acquiring Person). The Rights Agent will duly
execute and deliver any supplement or amendment hereto requested by the Company
which satisfies the terms of the preceding sentence.
5.5 Fractional Rights and Fractional Shares.
---------------------------------------
(a) The Company shall not be required to issue fractions of Rights or
to distribute Rights Certificates that evidence fractional Rights. In lieu of
such fractional Rights, as soon as practicable following the Separation Time
there shall be paid to the registered holders of the Rights Certificates with
regard to which such fractional Rights would otherwise be issuable, an amount in
cash equal to the same fraction of the current market value of a whole Right.
For the purposes of this Section 5.5, the current market value of a whole Right
shall be the closing price of the Rights for the Trading Day immediately prior
to the date on which such fractional Rights would have been otherwise issuable.
The closing price for any day shall be the last reported sale price, regular
way, or, in case no such sale takes place or is quoted on such date, the average
of the closing bid and asked prices, regular way, for each share of such
securities, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the securities are listed or admitted to trading
or, if the securities are not listed or admitted to trading on any national
securities exchange, as reported by the Nasdaq Stock Market or any similar
quotation system, or, if on any such date the securities are not listed or
admitted to trading on any national securities exchange or quoted by any such
organization or system, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the securities
selected by the Board of Directors of the
36
<PAGE>
Company; provided, however, that if on any such date the securities are not
listed or admitted to trading on a national securities exchange or quoted in the
over-the-counter market, the closing price per share of such securities on such
date as determined in good faith by the Board of Directors of the Company, after
consultation with a nationally recognized investment banking firm, and set forth
in a certificate delivered to the Rights Agent.
(b) If the Company elects not to issue certificates representing
fractional shares upon exercise or redemption of Rights, the Company shall, in
lieu thereof, in the sole discretion of the Board of Directors, either (a)
evidence such fractional shares by depositary receipts issued pursuant to an
appropriate agreement between the Company and a depositary selected by it,
providing that each holder of a depositary receipt shall have all of the rights,
privileges and preferences to which such holder would be entitled as a
Beneficial Owner of such fractional share, or (b) sell such shares on behalf of
the holders of Rights and pay to the registered holder of such Rights the
appropriate fraction of price per share received upon such sale.
(c) The holder of a Right by the acceptance of the Right expressly
waives his/her right to receive any fractional Rights or any fractional shares
upon exercise of a Right (except as provided in Section 5.5 hereof).
5.6 Rights of Action. Subject to the terms of this Agreement (including
----------------
Section 3.1(b)), rights of action in respect of this Agreement, other than
rights of action vested solely in the Rights Agent, are vested in the respective
holders of the Rights; and any holder of any Rights, without the consent of the
Rights Agent or of the holder of any other Rights, may, on such holder's own
behalf and for such holder's own benefit and the
37
<PAGE>
benefit of other holders of Rights, enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in
respect of, such holder's right to exercise such holder's Rights in the manner
provided in such holder's Rights Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of, the obligations of any Person subject to this
Agreement.
5.7 Holder of Rights Not Deemed a Stockholder. No holder, as such, of any
-----------------------------------------
Rights shall be entitled to vote, receive dividends or be deemed for any purpose
the holder of shares or any other securities which may at any time be issuable
on the exercise of such Rights, nor shall anything contained herein or in any
Rights Certificate be construed to confer upon the holder of any Rights, as
such, any of the rights of a Stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to Stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting Stockholders (except as
provided in Section 5.8 hereof), or to receive dividends or subscription rights,
or otherwise, until such Rights shall have been exercised or exchanged in
accordance with the provisions hereof.
5.8 Notice of Proposed Actions. In case the Company shall propose after
--------------------------
the Separation Time and prior to the Expiration Time (i) to effect or permit (in
cases where the Company's permission is required) the occurrence of any Flip-in
Date or Flip-over
38
<PAGE>
Transaction or Event or (ii) to effect the liquidation, dissolution or winding
up of the Company, then, in each such case, the Company shall give to each
holder of a Right, in accordance with Section 5.9 hereof, notice of such
proposed action, which shall specify the Flip-in Date or the date on which such
Flip-over Transaction or Event, liquidation, dissolution, or winding up is to
take place, and such notice shall be as given at least 20 Business Days prior to
the date of the taking of such proposed action.
5.9 Notices. Notices or demands authorized or required by this Agreement
-------
to be given or made by the Rights Agent or by the holder of any Rights to or on
the Company shall be sufficiently given or made if delivered or sent by first-
class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Varian Semiconductor Equipment Associates, Inc.
35 Dory Road
Gloucester, Massachusetts 01930
Attention: Corporate Secretary
Any notice or demand authorized or required by this Agreement to be
given or made by the Company or by the holder of any Rights to or on the Rights
Agent shall be sufficiently given or made if delivered or sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Company) as follows:
First Chicago Trust Company of New York
525 Washington Boulevard, Suite 4660
Jersey City, New Jersey 07310
Attention: Corporate Actions, Administration
Notices or demands authorized or required by this Agreement to be
given or made by the Company or the Rights Agent to or on the holder of any
Rights shall be sufficiently given or made if delivered or sent by first-class
mail, postage prepaid,
39
<PAGE>
addressed to such holder at the address of such holder as it appears upon the
registry books of the Rights Agent or, prior to the Separation Time, on the
registry books of the transfer agent for the Common Stock.
All such notices and demands shall be deemed to have been given on the
date of delivery thereof, if delivered by hand, and on the third day after the
mailing thereof, if mailed. Any notice that is mailed in the manner herein
provided, shall be deemed given, whether or not the holder receives the notice.
5.10 Suspension of Exercisability. To the extent that the Company
----------------------------
determines in good faith that some action will or need be taken pursuant to
Section 3.1(a), (b), (d) or (e) or to comply with federal or state securities
laws, the Company may suspend the exercisability of the Rights for a period of
up to ninety (90) days following the date of the occurrence of the Separation
Time or the Flip-in Date in order to take such action or comply with such laws.
In the event of any such suspension, the Company shall issue as promptly as
practicable a public announcement stating that the exercisability or
exchangeability of the Rights has been temporarily suspended. Notice thereof
pursuant to Section 5.9 shall not be required.
Failure to give a notice pursuant to the provisions of this Agreement
shall not affect the validity of any action taken hereunder.
5.11 Costs of Enforcement. The Company agrees that if the Company or any
--------------------
other Person the securities of which are purchasable upon exercise of Rights
fails to fulfill any of its obligations pursuant to this Agreement, then the
Company or such Person will reimburse the holder of any Rights for the costs and
expenses (including legal
40
<PAGE>
fees) incurred by such holder in actions to enforce such holder's rights
pursuant to any Rights or this Agreement.
5.12 Successors. All the covenants and provisions of this Agreement by or
----------
for the benefit of the Company or the Rights Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
5.13 Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any Person other than the Company, the Rights Agent and the
holders of the Rights any legal or equitable right, remedy or claim under this
Agreement; this Agreement shall be for the sole and exclusive benefit of the
Company, the Rights Agent and the holders of the Rights.
5.14 Determination and Actions by the Board of Directors, Etc. The Board
--------------------------------------------------------
of Directors of the Company shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers specifically
granted to the Board or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including, without limitation, the right
and power to (i) interpret the provisions of this Agreement and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement. All such actions, calculations, interpretations and determinations
(including, for purposes of clause (y) below, all omissions with respect to the
foregoing) which are done or made by the Board in good faith, shall (x) be
final, conclusive and binding on the Company, the Rights Agent, the holders of
the Rights and all other parties, and (y) not subject the Board of Directors of
the Company to any liability to the holders of the Rights.
41
<PAGE>
5.15 Descriptive Headings. Descriptive headings appear herein for
--------------------
convenience only and shall not control or affect the meaning or construction of
any of the provisions hereof.
5.16 Governing Law. This Agreement and each Right issued hereunder shall
-------------
be deemed to be a contract made under the laws of the State of Delaware and for
all purposes shall be governed by and construed in accordance with the laws of
such state applicable to contracts to be made and performed entirely within such
state.
5.17 Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
5.18 Severability. If any term or provision hereof or the application
------------
thereof to any circumstance shall, in any jurisdiction and to any extent, be
invalid or unenforceable, such term or provision shall be ineffective as to such
jurisdiction to the extent of such invalidity or unenforceability without
invalidation or rendering unenforceable the remaining terms and provisions
hereof or the application of such term or provision to circumstances other than
those as to which it is held invalid or unenforceable.
5.19 Book-Entry Account Statements. Except where the context otherwise
------------------------------
indicates, (a) if at any time or from time to time the Company determines that
shares of Common Stock shall be evidenced by book-entry account statements or
similar instruments or documents ("Book-Entry Account Statements"), then all
references in this Agreement to Common Stock certificate(s), certificates for
the Common Stock, certificates representing shares of Common Stock or
certificate for the associated share of
42
<PAGE>
Common Stock shall be deemed to include such Book-Entry Account Statements which
evidence such shares of Common Stock, (b) if at any time or from time to time
the Company determines that after the Separation Time the Rights shall be
evidenced by Book-Entry Account Statements, then all references in this
Agreement to Rights Certificates shall be deemed to include such Book-Entry
Account Statements which evidence such Rights and (c) if at any time or from
time to time the Company determines that shares of Preferred Stock issued upon
the exercise of Rights shall be evidenced by Book-Entry Account Statements, then
all references in this Agreement to certificates for such shares of Preferred
Stock shall be deemed to include such Book-Entry Account Statements which
evidence such shares of Preferred Stock.
43
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
By: \s\ Joseph B. Phair
------------------------------
Name: Joseph B. Phair
Title: Secretary
FIRST CHICAGO TRUST COMPANY OF
NEW YORK
By: \s\ Joanne Gorostiola
------------------------------
Name: Joanne Gorostiola
Title: Assistant Vice President
<PAGE>
EXHIBIT A
---------
[Form of Rights Certificate]
Certificate No. ______Rights
THE RIGHTS ARE SUBJECT TO REDEMPTION OR MANDATORY EXCHANGE, AT
THE OPTION OF THE COMPANY, ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. RIGHTS BENEFICIALLY OWNED BY ACQUIRING PERSONS OR
AFFILIATES OR ASSOCIATES THEREOF (AS SUCH TERMS ARE DEFINED IN
THE RIGHTS AGREEMENT) OR TRANSFEREES OF ANY OF THE FOREGOING WILL
BE VOID.
Rights Certificate
Varian Semiconductor Equipment Associates, Inc.
This certifies that _______________, or registered assigns, is the
registered holder of the number of Rights set forth above, each of which
entitles the registered holder thereof, subject to the terms, provisions and
conditions of the Rights Agreement, dated as of February 19, 1999 (as amended
from time to time, the "Rights Agreement"), between Varian Semiconductor
Equipment Associates, Inc., a Delaware corporation (the "Company"), and First
Chicago Trust Company of New York, as Rights Agent (the "Rights Agent," which
term shall include any successor Rights Agent under the Rights Agreement), to
purchase from the Company at any time after the Separation Time (as such term is
defined in the Rights Agreement) and prior to the close of business on April 2,
2009 (Massachusetts time) one one-thousandth of a fully paid share of
Participating Preferred Stock, par value $0.01 per share (the "Preferred
Stock"), of the Company (subject to adjustment as provided in the Rights
Agreement) at the Exercise Price referred to below, upon presentation and
surrender of this Rights Certificate with the Form of Election to Exercise duly
executed at the principal office of the Rights Agent
<PAGE>
in The City of New York. The Exercise Price shall initially be $120.00 per Right
and shall be subject to adjustment in certain events as provided in the Rights
Agreement.
In certain circumstances described in the Rights Agreement, the Rights
evidenced hereby may entitle the registered holder thereof to purchase
securities of an entity other than the Company or securities or assets of the
Company other than Preferred Stock, all as provided in the Rights Agreement.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies of
the Rights Agreement are on file at the principal office of the Company and are
available without cost upon written request.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the office of the Rights Agent designated for such purpose,
may be exchanged for another Rights Certificate or Rights Certificates of like
tenor evidencing an aggregate number of Rights equal to the aggregate number of
Rights evidenced by the Rights Certificate or Rights Certificates surrendered.
If this Rights Certificate shall be exercised in part, the registered holder
shall be entitled to receive, upon surrender hereof, another Rights Certificate
or Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, each Right
evidenced by this Certificate may be (a) redeemed by the Company under certain
circumstances, at
<PAGE>
its option, at a redemption price of $0.001 per Right, or (b) exchanged by the
Company under certain circumstances, at its option, for one share of Common
Stock or one-thousandth of a share of Preferred Stock per Right (or, in certain
cases, other securities or assets of the Company), subject in each case to
adjustment in certain events as provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of any
securities which may at any time be issuable on the exercise hereof, nor shall
anything contained in the Rights Agreement or herein be construed to confer upon
the holder hereof, as such, any of the rights of a Stockholder of the Company or
any right to vote for the election of directors or upon any matter submitted to
Stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
the Stockholders (except as provided in the Rights Agreement), or to receive
dividends or subscription rights, or otherwise, until the Rights evidenced by
this Rights Certificate shall have been exercised or exchanged as provided in
the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Date: ___________ ___, ____
ATTEST: VARIAN SEMICONDUCTOR
EQUIPMENT ASSOCIATES, INC.
____________________________ By:______________________________
Secretary Title:
Countersigned:
FIRST CHICAGO TRUST COMPANY
OF NEW YORK
By: ______________________________
Authorized Signature
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer
this Rights Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells, assigns
and transfers unto______________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ________________, _______
Signature Guaranteed: ____________________________________________
Signature
(Signature must correspond to name as
written upon the face of this Rights
Certificate in every particular, without
alteration or enlargement or any change
whatsoever)
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
<PAGE>
________________________________________________________________________________
(To be completed if true)
The undersigned hereby represents, for the benefit of all holders of Rights and
shares of Common Stock, that the Rights evidenced by this Rights Certificate are
not, and, to the knowledge of the undersigned, have never been, Beneficially
Owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in
the Rights Agreement).
_________________________________
Signature
________________________________________________________________________________
NOTICE
------
In the event the certification set forth above is not completed in
connection with a purported assignment, the Company will deem the Beneficial
Owner of the Rights evidenced by the enclosed Rights Certificate to be an
Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights
Agreement) or a transferee of any of the foregoing and accordingly will deem the
Rights evidenced by such Rights Certificate to be void and not transferable or
exercisable.
<PAGE>
(To be attached to each Rights Certificate)
FORM OF ELECTION TO EXERCISE
----------------------------
(To be executed if holder desires to exercise the Rights
Certificate.)
TO: [ ]
The undersigned hereby irrevocably elects to exercise _______________
whole Rights represented by the attached Rights Certificate to purchase the
shares of Common or Participating Preferred Stock issuable upon the exercise of
such Rights and requests that certificates for such shares be issued in the name
of:
_______________________________________________
Address:
_______________________________________________
_______________________________________________
Social Security or Other Taxpayer
Identification Number:_________________________
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance of such Rights shall be
registered in the name of and delivered to:
_______________________________________________
Address:
_______________________________________________
_______________________________________________
Social Security or Other Taxpayer
Identification Number:_________________________
Dated: ________________, _______
Signature Guaranteed:
Signature____________________________________
(Signature must correspond to name as
written upon the face of this Rights
Certificate in every particular, without
alteration or enlargement or any change
whatsoever)
<PAGE>
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank of trust company having an office or
correspondent in the United States.
________________________________________________________________________________
(To be completed if true)
The undersigned hereby represents, for the benefit of all holders of
Rights and shares of Common Stock, that the Rights evidenced by this Rights
Certificate are not, and, to the knowledge of the undersigned, have never been,
Beneficially Owned by an Acquiring Person or an Affiliate or Associate thereof
(as defined in the Rights Agreement).
____________________________________
Signature
________________________________________________________________________________
NOTICE
------
In the event the certification set forth above is not completed in
connection with a purported exercise, the Company will deem the Beneficial Owner
of the Rights evidenced by the attached Rights Certificate to be an Acquiring
Person or an Affiliate or Associate thereof (as defined in the Rights Agreement)
or a transferee of any of the foregoing and accordingly will deem the Rights
evidenced by such Rights Certificate to be void and not transferable or
exercisable.
<PAGE>
EXHIBIT B
---------
FORM OF CERTIFICATE OF DESIGNATION AND TERMS
OF PARTICIPATING PREFERRED STOCK OF
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
-----------------------------------------------
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
----------------------------------------
We, the undersigned, Richard A. Aurelio and Joseph B. Phair, the President and
Chief Executive Officer, and the Secretary, respectively, of Varian
Semiconductor Equipment Associates, Inc., a Delaware corporation (the
"Corporation"), do hereby certify as follows:
Pursuant to authority granted by Article IV of the Restated
Certificate of Incorporation of the Corporation and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation has adopted the following
resolutions fixing the designation and certain terms, powers, preferences and
other rights of a new series of the Corporation's Preferred Stock, par value
$0.01 per share, and certain qualifications, limitations and restrictions
thereon:
RESOLVED, that there is hereby established a series of Preferred
Stock, par value $0.01 per share, of the Corporation, and the designation and
certain terms, powers, preferences and other rights of the shares of such
series, and certain qualifications, limitations and restrictions thereon, are
hereby fixed as follows:
(i) The distinctive serial designation of this series shall be
"Participating Preferred Stock" (hereinafter called "this Series"). Each
share of this Series shall be identical in all respects with the other
shares of this Series except as to the dates from and after which dividends
thereon shall be cumulative.
(ii) The number of shares in this Series shall initially be
50,000, which number may from time to time be increased or decreased (but
not below the number then outstanding) by the Board of Directors. Shares of
this Series purchased by the Corporation shall be cancelled and shall
revert to authorized but unissued shares of Preferred Stock undesignated as
to series. Shares of this Series may be issued in fractional shares, which
fractional shares
<PAGE>
shall entitle the holder, in proportion to such holder's fractional share,
to all rights of a holder of a whole share of this Series.
(iii) The holders of full or fractional shares of this Series
shall be entitled to receive, when and as declared by the Board of
Directors, but only out of funds legally available therefor, dividends, (A)
on each date that dividends or other distributions (other than dividends or
distributions payable in Common Stock of the Corporation) are payable on or
in respect of Common Stock comprising part of the Reference Package (as
defined below), in an amount per whole share of this Series equal to the
aggregate amount of dividends or other distributions (other than dividends
or distributions payable in Common Stock of the Corporation) that would be
payable on such date to a holder of the Reference Package (as hereinafter
defined) and (B) on the last day of March, June, September and December in
each year, in an amount per whole share of this Series equal to the excess
(if any) of $2.50 over the aggregate dividends paid per whole share of this
Series during the three-month period ending on such last day. Each such
dividend shall be paid to the holders of record of shares of this Series on
the date, not exceeding sixty days preceding such dividend or distribution
payment date, fixed for the purpose by the Board of Directors in advance of
payment of each particular dividend or distribution. Dividends on each full
and each fractional share of this Series shall be cumulative from the date
such full or fractional share is originally issued; provided that any such
full or fractional share originally issued after a dividend record date and
on or prior to the dividend payment date to which such record date relates
shall not be entitled to receive the dividend payable on such dividend
payment date or any amount in respect of the period from such original
issuance to such dividend payment date.
The term "Reference Package" shall initially mean 1,000 shares of
Common Stock, $0.01 par value per share ("Common Stock"), of the
Corporation. In the event the Corporation shall at any time after 5:00
p.m., California time, on April 2, 1999 (A) declare or pay a dividend on
any Common Stock payable in Common Stock, (B) subdivide any Common Stock or
(C) combine any Common Stock into a smaller number of shares, then and in
each such case the Reference Package after such event shall be the Common
Stock that a holder of the Reference Package immediately prior to such
event would hold thereafter as a result thereof.
Holders of shares of this Series shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided on this Series.
So long as any shares of this series are outstanding, no dividends
(other than a dividend in Common Stock or in any other stock ranking junior
to this Series as to dividends and upon liquidation) shall be declared or
paid or set aside for payment or other distribution declared or made upon
the Common Stock or upon any other stock ranking junior to this Series as
to dividends or upon liquidation, nor shall any Common Stock nor any other
stock of the Corporation
<PAGE>
ranking junior to or on a parity with this Series as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any shares of any such stock) by the Corporation
(except by conversion into or exchange for stock of the Corporation ranking
junior to this Series as to dividends and upon liquidation), unless, in
each case, the full cumulative dividends (including the dividend to be due
upon payment of such dividend, distribution, redemption, purchase or other
acquisition) on all outstanding shares of this Series shall have been, or
shall contemporaneously be, paid.
(iv) In the event of any merger, consolidation, reclassification
or other transaction in which the shares of Common Stock are exchanged for
or changed into other stock or securities, cash and/or any other property,
then in any such case the shares of this Series shall at the same time be
similarly exchanged or changed in an amount per whole share equal to the
aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, that a holder of the Reference
Package would be entitled to receive as a result of such transaction.
(v) In the event of any liquidation, dissolution or winding up
of the affairs of the Corporation, whether voluntary or involuntary, the
holders of full and fractional shares of this Series shall be entitled,
before any distribution or payment is made on any date to the holders of
the Common Stock or any other stock of the Corporation ranking junior to
this Series upon liquidation, to be paid in full an amount per whole share
of this Series equal to the greater of (A) $100 or (B) the aggregate amount
distributed or to be distributed prior to such date in connection with such
liquidation, dissolution or winding up to a holder of the Reference Package
(such greater amount being hereinafter referred to as the "Liquidation
Preference"), together with accrued dividends to such distribution or
payment date, whether or not earned or declared. If such payment shall have
been made in full to all holders of shares of this Series, the holders of
shares of this Series as such shall have no right or claim to any of the
remaining assets of the Corporation.
In the event the assets of the Corporation available for distribution
to the holders of shares of this Series upon any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, shall
be insufficient to pay in full all amounts to which such holders are
entitled pursuant to the first paragraph of this Section (v), no such
distribution shall be made on account of any shares of any other class or
series of Preferred Stock ranking on a parity with the shares of this
Series upon such liquidation, dissolution or winding up unless
proportionate distributive amounts shall be paid on account of the shares
of this Series, ratably in proportion to the full distributable amounts for
which holders of all such parity shares are respectively entitled upon such
liquidation, dissolution or winding up.
Upon the liquidation, dissolution or winding up of the Corporation,
the holders of shares of this Series then outstanding shall be entitled to
be paid out of
<PAGE>
assets of the Corporation available for distribution to its stockholders
all amounts to which such holders are entitled pursuant to the first
paragraph of this Section (v) before any payment shall be made to the
holders of Common Stock or any other stock of the Corporation ranking
junior upon liquidation to this Series.
For the purposes of this Section (v), the consolidation or merger of,
or binding share exchange by, the Corporation with any other corporation
shall not be deemed to constitute a liquidation, dissolution or winding up
of the Corporation.
(vi) The shares of this Series shall not be redeemable.
(vii) In addition to any other vote or consent of stockholders
required by law or by the Restated Certificate of Incorporation, as
amended, of the Corporation, each whole share of this Series shall, on any
matter, vote as a class with any other capital stock comprising part of the
Reference Package and voting on such matter and shall have the number of
votes thereon that a holder of the Reference Package would have.
IN WITNESS WHEREOF, the undersigned have signed and attested this
certificate on the ___ day of March, 1999.
_________________________________
Richard A. Aurelio
President and
Chief Executive Officer
Attest:
__________________________________
Joseph B. Phair
Secretary
<PAGE>
EXHIBIT 10.5
FORM OF CHANGE IN CONTROL AGREEMENT FOR CHIEF EXECUTIVE OFFICER
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ("Agreement") is
entered into effective as of April 2, 1999, by and between VARIAN SEMICONDUCTOR
EQUIPMENT ASSOCIATES, INC., a Delaware corporation (the "Company")/1/, and
_______________, an employee of the Company ("Employee").
The Company's Board of Directors (the "Board") has determined that it is in
the best interest of the Company and its stockholders for the Company to agree
to pay Employee termination compensation in the event Employee should leave the
employ of the Company under the circumstances described below. The Board
recognizes that the possibility of a proposal from a third person, whether or
not solicited by the Company, concerning a possible "Change in Control" of the
Company (as such language is defined in Section 3(d)) will be unsettling to
Employee. Therefore, the arrangements set forth in this Agreement are being made
to help assure a continuing dedication by Employee to Employee's duties to the
Company notwithstanding the proposal or occurrence of a Change in Control. The
Board believes it imperative, should the Company receive any proposal from a
third party, that Employee, without being influenced by the uncertainties of
Employee's own situation, be able to assess and advise the Board whether such
proposals are in the best interest of the Company and its stockholders, and to
enable Employee to take action regarding such proposals as the Board might
determine to be appropriate. The Board also wishes to demonstrate to key
personnel that the Company desires to enhance management relations and its
ability to retain and, if needed, to attract new management, and intends to
ensure that loyal and dedicated management personnel are treated fairly.
In view of the foregoing, the Company and Employee agree as follows:
1. EFFECTIVE DATE AND TERM OF AGREEMENT.
------------------------------------
This Agreement is effective and binding on the Company and Employee as of
the date hereof; provided, however, that, subject to Section 2(d), the
provisions of Sections 3 and 4 shall become operative only upon the Change in
Control Date.
2. EMPLOYMENT OF EMPLOYEE.
----------------------
____________________________
/1/ "Company" shall include the Company, any successor to the Company's
business and/or assets, and any party which executes and delivers the agreement
required by Section 6(e) or which otherwise becomes bound by the terms and
conditions of this Agreement by operation of law or otherwise.
<PAGE>
(a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this
Agreement shall affect any right which Employee may otherwise have to terminate
Employee's employment, nor shall anything in this Agreement affect any right
which the Company may have to terminate Employee's employment at any time in any
lawful manner.
(b) In the event of a Potential Change in Control, to be entitled to
receive the benefits provided by this Agreement, Employee will not voluntarily
leave the employ of the Company, and will continue to perform Employee's regular
duties and the services specified in the recitals of this Agreement until the
Change in Control Date. Should Employee voluntarily terminate employment prior
to the Change in Control Date, this Agreement shall lapse upon such termination
and be of no further force or effect.
(c) If Employee's employment terminates on or after the Change in Control
Date, the Company will provide to Employee the payments and benefits as provided
in Sections 3 and 4.
(d) If Employee's employment is terminated by the Company prior to the
Change in Control Date but on or after a Potential Change in Control Date, then
the Company will provide to Employee the payments and benefits as provided in
Sections 3 and 4 unless the Company reasonably demonstrates that Employee's
termination of employment neither (i) was at the request of a third party who
has taken steps reasonably calculated to effect a Change in Control nor (ii)
arose in connection with or in anticipation of a Change in Control. Solely for
purposes of determining the timing of payments and the provision of benefits in
Sections 3 and 4 under the circumstances described in this Section 2(d),
Employee's date of termination shall be deemed to be the Change in Control Date.
3. TERMINATION FOLLOWING CHANGE IN CONTROL.
---------------------------------------
(a) If a Change in Control shall have occurred, Employee shall be entitled
to the benefits provided in Section 4 upon the subsequent termination of
Employee's employment within the applicable period set forth in Section 4 unless
such termination is due to Employee's death or Disability or is for Cause (as
such terms are defined in Section 3(d)).
(b) If following a Change in Control, Employee's employment is terminated
by reason of Employee's death or Disability, Employee shall be entitled to death
or long-term disability benefits from the Company no less favorable than the
most favorable benefits to which Employee would have been entitled had the death
or Disability occurred at any time during the period commencing one (1) year
prior to the Change in Control.
(c) If Employee's employment shall be terminated by the Company for Cause
during the term of this Agreement, the Company shall pay Employee's Base Salary
through the date of termination at the rate in effect at the time notice of
termination is given, and the Company shall have no further obligations to
Employee under this Agreement.
(d) For purposes of this Agreement:
<PAGE>
"Base Salary" shall mean the annual base salary paid to Employee
immediately prior to a Change in Control, provided that such amount shall in no
event be less than the annual base salary paid to Employee during the one (1)
year period immediately prior to the Change in Control.
A "Change in Control" shall be deemed to have occurred if:
(i) Any individual or group constituting a "person", as such term
is used in Sections 13(d) and 14(d)(2) of the Exchange Act (other than (A) the
Company or any of its subsidiaries or (B) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of any of its
subsidiaries), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's outstanding securities then entitled
ordinarily (and apart from rights accruing under special circumstances) to vote
for the election of directors; or
(ii) Continuing Directors cease to constitute at least a majority of
the Board; or
(iii) there occurs a reorganization, merger, consolidation or other
corporate transaction involving the Company (a "Transaction"), in each case with
respect to which the stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own more than 50% of the
combined voting power of the Company or other corporation resulting from such
Transaction; or
(iv) all or substantially all of the assets of the Company are sold,
liquidated or distributed;
provided, however, that a "Change in Control" shall not be deemed to have
occurred under this Agreement if, prior to the occurrence of a specified event
that would otherwise constitute a Change in Control hereunder, the disinterested
Continuing Directors then in office, by a majority vote thereof, determine that
the occurrence of such specified event shall not be deemed to be a Change in
Control with respect to Employee hereunder if the Change in Control results from
actions or events in which Employee is a participant in a capacity other than
solely as an officer, employee or director of the Company.
"Change in Control Date" shall mean the date on which a Change in Control
occurs.
"Cause" shall mean:
(i) The continued willful failure of Employee to perform Employee's
duties to the Company (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) after written notice thereof
(specifying the particulars thereof in reasonable detail) and a reasonable
opportunity to be heard and cure such failure are given to Employee by the Board
or a committee thereof; or
(ii) The willful commission by Employee of a wrongful act that
caused or was
<PAGE>
reasonably likely to cause substantial damage to the Company, or an act of fraud
in the performance of Employee's duties on behalf of the Company; or
(iii) The conviction of Employee for commission of a felony in
connection with the performance of Employee's duties on behalf of the Company;
or
(iv) The order of a federal or state regulatory authority having
jurisdiction over the Company or its operations or by a court of competent
jurisdiction requiring the termination of Employee's employment by the Company.
"Continuing Directors" shall mean the directors of the Company in office on
the date hereof and any successor to any such director who was nominated or
selected by a majority of the Continuing Directors in office at the time of the
director's nomination or selection and who is not an "affiliate" or "associate"
(as defined in Regulation 12B under the Exchange Act) of any person who is the
beneficial owner, directly or indirectly, of securities representing ten percent
(10%) or more of the combined voting power of the Company's outstanding
securities then entitled ordinarily to vote for the election of directors.
"Disability" shall mean Employee's incapacity due to physical or mental
illness such that Employee shall have become qualified to receive benefits under
the Company's long-term disability plan as in effect on the date of the Change
in Control.
"Dispute" shall mean, in the case of termination of Employee's employment
for Disability or Cause, that Employee challenges the existence of Disability or
Cause.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Potential Change in Control" shall mean the earliest to occur of (a) the
execution of an agreement or letter of intent, the consummation of the
transactions described in which would result in a Change in Control, (b) the
approval by the Board of a transaction or series of transactions, the
consummation of which would result in a Change in Control, or (c) the public
announcement of a tender offer for the Company's voting stock, the completion of
which would result in a Change in Control; provided, that no such event shall be
a "Potential Change in Control" unless (i) in the case of any agreement or
letter of intent described in clause (a), the transaction described therein is
subsequently consummated by the Company and the other party or parties to such
agreement or letter of intent and thereupon constitutes a "Change in Control",
(ii) in the case of any Board-approved transaction described in clause (b), the
transaction so approved is subsequently consummated and thereupon constitutes a
"Change in Control" or (iii) in the case of any tender offer described in clause
(c), such tender offer is subsequently completed and such completion thereupon
constitutes a "Change in Control".
"Potential Change in Control Date" shall mean the date on which a Potential
Change in Control occurs.
"Retirement" shall mean Employee's actual retirement after reaching the
normal or early
<PAGE>
retirement date provided for in the Company's Retirement and Profit-Sharing
Program as in effect on the date of Employee's termination of employment.
(e) Any termination of employment by the Company shall be communicated by
written notice, specify the date of termination, state the specific basis for
termination and set forth in reasonable detail the facts and circumstances of
the termination in order to provide a basis for determining the entitlement to
any payments under this Agreement.
(f) If within thirty (30) days after notice of termination is given, the
party to whom the notice was given notifies the other party that a Dispute
exists, the parties will promptly pursue resolution of such Dispute with
reasonable diligence; provided, however, that pending resolution of any such
Dispute, the Company shall pay 75% of any amounts which would otherwise be due
Employee pursuant to Section 4 if such Dispute did not exist into escrow pending
resolution of such Dispute and pay 25% of such amounts to Employee. Employee
agrees to return to the Company any such amounts to which it is ultimately
determined that he is not entitled.
4. PAYMENTS AND BENEFITS UPON TERMINATION.
--------------------------------------
(a) If within eighteen (18) months after a Change in Control, the Company
terminates Employee's employment other than by reason of Employee's death,
Disability or for Cause, or if Employee terminates Employee's employment for any
reason, then the Employee shall be entitled to the following payments and
benefits:
(i) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum severance payment equal to 2.99 multiplied by the sum of
(A) Employee's Base Salary, (B) the highest annual bonus that was paid to
Employee in any of the three fiscal years ending prior to the date of
termination under the Company's Management Incentive Plan (the "MIP") or Varian
Associates, Inc.'s Management Incentive Plan, and (C) the highest cash bonus for
a performance period of more than one fiscal year that was paid to Employee in
any of the three fiscal years ending prior to the date of termination under the
MIP.
(ii) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum payment equal to a pro rata portion (based on the number
of days elapsed during the fiscal year and/or other bonus performance period in
which the termination occurs) of Employee's target bonus under the MIP for the
fiscal year and for any other partially completed bonus performance period in
which the termination occurs.
(iii) All waiting periods for the exercise of any stock options
granted to Employee and all conditions or restrictions of any restricted stock
granted to Employee shall terminate, and all such options shall be exercisable
in full according to their terms, and the restricted stock shall be transferred
to Employee as soon as reasonably practicable thereafter.
(iv) Employee's participation as of the date of termination in the
life, medical/dental/vision and disability insurance plans and financial/tax
counseling plan of the
<PAGE>
Company shall be continued on the same terms (including any cost sharing) as if
Employee were an employee of the Company (or equivalent benefits provided) until
the earlier of Employee's commencement of substantially equivalent full-time
employment with a new employer or twenty-four (24) months after the date of
termination; provided, however, that after the date of termination, Employee
shall no longer be entitled to receive Company-paid executive physicals or, upon
expiration of the applicable memberships, Company-paid airline memberships. In
the event Employee shall die before the expiration of the period during which
the Company is required to continue Employee's participation in such insurance
plans, the participation of Employee's surviving spouse and family in the
Company's insurance plans shall continue throughout such period.
(v) Employee may elect upon termination to purchase any automobile
then in the possession of Employee and subject to a lease of which the Company
is the lessor by payment to the Company of the residual value set forth in the
lease, without any increase for remaining lease payments during the term or
other lease breakage costs. Employee may elect to have any such payment deducted
from any payments due the Employee hereunder.
(vi) All payments and benefits provided under this Agreement shall
be subject to applicable tax withholding.
(b) Following Employee's termination of employment for any reason, the
Company shall have the unconditional right to reduce any payments owed to
Employee hereunder by the amount of any due and unpaid principal and interest on
any loans by the Company to Employee and Employee hereby agrees and consents to
such right on the part of the Company.
5. GROSS-UP PAYMENT.
-----------------
(a) Notwithstanding anything herein to the contrary, if it is determined
that any Payment would be subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or
penalties with respect to such excise tax (such excise tax, together with any
interest or penalties thereon, is herein referred to as an "Excise Tax"), then
Employee shall be entitled to an additional payment (a "Gross-Up Payment") in an
amount that will place Employee in the same after-tax economic position that
Employee would have enjoyed if the Excise Tax had not applied to the Payment.
The amount of the Gross-Up Payment shall be determined by a nationally-
recognized independent public accounting firm designated by agreement between
Employee and the Company (the "Accounting Firm"). No Gross-Up Payments shall be
payable hereunder if the Accounting Firm determines that the Payments are not
subject to an Excise Tax.
"Payment" means (i) any amount due or paid to Employee under this
Agreement, (ii) any amount that is due or paid to Employee under any plan,
program or arrangement of the Company and its subsidiaries and (iii) any amount
or benefit that is due or payable to Employee under this Agreement or under any
plan, program or arrangement of the Company and its subsidiaries not otherwise
covered under clause (i) or (ii) hereof which must reasonably be taken into
account
<PAGE>
under Section 280G of the Code in determining the amount the "parachute
payments" received by Employee, including, without limitation, any amounts which
must be taken into account under Section 280G of the Code as a result of (A) the
acceleration of the vesting of any option, restricted stock or other equity
award, (B) the acceleration of the time at which any payment or benefit is
receivable by Employee or (C) any contingent severance or other amounts that are
payable to Employee.
(b) Subject to the provisions of Section 5(c), all determinations required
under this Section 5, including whether a Gross-Up Payment is required, the
amount of the Payments constituting excess parachute payments, and the amount of
the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide
detailed supporting calculations both to Employee and the Company within fifteen
days of the date reasonably requested by Employee or the Company on which a
determination under this Section 5 is necessary or advisable. The Company shall
pay to Employee the initial Gross-Up Payment within 5 days of the receipt by
Employee and the Company of the determination of the Accounting Firm. If the
Accounting Firm determines that no Excise Tax is payable by Employee, the
Company shall cause its accountants to provide Employee with an opinion that the
Accounting Firm has substantial authority under the Code not to report an Excise
Tax on Employee's federal income tax return. Any determination by the Accounting
Firm shall be binding upon Employee and the Company. If the initial Gross-Up
Payment is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Employee with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 5(c)
below, shall promptly pay to Employee an additional Gross-Up Payment in respect
of the Underpayment.
(c) Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of a Gross-Up Payment. Such notice shall be given as soon as practicable
after Employee knows of such claim and shall apprise the Company of the nature
of the claim and the date on which the claim is requested to be paid. Employee
agrees not to pay the claim until the expiration of the thirty (30) day period
following the date on which Employee notifies the Company, or such shorter
period ending on the date the Taxes with respect to such claim are due (the
"Notice Period"). If the Company notifies Employee in writing prior to the
expiration of the Notice Period that it desires to contest the claim, Employee
shall: (i) give the Company any information reasonably requested by the Company
relating to the claim; (ii) take such action in connection with the claim as the
Company may reasonably request, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably selected by
the Company and reasonably acceptable to Employee; (iii) cooperate with the
Company in good faith in contesting the claim; and (iv) permit the Company to
participate in any proceedings relating to the claim. Employee shall permit the
Company to control all proceedings related to the claim and, at its option,
permit the Company to pursue or forgo any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in respect of
such claim. If requested by the Company, Employee agrees either to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner and
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts as the
Company shall determine; provided, however, that, if the Company directs
Employee to pay such claim and pursue a refund, the Company shall advance the
amount of such payment to Employee on an after-tax and interest-free basis (an
"Advance"). The Company's control of the contest related to the claim shall be
limited to the issues related to the Gross-Up Payment and Employee shall be
<PAGE>
entitled to settle or contest, as the case may be, any other issues raised by
the Internal Revenue Service or other taxing authority. If the Company does not
notify Employee in writing prior to the end of the Notice Period of its desire
to contest the claim, the Company shall pay to Employee an additional Gross-Up
Payment in respect of the excess parachute payments that are the subject of the
claim, and Employee agrees to pay the amount of the Excise Tax that is the
subject of the claim to the applicable taxing authority in accordance with
applicable law.
(d) If, after receipt by Employee of an Advance, Employee becomes entitled
to a refund with respect to the claim to which such Advance relates, Employee
shall pay the Company the amount of the refund (together with any interest paid
or credited thereon after Taxes applicable thereto). If, after receipt by
Employee of an Advance, a determination is made that Employee shall not be
entitled to any refund with respect to the claim and the Company does not
promptly notify Employee of its intent to contest the denial of refund, then the
amount of the Advance shall not be required to be repaid by Employee and the
amount thereof shall offset the amount of the additional Gross-Up Payment then
owing to Employee.
(e) The Company shall indemnify Employee and hold Employee harmless, on an
after-tax basis, from any costs, expenses, penalties, fines, interest or other
liabilities ("Losses") incurred by Employee with respect to the exercise by the
Company of any of its rights under this Section 5, including, without
limitation, any Losses related to the Company's decision to contest a claim or
any imputed income to Employee resulting from any Advance or action taken on
Employee's behalf by the Company hereunder. The Company shall pay all legal fees
and expenses incurred under this Section 5, and shall promptly reimburse
Employee for the reasonable expenses incurred by Employee in connection with any
actions taken by the Company or required to be taken by Employee hereunder. The
Company shall also pay all of the fees and expenses of the Accounting Firm,
including, without limitation, the fees and expenses related to the opinion
referred to in Section 5(b).
6. GENERAL.
--------
(a) Employee shall retain in confidence under the conditions of the
Company's confidentiality agreement with Employee any proprietary or other
confidential information known to Employee concerning the Company and its
business so long as such information is not publicly disclosed and disclosure is
not required by an order of any governmental body or court. If required,
Employee shall return to the Company any memoranda, documents or other materials
proprietary to the Company.
(b) While employed by the Company and following the termination of such
employment (other than a termination of employment by the Company other than for
Cause) for a period of two (2) years, Employee shall not:
(i) whether for Employee's own account or for the account of any
other individual, partnership, firm, corporation or other business
organization, intentionally solicit, endeavor to entice away from the
Company or a subsidiary of the Company (each, a "Protected Party"), or
otherwise interfere with the relationship of a Protected Party with, any
person who is employed by a Protected Party or any person or
<PAGE>
entity who is, or was within the then most recent twelve (12) month period,
a customer or client of a Protected Party; or
(ii) without the prior written consent of the Protected Party, in any
geographic area in which the Protected Party is then conducting business,
directly or indirectly own an interest in, manage, operate, join, control,
lend money or render financial or other assistance to or participate in or
be connected with, as an officer, employee, partner, stockholder,
consultant or otherwise, any individual, partnership, firm, corporation or
other business organization or entity that is engaged in any business in
which the Protected Party is actively engaged at the time; provided,
however, that the restrictions in this Section 6(b)(ii) shall not apply to
(A) any non-employee directorships held by Employee as of the date hereof
or (B) ownership by Employee for personal investment purposes only of not
in excess of 1% of the voting stock of any publicly held corporation.
Employee acknowledges that a breach of any of the covenants contained in
this Section 6(b) may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it may not be possible to measure
damages for such injuries precisely and that, in the event of such a breach, any
payments remaining under the terms of this Agreement shall cease and the Company
may be entitled to obtain a temporary restraining order and/or a preliminary or
permanent injunction restraining Employee from engaging in activities prohibited
by this Section 6(b) or such other relief as may be required to specifically
enforce any of the covenants in this Section 6(b). Employee agrees to and hereby
does submit to in personam jurisdiction before each and every such court in the
State of California, County of Santa Clara, for that purpose. This Section 6(b)
shall survive any termination of this Agreement.
(c) If litigation is brought by Employee to enforce or interpret any
provision contained in this Agreement, the Company shall indemnify Employee for
Employee's reasonable attorney's fees and disbursements incurred in such
litigation and pay prejudgment interest on any money judgment obtained by
Employee calculated at the prime rate of interest in effect from time to time at
the Bank of America, San Francisco, from the date that payment should have been
made under the Agreement, provided that Employee shall not have been found by
the court in which such litigation is pending to have had no cause in bringing
the action, or to have acted in bad faith, which finding must be final with the
time to appeal therefrom having expired and no appeal having been taken.
(d) Except as provided in Section 4, the Company's obligation to pay to
Employee the compensation and to make the arrangements provided in this
Agreement shall be absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, any setoff, counterclaim,
recoupment, defense or other right which the Company may have against Employee
or anyone else. All amounts payable by the Company hereunder shall be paid
without notice or demand. Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment.
(e) The Company shall require any successor, whether direct or indirect, by
purchase, merger, consolidation or otherwise, to all or substantially all of the
business and/or assets of the
<PAGE>
Company, by written agreement to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
(f) This Agreement shall inure to the benefit of and be enforceable by
Employee's heirs, successors and assigns. If Employee should die while any
amounts would still be payable to Employee hereunder if Employee had continued
to live, all such amounts shall be paid in accordance with the terms of this
Agreement to Employee's heirs, successors and assigns.
(g) For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to Employee: If to the Company:
Varian Semiconductor Equipment
Associates, Inc.
35 Dory Road
Gloucester, MA 01930
Attn: Vice President, Human Resources
or to such other address as either party furnishes to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
(h) This Agreement shall constitute the entire agreement between Employee
and the Company concerning the subject matter of this Agreement.
(i) The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California without
giving effect to the provisions, principles or policies thereof relating to
choice or conflict of laws. The invalidity or unenforceability of any provision
of this Agreement in any circumstance shall not affect the validity or
enforceability of such provision in any other circumstance or the validity or
enforceability of any other provision of this Agreement, and, except to the
extent such provision is invalid or unenforceable, this Agreement shall remain
in full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof in such jurisdiction, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. This Section 6(i)
shall survive any termination of this Agreement.
(j) This Agreement may be terminated by the Company pursuant to a
resolution adopted by the Board at any time prior to a Potential Change in
Control Date. After a Change in Control Date or a Potential Change in Control
Date, this Agreement may only be terminated with the consent of Employee.
<PAGE>
(k) No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement and this Agreement
shall supersede all prior agreements, negotiations, correspondence, undertakings
and communications of the parties, oral or written, with respect to the subject
matter hereof including, without limitation, the Amended and Restated Change in
Control Agreement between Employee and Varian Associates, Inc.
(l) In the event that the Company becomes party to a transaction that is
intended to qualify for "pooling of interests" accounting treatment and, but for
one or more of the provisions of this Agreement would so qualify, then this
Agreement shall be interpreted so as to preserve such accounting treatment, and
to the extent that any provision of this Agreement would disqualify the
transaction from pooling of interests accounting treatment, then such provision
shall be null and void. All determinations to be made in connection with the
preceding sentence shall be made by the independent accounting firm whose
opinion with respect to "pooling of interests" treatment is required as a
condition to the Company's consummation of such transaction.
IN WITNESS WHEREOF, the parties acknowledge that they have read and
understand the terms of this Agreement and have executed this Agreement to be
effective as of April 2, 1999.
VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC. EMPLOYEE
__________________________________ ______________________________
By:
Title:
<PAGE>
EXHIBIT 10.6
FORM OF CHANGE IN CONTROL AGREEMENT FOR CHIEF FINANCIAL OFFICER
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ("Agreement") is
entered into effective as of April 2, 1999, by and between VARIAN SEMICONDUCTOR
EQUIPMENT ASSOCIATES, INC., a Delaware corporation (the "Company")/1/, and
_______________, an employee of the Company ("Employee").
The Company's Board of Directors (the "Board") has determined that it is in
the best interest of the Company and its stockholders for the Company to agree
to pay Employee termination compensation in the event Employee should leave the
employ of the Company under the circumstances described below. The Board
recognizes that the possibility of a proposal from a third person, whether or
not solicited by the Company, concerning a possible "Change in Control" of the
Company (as such language is defined in Section 3(d)) will be unsettling to
Employee. Therefore, the arrangements set forth in this Agreement are being made
to help assure a continuing dedication by Employee to Employee's duties to the
Company notwithstanding the proposal or occurrence of a Change in Control. The
Board believes it imperative, should the Company receive any proposal from a
third party, that Employee, without being influenced by the uncertainties of
Employee's own situation, be able to assess and advise the Board whether such
proposals are in the best interest of the Company and its stockholders, and to
enable Employee to take action regarding such proposals as the Board might
determine to be appropriate. The Board also wishes to demonstrate to key
personnel that the Company desires to enhance management relations and its
ability to retain and, if needed, to attract new management, and intends to
ensure that loyal and dedicated management personnel are treated fairly.
In view of the foregoing, the Company and Employee agree as follows:
1. EFFECTIVE DATE AND TERM OF AGREEMENT.
------------------------------------
This Agreement is effective and binding on the Company and Employee as of
the date hereof; provided, however, that, subject to Section 2(d), the
provisions of Sections 3 and 4 shall become operative only upon the Change in
Control Date.
2. EMPLOYMENT OF EMPLOYEE.
----------------------
____________________________
/1/ "Company" shall include the Company, any successor to the Company's
business and/or assets, and any party which executes and delivers the agreement
required by Section 6(e) or which otherwise becomes bound by the terms and
conditions of this Agreement by operation of law or otherwise.
<PAGE>
(a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this
Agreement shall affect any right which Employee may otherwise have to terminate
Employee's employment, nor shall anything in this Agreement affect any right
which the Company may have to terminate Employee's employment at any time in any
lawful manner.
(b) In the event of a Potential Change in Control, to be entitled to
receive the benefits provided by this Agreement, Employee will not voluntarily
leave the employ of the Company, and will continue to perform Employee's regular
duties and the services specified in the recitals of this Agreement until the
Change in Control Date. Should Employee voluntarily terminate employment prior
to the Change in Control Date, this Agreement shall lapse upon such termination
and be of no further force or effect.
(c) If Employee's employment terminates on or after the Change in Control
Date, the Company will provide to Employee the payments and benefits as provided
in Sections 3 and 4.
(d) If Employee's employment is terminated by the Company prior to the
Change in Control Date but on or after a Potential Change in Control Date, then
the Company will provide to Employee the payments and benefits as provided in
Sections 3 and 4 unless the Company reasonably demonstrates that Employee's
termination of employment neither (i) was at the request of a third party who
has taken steps reasonably calculated to effect a Change in Control nor (ii)
arose in connection with or in anticipation of a Change in Control. Solely for
purposes of determining the timing of payments and the provision of benefits in
Sections 3 and 4 under the circumstances described in this Section 2(d),
Employee's date of termination shall be deemed to be the Change in Control Date.
3. TERMINATION FOLLOWING CHANGE IN CONTROL.
---------------------------------------
(a) If a Change in Control shall have occurred, Employee shall be entitled
to the benefits provided in Section 4 upon the subsequent termination of
Employee's employment within the applicable period set forth in Section 4 unless
such termination is due to Employee's death, Retirement or Disability or is for
Cause or is effected by Employee other than for Good Reason (as such terms are
defined in Section 3(d)).
(b) If following a Change in Control, Employee's employment is terminated
by reason of Employee's death or Disability, Employee shall be entitled to death
or long-term disability benefits from the Company no less favorable than the
most favorable benefits to which Employee would have been entitled had the death
or Disability occurred at any time during the period commencing one (1) year
prior to the Change in Control.
(c) If Employee's employment shall be terminated by the Company for Cause
or by Employee other than for Good Reason during the term of this Agreement, the
Company shall pay Employee's Base Salary through the date of termination at the
rate in effect at the time notice of termination is given, and the Company shall
have no further obligations to Employee under this Agreement.
(d) For purposes of this Agreement:
<PAGE>
"Base Salary" shall mean the annual base salary paid to Employee
immediately prior to a Change in Control, provided that such amount shall in no
event be less than the annual base salary paid to Employee during the one (1)
year period immediately prior to the Change in Control.
A "Change in Control" shall be deemed to have occurred if:
(i) Any individual or group constituting a "person", as such term
is used in Sections 13(d) and 14(d)(2) of the Exchange Act (other than (A) the
Company or any of its subsidiaries or (B) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of any of its
subsidiaries), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's outstanding securities then entitled
ordinarily (and apart from rights accruing under special circumstances) to vote
for the election of directors; or
(ii) Continuing Directors cease to constitute at least a majority of
the Board; or
(iii) there occurs a reorganization, merger, consolidation or other
corporate transaction involving the Company (a "Transaction"), in each case with
respect to which the stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own more than 50% of the
combined voting power of the Company or other corporation resulting from such
Transaction; or
(iv) all or substantially all of the assets of the Company are sold,
liquidated or distributed;
provided, however, that a "Change in Control" shall not be deemed to have
occurred under this Agreement if, prior to the occurrence of a specified event
that would otherwise constitute a Change in Control hereunder, the disinterested
Continuing Directors then in office, by a majority vote thereof, determine that
the occurrence of such specified event shall not be deemed to be a Change in
Control with respect to Employee hereunder if the Change in Control results from
actions or events in which Employee is a participant in a capacity other than
solely as an officer, employee or director of the Company.
"Change in Control Date" shall mean the date on which a Change in Control
occurs.
"Cause" shall mean:
(i) The continued willful failure of Employee to perform Employee's
duties to the Company (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) after written notice thereof
(specifying the particulars thereof in reasonable detail) and a reasonable
opportunity to be heard and cure such failure are given to Employee by the Board
or a committee thereof; or
<PAGE>
(ii) The willful commission by Employee of a wrongful act that
caused or was reasonably likely to cause substantial damage to the Company, or
an act of fraud in the performance of Employee's duties on behalf of the
Company; or
(iii) The conviction of Employee for commission of a felony in
connection with the performance of Employee's duties on behalf of the Company;
or
(iv) The order of a federal or state regulatory authority having
jurisdiction over the Company or its operations or by a court of competent
jurisdiction requiring the termination of Employee's employment by the Company.
"Continuing Directors" shall mean the directors of the Company in office on
the date hereof and any successor to any such director who was nominated or
selected by a majority of the Continuing Directors in office at the time of the
director's nomination or selection and who is not an "affiliate" or "associate"
(as defined in Regulation 12B under the Exchange Act) of any person who is the
beneficial owner, directly or indirectly, of securities representing ten percent
(10%) or more of the combined voting power of the Company's outstanding
securities then entitled ordinarily to vote for the election of directors.
"Disability" shall mean Employee's incapacity due to physical or mental
illness such that Employee shall have become qualified to receive benefits under
the Company's long-term disability plan as in effect on the date of the Change
in Control.
"Dispute" shall mean, in the case of termination of Employee's employment
for Disability or Cause, that Employee challenges the existence of Disability or
Cause, and in the case of termination of Employee's employment for Good Reason,
that the Company challenges the existence of Good Reason for termination of
Employee's employment.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Equivalent Position" shall mean an employment position that:
(i) is in a substantive area of competence (e.g., finance,
accounting, legal, operations management or human resources) that is consistent
with Employee's experience and not materially different from the substantive
area of competence of Employee's position with the Company prior to the Change
in Control;
(ii) requires that Employee serve in a role and perform duties that
are functionally equivalent to the role and duties performed by Employee for the
Company prior to the Change in Control;
(iii) carries a title that does not connote a lesser rank or
corporate role than is connoted by Employee's title with the Company prior to
the Change in Control;
(iv) does not constitute a material, adverse change in Employee's
<PAGE>
responsibilities or duties, when compare to Employee's responsibilities or
duties with the Company prior to the Change in Control;
(v) requires that Employee be deemed an executive officer (for
purposes of the rules promulgated under Section 16 of the Securities Exchange
Act of 1934) of a publicly-traded successor entity having net assets or annual
revenues that are no less than those of the Company prior to the Change in
Control; and
(vi) has Employee reporting directly to the Chief Executive Officer
of the combined or acquiring company.
"Good Reason" shall mean:
(i) The assignment to Employee of a position, title,
responsibilities or duties such that he no longer holds an Equivalent Position;
or
(ii) A reduction of Employee's total compensation as the same may
have been increased from time to time after the Change in Control Date other
than (A) a reduction implemented with the consent of Employee or (B) a reduction
that is generally comparable (proportionately) to compensation reductions
imposed on senior executives of the Company generally; or
(iii) The failure to provide to Employee the benefits and
perquisites, including participation on a comparable basis in the Company's
stock option, incentive, and other similar plans in which employees of the
Company of comparable title and salary grade participate, as were provided to
Employee immediately prior to a Change in Control, or with a package of benefits
and perquisites that are substantially comparable in all material respects to
such benefits and perquisites provided prior to the Change in Control; or
(iv) The relocation of the office of the Company where Employee is
employed immediately prior to the Change in Control Date (the "CIC Location") to
a location which is more than 50 miles away from the CIC Location or the
Company's requiring Employee to be based more than 50 miles away from the CIC
Location (except for required travel on the Company's business to an extent
substantially consistent with Employee's customary business travel obligations
in the ordinary course of business prior to the Change in Control Date);
(v) The failure of the Company to obtain promptly upon any Change
in Control the express written assumption of an agreement to perform this
Agreement by any successor as contemplated in Section 6(e); or
(vi) The attempted termination of Employee's employment for Cause on
grounds insufficient to constitute a basis of termination for Cause under this
Agreement; or
(vii) The failure of the Company to promptly make any payment into
escrow when so required by Section 3(f).
<PAGE>
"Potential Change in Control" shall mean the earliest to occur of (a) the
execution of an agreement or letter of intent, the consummation of the
transactions described in which would result in a Change in Control, (b) the
approval by the Board of a transaction or series of transactions, the
consummation of which would result in a Change in Control, or (c) the public
announcement of a tender offer for the Company's voting stock, the completion of
which would result in a Change in Control; provided, that no such event shall be
a "Potential Change in Control" unless (i) in the case of any agreement or
letter of intent described in clause (a), the transaction described therein is
subsequently consummated by the Company and the other party or parties to such
agreement or letter of intent and thereupon constitutes a "Change in Control",
(ii) in the case of any Board-approved transaction described in clause (b), the
transaction so approved is subsequently consummated and thereupon constitutes a
"Change in Control" or (iii) in the case of any tender offer described in clause
(c), such tender offer is subsequently completed and such completion thereupon
constitutes a "Change in Control".
"Potential Change in Control Date" shall mean the date on which a Potential
Change in Control occurs.
"Retirement" shall mean Employee's actual retirement after reaching the
normal or early retirement date provided for in the Company's Retirement and
Profit-Sharing Program as in effect on the date of Employee's termination of
employment.
(e) Any termination of employment by the Company or by Employee shall be
communicated by written notice, specify the date of termination, state the
specific basis for termination and set forth in reasonable detail the facts and
circumstances of the termination in order to provide a basis for determining the
entitlement to any payments under this Agreement.
(f) If within thirty (30) days after notice of termination is given, the
party to whom the notice was given notifies the other party that a Dispute
exists, the parties will promptly pursue resolution of such Dispute with
reasonable diligence; provided, however, that pending resolution of any such
Dispute, the Company shall pay 75% of any amounts which would otherwise be due
Employee pursuant to Section 4 if such Dispute did not exist into escrow pending
resolution of such Dispute and pay 25% of such amounts to Employee. Employee
agrees to return to the Company any such amounts to which it is ultimately
determined that he is not entitled.
4. PAYMENTS AND BENEFITS UPON TERMINATION.
--------------------------------------
(a) If within eighteen (18) months after a Change in Control, the Company
terminates Employee's employment other than by reason of Employee's death,
Disability, Retirement or for Cause, or if Employee terminates Employee's
employment for Good Reason, then the Employee shall be entitled to the following
payments and benefits:
(i) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum severance payment equal to 2.50 multiplied by the sum of
(A) Employee's Base Salary, (B) the highest annual bonus that was paid to
Employee in any of the three fiscal years ending prior to
<PAGE>
the date of termination under the Company's Management Incentive Plan (the
"MIP") or Varian Associates, Inc.'s Management Incentive Plan, and (C) the
highest cash bonus for a performance period of more than one fiscal year that
was paid to Employee in any of the three fiscal years ending prior to the date
of termination under the MIP.
(ii) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum payment equal to a pro rata portion (based on the number
of days elapsed during the fiscal year and/or other bonus performance period in
which the termination occurs) of Employee's target bonus under the MIP for the
fiscal year and for any other partially completed bonus performance period in
which the termination occurs.
(iii) All waiting periods for the exercise of any stock options
granted to Employee and all conditions or restrictions of any restricted stock
granted to Employee shall terminate, and all such options shall be exercisable
in full according to their terms, and the restricted stock shall be transferred
to Employee as soon as reasonably practicable thereafter.
(iv) Employee's participation as of the date of termination in the
life, medical/dental/vision and disability insurance plans and financial/tax
counseling plan of the Company shall be continued on the same terms (including
any cost sharing) as if Employee were an employee of the Company (or equivalent
benefits provided) until the earlier of Employee's commencement of substantially
equivalent full-time employment with a new employer or twenty-four (24) months
after the date of termination; provided, however, that after the date of
termination, Employee shall no longer be entitled to receive Company-paid
executive physicals or, upon expiration of the applicable memberships, Company-
paid airline memberships. In the event Employee shall die before the expiration
of the period during which the Company is required to continue Employee's
participation in such insurance plans, the participation of Employee's surviving
spouse and family in the Company's insurance plans shall continue throughout
such period.
(v) Employee may elect upon termination to purchase any automobile
then in the possession of Employee and subject to a lease of which the Company
is the lessor by payment to the Company of the residual value set forth in the
lease, without any increase for remaining lease payments during the term or
other lease breakage costs. Employee may elect to have any such payment deducted
from any payments due the Employee hereunder.
(vi) All payments and benefits provided under this Agreement shall
be subject to applicable tax withholding.
(b) Following Employee's termination of employment for any reason, the
Company shall have the unconditional right to reduce any payments owed to
Employee hereunder by the amount of any due and unpaid principal and interest on
any loans by the Company to Employee and Employee hereby agrees and consents to
such right on the part of the Company.
5. GROSS-UP PAYMENT.
-----------------
<PAGE>
(a) Notwithstanding anything herein to the contrary, if it is determined
that any Payment would be subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or
penalties with respect to such excise tax (such excise tax, together with any
interest or penalties thereon, is herein referred to as an "Excise Tax"), then
Employee shall be entitled to an additional payment (a "Gross-Up Payment") in an
amount that will place Employee in the same after-tax economic position that
Employee would have enjoyed if the Excise Tax had not applied to the Payment.
The amount of the Gross-Up Payment shall be determined by a nationally-
recognized independent public accounting firm designated by agreement between
Employee and the Company (the "Accounting Firm"). No Gross-Up Payments shall be
payable hereunder if the Accounting Firm determines that the Payments are not
subject to an Excise Tax.
"Payment" means (i) any amount due or paid to Employee under this
Agreement, (ii) any amount that is due or paid to Employee under any plan,
program or arrangement of the Company and its subsidiaries and (iii) any amount
or benefit that is due or payable to Employee under this Agreement or under any
plan, program or arrangement of the Company and its subsidiaries not otherwise
covered under clause (i) or (ii) hereof which must reasonably be taken into
account under Section 280G of the Code in determining the amount the "parachute
payments" received by Employee, including, without limitation, any amounts which
must be taken into account under Section 280G of the Code as a result of (A) the
acceleration of the vesting of any option, restricted stock or other equity
award, (B) the acceleration of the time at which any payment or benefit is
receivable by Employee or (C) any contingent severance or other amounts that are
payable to Employee.
(b) Subject to the provisions of Section 5(c), all determinations required
under this Section 5, including whether a Gross-Up Payment is required, the
amount of the Payments constituting excess parachute payments, and the amount of
the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide
detailed supporting calculations both to Employee and the Company within fifteen
days of the date reasonably requested by Employee or the Company on which a
determination under this Section 5 is necessary or advisable. The Company shall
pay to Employee the initial Gross-Up Payment within 5 days of the receipt by
Employee and the Company of the determination of the Accounting Firm. If the
Accounting Firm determines that no Excise Tax is payable by Employee, the
Company shall cause its accountants to provide Employee with an opinion that the
Accounting Firm has substantial authority under the Code not to report an Excise
Tax on Employee's federal income tax return. Any determination by the Accounting
Firm shall be binding upon Employee and the Company. If the initial Gross-Up
Payment is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Employee with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 5(c)
below, shall promptly pay to Employee an additional Gross-Up Payment in respect
of the Underpayment.
(c) Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of a Gross-Up Payment. Such notice shall be given as soon as practicable
after Employee knows of such claim and shall apprise the Company of the nature
of the claim and the date on which the claim is requested to be paid. Employee
agrees not to pay the claim until the expiration of the thirty (30)
<PAGE>
day period following the date on which Employee notifies the Company, or such
shorter period ending on the date the Taxes with respect to such claim are due
(the "Notice Period"). If the Company notifies Employee in writing prior to the
expiration of the Notice Period that it desires to contest the claim, Employee
shall: (i) give the Company any information reasonably requested by the Company
relating to the claim; (ii) take such action in connection with the claim as the
Company may reasonably request, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably selected by
the Company and reasonably acceptable to Employee; (iii) cooperate with the
Company in good faith in contesting the claim; and (iv) permit the Company to
participate in any proceedings relating to the claim. Employee shall permit the
Company to control all proceedings related to the claim and, at its option,
permit the Company to pursue or forgo any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in respect of
such claim. If requested by the Company, Employee agrees either to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner and
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts as the
Company shall determine; provided, however, that, if the Company directs
Employee to pay such claim and pursue a refund, the Company shall advance the
amount of such payment to Employee on an after-tax and interest-free basis (an
"Advance"). The Company's control of the contest related to the claim shall be
limited to the issues related to the Gross-Up Payment and Employee shall be
entitled to settle or contest, as the case may be, any other issues raised by
the Internal Revenue Service or other taxing authority. If the Company does not
notify Employee in writing prior to the end of the Notice Period of its desire
to contest the claim, the Company shall pay to Employee an additional Gross-Up
Payment in respect of the excess parachute payments that are the subject of the
claim, and Employee agrees to pay the amount of the Excise Tax that is the
subject of the claim to the applicable taxing authority in accordance with
applicable law.
(d) If, after receipt by Employee of an Advance, Employee becomes entitled
to a refund with respect to the claim to which such Advance relates, Employee
shall pay the Company the amount of the refund (together with any interest paid
or credited thereon after Taxes applicable thereto). If, after receipt by
Employee of an Advance, a determination is made that Employee shall not be
entitled to any refund with respect to the claim and the Company does not
promptly notify Employee of its intent to contest the denial of refund, then the
amount of the Advance shall not be required to be repaid by Employee and the
amount thereof shall offset the amount of the additional Gross-Up Payment then
owing to Employee.
(e) The Company shall indemnify Employee and hold Employee harmless, on an
after-tax basis, from any costs, expenses, penalties, fines, interest or other
liabilities ("Losses") incurred by Employee with respect to the exercise by the
Company of any of its rights under this Section 5, including, without
limitation, any Losses related to the Company's decision to contest a claim or
any imputed income to Employee resulting from any Advance or action taken on
Employee's behalf by the Company hereunder. The Company shall pay all legal fees
and expenses incurred under this Section 5, and shall promptly reimburse
Employee for the reasonable expenses incurred by Employee in connection with any
actions taken by the Company or required to be taken by Employee hereunder. The
Company shall also pay all of the fees and expenses of the Accounting Firm,
including, without limitation, the fees and expenses related to the opinion
referred to in Section 5(b).
<PAGE>
6. GENERAL.
--------
(a) Employee shall retain in confidence under the conditions of the
Company's confidentiality agreement with Employee any proprietary or other
confidential information known to Employee concerning the Company and its
business so long as such information is not publicly disclosed and disclosure is
not required by an order of any governmental body or court. If required,
Employee shall return to the Company any memoranda, documents or other materials
proprietary to the Company.
(b) While employed by the Company and following the termination of such
employment (other than a termination of employment by Employee for Good Reason
or by the Company other than for Cause) for a period of two (2) years, Employee
shall not, whether for Employee's own account or for the account of any other
individual, partnership, firm, corporation or other business organization,
intentionally solicit, endeavor to entice away from the Company or a subsidiary
of the Company (each, a "Protected Party"), or otherwise interfere with the
relationship of a Protected Party with, any person who is employed by a
Protected Party or any person or entity who is, or was within the then most
recent twelve (12) month period, a customer or client of a Protected Party.
Employee acknowledges that a breach of any of the covenants contained in
this Section 6(b) may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it may not be possible to measure
damages for such injuries precisely and that, in the event of such a breach, any
payments remaining under the terms of this Agreement shall cease and the Company
may be entitled to obtain a temporary restraining order and/or a preliminary or
permanent injunction restraining Employee from engaging in activities prohibited
by this Section 6(b) or such other relief as may be required to specifically
enforce any of the covenants in this Section 6(b). Employee agrees to and hereby
does submit to in personam jurisdiction before each and every such court in the
State of California, County of Santa Clara, for that purpose. This Section 6(b)
shall survive any termination of this Agreement.
(c) If litigation is brought by Employee to enforce or interpret any
provision contained in this Agreement, the Company shall indemnify Employee for
Employee's reasonable attorney's fees and disbursements incurred in such
litigation and pay prejudgment interest on any money judgment obtained by
Employee calculated at the prime rate of interest in effect from time to time at
the Bank of America, San Francisco, from the date that payment should have been
made under the Agreement, provided that Employee shall not have been found by
the court in which such litigation is pending to have had no cause in bringing
the action, or to have acted in bad faith, which finding must be final with the
time to appeal therefrom having expired and no appeal having been taken.
(d) Except as provided in Section 4, the Company's obligation to pay to
Employee the compensation and to make the arrangements provided in this
Agreement shall be absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, any setoff, counterclaim,
recoupment, defense or other right which the Company may have against Employee
or anyone else. All amounts payable by the Company hereunder shall be paid
without
<PAGE>
notice or demand. Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment.
(e) The Company shall require any successor, whether direct or indirect, by
purchase, merger, consolidation or otherwise, to all or substantially all of the
business and/or assets of the Company, by written agreement to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place.
(f) This Agreement shall inure to the benefit of and be enforceable by
Employee's heirs, successors and assigns. If Employee should die while any
amounts would still be payable to Employee hereunder if Employee had continued
to live, all such amounts shall be paid in accordance with the terms of this
Agreement to Employee's heirs, successors and assigns.
(g) For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to Employee: If to the Company:
Varian Semiconductor Equipment
Associates, Inc.
35 Dory Street
Gloucester, MA 01930
Attn: Vice President, Human Resources
or to such other address as either party furnishes to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
(h) This Agreement shall constitute the entire agreement between Employee
and the Company concerning the subject matter of this Agreement.
(i) The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California without
giving effect to the provisions, principles or policies thereof relating to
choice or conflict of laws. The invalidity or unenforceability of any provision
of this Agreement in any circumstance shall not affect the validity or
enforceability of such provision in any other circumstance or the validity or
enforceability of any other provision of this Agreement, and, except to the
extent such provision is invalid or unenforceable, this Agreement shall remain
in full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof in such jurisdiction, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. This Section 6(i)
shall survive any termination of this Agreement.
<PAGE>
(j) This Agreement may be terminated by the Company pursuant to a
resolution adopted by the Board at any time prior to a Potential Change in
Control Date. After a Change in Control Date or a Potential Change in Control
Date, this Agreement may only be terminated with the consent of Employee.
(k) No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement and this Agreement
shall supersede all prior agreements, negotiations, correspondence, undertakings
and communications of the parties, oral or written, with respect to the subject
matter hereof including, without limitation, the Amended and Restated Change in
Control Agreement between Employee and Varian Associates, Inc.
(l) In the event that the Company becomes party to a transaction that is
intended to qualify for "pooling of interests" accounting treatment and, but for
one or more of the provisions of this Agreement would so qualify, then this
Agreement shall be interpreted so as to preserve such accounting treatment, and
to the extent that any provision of this Agreement would disqualify the
transaction from pooling of interests accounting treatment, then such provision
shall be null and void. All determinations to be made in connection with the
preceding sentence shall be made by the independent accounting firm whose
opinion with respect to "pooling of interests" treatment is required as a
condition to the Company's consummation of such transaction.
IN WITNESS WHEREOF, the parties acknowledge that they have read and
understand the terms of this Agreement and have executed this Agreement to be
effective as of April 2, 1999.
VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC. EMPLOYEE
________________________________ ______________________________
By:
Title:
<PAGE>
EXHIBIT 10.7
FORM OF CHANGE IN CONTROL AGREEMENT FOR SENIOR EXECUTIVES
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT ("Agreement") is
entered into effective as of April 2, 1999, by and between VARIAN SEMICONDUCTOR
EQUIPMENT ASSOCIATES, INC., a Delaware corporation (the "Company")/1/, and
_______________, an employee of the Company ("Employee").
The Company's Board of Directors (the "Board") has determined that it is in
the best interest of the Company and its stockholders for the Company to agree
to pay Employee termination compensation in the event Employee should leave the
employ of the Company under the circumstances described below. The Board
recognizes that the possibility of a proposal from a third person, whether or
not solicited by the Company, concerning a possible "Change in Control" of the
Company (as such language is defined in Section 3(d)) will be unsettling to
Employee. Therefore, the arrangements set forth in this Agreement are being made
to help assure a continuing dedication by Employee to Employee's duties to the
Company notwithstanding the proposal or occurrence of a Change in Control. The
Board believes it imperative, should the Company receive any proposal from a
third party, that Employee, without being influenced by the uncertainties of
Employee's own situation, be able to assess and advise the Board whether such
proposals are in the best interest of the Company and its stockholders, and to
enable Employee to take action regarding such proposals as the Board might
determine to be appropriate. The Board also wishes to demonstrate to key
personnel that the Company desires to enhance management relations and its
ability to retain and, if needed, to attract new management, and intends to
ensure that loyal and dedicated management personnel are treated fairly.
In view of the foregoing, the Company and Employee agree as follows:
1. EFFECTIVE DATE AND TERM OF AGREEMENT.
------------------------------------
This Agreement is effective and binding on the Company and Employee as of
the date hereof; provided, however, that, subject to Section 2(d), the
provisions of Sections 3 and 4 shall become operative only upon the Change in
Control Date.
2. EMPLOYMENT OF EMPLOYEE.
----------------------
____________________________
/1/ "Company" shall include the Company, any successor to the Company's
business and/or assets, and any party which executes and delivers the agreement
required by Section 6(e) or which otherwise becomes bound by the terms and
conditions of this Agreement by operation of law or otherwise.
<PAGE>
(a) Except as provided in Sections 2(b), 2(c) and 2(d), nothing in this
Agreement shall affect any right which Employee may otherwise have to terminate
Employee's employment, nor shall anything in this Agreement affect any right
which the Company may have to terminate Employee's employment at any time in any
lawful manner.
(b) In the event of a Potential Change in Control, to be entitled to
receive the benefits provided by this Agreement, Employee will not voluntarily
leave the employ of the Company, and will continue to perform Employee's regular
duties and the services specified in the recitals of this Agreement until the
Change in Control Date. Should Employee voluntarily terminate employment prior
to the Change in Control Date, this Agreement shall lapse upon such termination
and be of no further force or effect.
(c) If Employee's employment terminates on or after the Change in Control
Date, the Company will provide to Employee the payments and benefits as provided
in Sections 3 and 4.
(d) If Employee's employment is terminated by the Company prior to the
Change in Control Date but on or after a Potential Change in Control Date, then
the Company will provide to Employee the payments and benefits as provided in
Sections 3 and 4 unless the Company reasonably demonstrates that Employee's
termination of employment neither (i) was at the request of a third party who
has taken steps reasonably calculated to effect a Change in Control nor (ii)
arose in connection with or in anticipation of a Change in Control. Solely for
purposes of determining the timing of payments and the provision of benefits in
Sections 3 and 4 under the circumstances described in this Section 2(d),
Employee's date of termination shall be deemed to be the Change in Control Date.
3. TERMINATION FOLLOWING CHANGE IN CONTROL.
---------------------------------------
(a) If a Change in Control shall have occurred, Employee shall be entitled
to the benefits provided in Section 4 upon the subsequent termination of
Employee's employment within the applicable period set forth in Section 4 unless
such termination is due to Employee's death, Retirement or Disability or is for
Cause or is effected by Employee other than for Good Reason (as such terms are
defined in Section 3(d)).
(b) If following a Change in Control, Employee's employment is terminated
by reason of Employee's death or Disability, Employee shall be entitled to death
or long-term disability benefits from the Company no less favorable than the
most favorable benefits to which Employee would have been entitled had the death
or Disability occurred at any time during the period commencing one (1) year
prior to the Change in Control.
(c) If Employee's employment shall be terminated by the Company for Cause
or by Employee other than for Good Reason during the term of this Agreement, the
Company shall pay Employee's Base Salary through the date of termination at the
rate in effect at the time notice of termination is given, and the Company shall
have no further obligations to Employee under this Agreement.
(d) For purposes of this Agreement:
<PAGE>
"Base Salary" shall mean the annual base salary paid to Employee
immediately prior to a Change in Control, provided that such amount shall in no
event be less than the annual base salary paid to Employee during the one (1)
year period immediately prior to the Change in Control.
A "Change in Control" shall be deemed to have occurred if:
(i) Any individual or group constituting a "person", as such term
is used in Sections 13(d) and 14(d)(2) of the Exchange Act (other than (A) the
Company or any of its subsidiaries or (B) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of any of its
subsidiaries), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's outstanding securities then entitled
ordinarily (and apart from rights accruing under special circumstances) to vote
for the election of directors; or
(ii) Continuing Directors cease to constitute at least a majority of
the Board; or
(iii) There occurs a reorganization, merger, consolidation or other
corporate transaction involving the Company (a "Transaction"), in each case with
respect to which the stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own more than 50% of the
combined voting power of the Company or other corporation resulting from such
Transaction; or
(iv) All or substantially all of the assets of the Company are sold,
liquidated or distributed;
provided, however, that a "Change in Control" shall not be deemed to have
occurred under this Agreement if, prior to the occurrence of a specified event
that would otherwise constitute a Change in Control hereunder, the disinterested
Continuing Directors then in office, by a majority vote thereof, determine that
the occurrence of such specified event shall not be deemed to be a Change in
Control with respect to Employee hereunder if the Change in Control results from
actions or events in which Employee is a participant in a capacity other than
solely as an officer, employee or director of the Company.
"Change in Control Date" shall mean the date on which a Change in Control
occurs.
"Cause" shall mean:
(i) The continued willful failure of Employee to perform Employee's
duties to the Company (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) after written notice thereof
(specifying the particulars thereof in reasonable detail) and a reasonable
opportunity to be heard and cure such failure are given to Employee by the Board
or a committee thereof; or
<PAGE>
(ii) The willful commission by Employee of a wrongful act that
caused or was reasonably likely to cause substantial damage to the Company, or
an act of fraud in the performance of Employee's duties on behalf of the
Company; or
(iii) The conviction of Employee for commission of a felony in
connection with the performance of Employee's duties on behalf of the Company;
or
(iv) The order of a federal or state regulatory authority having
jurisdiction over the Company or its operations or by a court of competent
jurisdiction requiring the termination of Employee's employment by the Company.
"Continuing Directors" shall mean the directors of the Company in office on
the date hereof and any successor to any such director who was nominated or
selected by a majority of the Continuing Directors in office at the time of the
director's nomination or selection and who is not an "affiliate" or "associate"
(as defined in Regulation 12B under the Exchange Act) of any person who is the
beneficial owner, directly or indirectly, of securities representing ten percent
(10%) or more of the combined voting power of the Company's outstanding
securities then entitled ordinarily to vote for the election of directors.
"Disability" shall mean Employee's incapacity due to physical or mental
illness such that Employee shall have become qualified to receive benefits under
the Company's long-term disability plan as in effect on the date of the Change
in Control.
"Dispute" shall mean, in the case of termination of Employee's employment
for Disability or Cause, that Employee challenges the existence of Disability or
Cause, and in the case of termination of Employee's employment for Good Reason,
that the Company challenges the existence of Good Reason for termination of
Employee's employment.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Good Reason" shall mean:
(i) The assignment of Employee to duties which are materially
different from Employee's duties immediately prior to the Change in Control and
which result in a material reduction in Employee's authority and responsibility
when compared to the highest level of authority and responsibility assigned to
Employee at any time during the six (6) month period prior to the Change in
Control Date; or
(ii) A reduction of Employee's total compensation as the same may
have been increased from time to time after the Change in Control Date other
than (A) a reduction implemented with the consent of Employee or (B) a reduction
that is generally comparable (proportionately) to compensation reductions
imposed on senior executives of the Company generally; or
<PAGE>
(iii) The failure to provide to Employee the benefits and
perquisites, including participation on a comparable basis in the Company's
stock option, incentive, and other similar plans in which employees of the
Company of comparable title and salary grade participate, as were provided to
Employee immediately prior to a Change in Control, or with a package of benefits
and perquisites that are substantially comparable in all material respects to
such benefits and perquisites provided prior to the Change in Control; or
(iv) The relocation of the office of the Company where Employee is
employed immediately prior to the Change in Control Date (the "CIC Location") to
a location which is more than 50 miles away from the CIC Location or the
Company's requiring Employee to be based more than 50 miles away from the CIC
Location (except for required travel on the Company's business to an extent
substantially consistent with Employee's customary business travel obligations
in the ordinary course of business prior to the Change in Control Date);
(v) The failure of the Company to obtain promptly upon any Change
in Control the express written assumption of an agreement to perform this
Agreement by any successor as contemplated in Section 6(e); or
(vi) The attempted termination of Employee's employment for Cause on
grounds insufficient to constitute a basis of termination for Cause under this
Agreement; or
(vii) The failure of the Company to promptly make any payment into
escrow when so required by Section 3(f).
"Potential Change in Control" shall mean the earliest to occur of (a) the
execution of an agreement or letter of intent, the consummation of the
transactions described in which would result in a Change in Control, (b) the
approval by the Board of a transaction or series of transactions, the
consummation of which would result in a Change in Control, or (c) the public
announcement of a tender offer for the Company's voting stock, the completion of
which would result in a Change in Control; provided, that no such event shall be
a "Potential Change in Control" unless (i) in the case of any agreement or
letter of intent described in clause (a), the transaction described therein is
subsequently consummated by the Company and the other party or parties to such
agreement or letter of intent and thereupon constitutes a "Change in Control",
(ii) in the case of any Board-approved transaction described in clause (b), the
transaction so approved is subsequently consummated and thereupon constitutes a
"Change in Control" or (iii) in the case of any tender offer described in clause
(c), such tender offer is subsequently completed and such completion thereupon
constitutes a "Change in Control".
"Potential Change in Control Date" shall mean the date on which a Potential
Change in Control occurs.
"Retirement" shall mean Employee's actual retirement after reaching the
normal or early retirement date provided for in the Company's Retirement and
Profit-Sharing Program as in effect on the date of Employee's termination of
employment.
<PAGE>
(e) Any termination of employment by the Company or by Employee shall be
communicated by written notice, specify the date of termination, state the
specific basis for termination and set forth in reasonable detail the facts and
circumstances of the termination in order to provide a basis for determining the
entitlement to any payments under this Agreement.
(f) If within thirty (30) days after notice of termination is given, the
party to whom the notice was given notifies the other party that a Dispute
exists, the parties will promptly pursue resolution of such Dispute with
reasonable diligence; provided, however, that pending resolution of any such
Dispute, the Company shall pay 75% of any amounts which would otherwise be due
Employee pursuant to Section 4 if such Dispute did not exist into escrow pending
resolution of such Dispute and pay 25% of such amounts to Employee. Employee
agrees to return to the Company any such amounts to which it is ultimately
determined that he is not entitled.
4. PAYMENTS AND BENEFITS UPON TERMINATION.
--------------------------------------
(a) If within eighteen (18) months after a Change in Control, the Company
terminates Employee's employment other than by reason of Employee's death,
Disability, Retirement or for Cause, or if Employee terminates Employee's
employment for Good Reason, then the Employee shall be entitled to the following
payments and benefits:
(i) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum severance payment equal to 2.50 multiplied by the sum of
(A) Employee's Base Salary, (B) the highest annual bonus that was paid to
Employee in any of the three fiscal years ending prior to the date of
termination under the Company's Management Incentive Plan (the "MIP") or Varian
Associates, Inc.'s Management Incentive Plan, and (C) the highest cash bonus for
a performance period of more than one fiscal year that was paid to Employee in
any of the three fiscal years ending prior to the date of termination under the
MIP.
(ii) The Company shall pay to Employee as compensation for services
rendered, no later than five (5) business days following the date of
termination, a lump sum payment equal to a pro rata portion (based on the number
of days elapsed during the fiscal year and/or other bonus performance period in
which the termination occurs) of Employee's target bonus under the MIP for the
fiscal year and for any other partially completed bonus performance period in
which the termination occurs.
(iii) All waiting periods for the exercise of any stock options
granted to Employee and all conditions or restrictions of any restricted stock
granted to Employee shall terminate, and all such options shall be exercisable
in full according to their terms, and the restricted stock shall be transferred
to Employee as soon as reasonably practicable thereafter.
(iv) Employee's participation as of the date of termination in the
life, medical/dental/vision and disability insurance plans and financial/tax
counseling plan of the Company shall be continued on the same terms (including
any cost sharing) as if Employee were an employee of the Company (or equivalent
benefits provided) until the earlier of Employee's
<PAGE>
commencement of substantially equivalent full-time employment with a new
employer or twenty-four (24) months after the date of termination; provided,
however, that after the date of termination, Employee shall no longer be
entitled to receive Company-paid executive physicals or, upon expiration of the
applicable memberships, Company-paid airline memberships. In the event Employee
shall die before the expiration of the period during which the Company is
required to continue Employee's participation in such insurance plans, the
participation of Employee's surviving spouse and family in the Company's
insurance plans shall continue throughout such period.
(v) Employee may elect upon termination to purchase any automobile
then in the possession of Employee and subject to a lease of which the Company
is the lessor by payment to the Company of the residual value set forth in the
lease, without any increase for remaining lease payments during the term or
other lease breakage costs. Employee may elect to have any such payment deducted
from any payments due the Employee hereunder.
(vi) All payments and benefits provided under this Agreement shall
be subject to applicable tax withholding.
(b) Following Employee's termination of employment for any reason, the
Company shall have the unconditional right to reduce any payments owed to
Employee hereunder by the amount of any due and unpaid principal and interest on
any loans by the Company to Employee and Employee hereby agrees and consents to
such right on the part of the Company.
5. GROSS-UP PAYMENT.
-----------------
(a) Notwithstanding anything herein to the contrary, if it is determined
that any Payment would be subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or
penalties with respect to such excise tax (such excise tax, together with any
interest or penalties thereon, is herein referred to as an "Excise Tax"), then
Employee shall be entitled to an additional payment (a "Gross-Up Payment") in an
amount that will place Employee in the same after-tax economic position that
Employee would have enjoyed if the Excise Tax had not applied to the Payment.
The amount of the Gross-Up Payment shall be determined by a nationally-
recognized independent public accounting firm designated by agreement between
Employee and the Company (the "Accounting Firm"). No Gross-Up Payments shall be
payable hereunder if the Accounting Firm determines that the Payments are not
subject to an Excise Tax.
"Payment" means (i) any amount due or paid to Employee under this
Agreement, (ii) any amount that is due or paid to Employee under any plan,
program or arrangement of the Company and its subsidiaries and (iii) any amount
or benefit that is due or payable to Employee under this Agreement or under any
plan, program or arrangement of the Company and its subsidiaries not otherwise
covered under clause (i) or (ii) hereof which must reasonably be taken into
account under Section 280G of the Code in determining the amount the "parachute
payments" received by Employee, including, without limitation, any amounts which
must be taken into account under Section 280G of the Code as a result of (A) the
acceleration of the vesting of any option, restricted stock or other equity
award, (B) the acceleration of the time at which any payment or benefit is
receivable by Employee or (C) any contingent severance or other amounts that are
<PAGE>
payable to Employee.
(b) Subject to the provisions of Section 5(c), all determinations required
under this Section 5, including whether a Gross-Up Payment is required, the
amount of the Payments constituting excess parachute payments, and the amount of
the Gross-Up Payment, shall be made by the Accounting Firm, which shall provide
detailed supporting calculations both to Employee and the Company within fifteen
days of the date reasonably requested by Employee or the Company on which a
determination under this Section 5 is necessary or advisable. The Company shall
pay to Employee the initial Gross-Up Payment within 5 days of the receipt by
Employee and the Company of the determination of the Accounting Firm. If the
Accounting Firm determines that no Excise Tax is payable by Employee, the
Company shall cause its accountants to provide Employee with an opinion that the
Accounting Firm has substantial authority under the Code not to report an Excise
Tax on Employee's federal income tax return. Any determination by the Accounting
Firm shall be binding upon Employee and the Company. If the initial Gross-Up
Payment is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Employee with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 5(c)
below, shall promptly pay to Employee an additional Gross-Up Payment in respect
of the Underpayment.
(c) Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of a Gross-Up Payment. Such notice shall be given as soon as practicable
after Employee knows of such claim and shall apprise the Company of the nature
of the claim and the date on which the claim is requested to be paid. Employee
agrees not to pay the claim until the expiration of the thirty (30) day period
following the date on which Employee notifies the Company, or such shorter
period ending on the date the Taxes with respect to such claim are due (the
"Notice Period"). If the Company notifies Employee in writing prior to the
expiration of the Notice Period that it desires to contest the claim, Employee
shall: (i) give the Company any information reasonably requested by the Company
relating to the claim; (ii) take such action in connection with the claim as the
Company may reasonably request, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably selected by
the Company and reasonably acceptable to Employee; (iii) cooperate with the
Company in good faith in contesting the claim; and (iv) permit the Company to
participate in any proceedings relating to the claim. Employee shall permit the
Company to control all proceedings related to the claim and, at its option,
permit the Company to pursue or forgo any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in respect of
such claim. If requested by the Company, Employee agrees either to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner and
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts as the
Company shall determine; provided, however, that, if the Company directs
Employee to pay such claim and pursue a refund, the Company shall advance the
amount of such payment to Employee on an after-tax and interest-free basis (an
"Advance"). The Company's control of the contest related to the claim shall be
limited to the issues related to the Gross-Up Payment and Employee shall be
entitled to settle or contest, as the case may be, any other issues raised by
the Internal Revenue Service or other taxing authority. If the Company does not
notify Employee in writing prior to the end of the Notice Period of its desire
to contest the claim, the Company shall pay to
<PAGE>
Employee an additional Gross-Up Payment in respect of the excess parachute
payments that are the subject of the claim, and Employee agrees to pay the
amount of the Excise Tax that is the subject of the claim to the applicable
taxing authority in accordance with applicable law.
(d) If, after receipt by Employee of an Advance, Employee becomes entitled
to a refund with respect to the claim to which such Advance relates, Employee
shall pay the Company the amount of the refund (together with any interest paid
or credited thereon after Taxes applicable thereto). If, after receipt by
Employee of an Advance, a determination is made that Employee shall not be
entitled to any refund with respect to the claim and the Company does not
promptly notify Employee of its intent to contest the denial of refund, then the
amount of the Advance shall not be required to be repaid by Employee and the
amount thereof shall offset the amount of the additional Gross-Up Payment then
owing to Employee.
(e) The Company shall indemnify Employee and hold Employee harmless, on an
after-tax basis, from any costs, expenses, penalties, fines, interest or other
liabilities ("Losses") incurred by Employee with respect to the exercise by the
Company of any of its rights under this Section 5, including, without
limitation, any Losses related to the Company's decision to contest a claim or
any imputed income to Employee resulting from any Advance or action taken on
Employee's behalf by the Company hereunder. The Company shall pay all legal fees
and expenses incurred under this Section 5, and shall promptly reimburse
Employee for the reasonable expenses incurred by Employee in connection with any
actions taken by the Company or required to be taken by Employee hereunder. The
Company shall also pay all of the fees and expenses of the Accounting Firm,
including, without limitation, the fees and expenses related to the opinion
referred to in Section 5(b).
6. GENERAL.
--------
(a) Employee shall retain in confidence under the conditions of the
Company's confidentiality agreement with Employee any proprietary or other
confidential information known to Employee concerning the Company and its
business so long as such information is not publicly disclosed and disclosure is
not required by an order of any governmental body or court. If required,
Employee shall return to the Company any memoranda, documents or other materials
proprietary to the Company.
(b) While employed by the Company and following the termination of such
employment (other than a termination of employment by Employee for Good Reason
or by the Company other than for Cause) for a period of two (2) years, Employee
shall not, whether for Employee's own account or for the account of any other
individual, partnership, firm, corporation or other business organization,
intentionally solicit, endeavor to entice away from the Company or a subsidiary
of the Company (each, a "Protected Party"), or otherwise interfere with the
relationship of a Protected Party with, any person who is employed by a
Protected Party or any person or entity who is, or was within the then most
recent twelve (12) month period, a customer or client of a Protected Party.
Employee acknowledges that a breach of any of the covenants contained in
this Section 6(b) may result in material irreparable injury to the Company for
which there is no adequate
<PAGE>
remedy at law, that it may not be possible to measure damages for such injuries
precisely and that, in the event of such a breach, any payments remaining under
the terms of this Agreement shall cease and the Company may be entitled to
obtain a temporary restraining order and/or a preliminary or permanent
injunction restraining Employee from engaging in activities prohibited by this
Section 6(b) or such other relief as may be required to specifically enforce any
of the covenants in this Section 6(b). Employee agrees to and hereby does submit
to in personam jurisdiction before each and every such court in the State of
California, County of Santa Clara, for that purpose. This Section 6(b) shall
survive any termination of this Agreement.
(c) If litigation is brought by Employee to enforce or interpret any
provision contained in this Agreement, the Company shall indemnify Employee for
Employee's reasonable attorney's fees and disbursements incurred in such
litigation and pay prejudgment interest on any money judgment obtained by
Employee calculated at the prime rate of interest in effect from time to time at
the Bank of America, San Francisco, from the date that payment should have been
made under the Agreement, provided that Employee shall not have been found by
the court in which such litigation is pending to have had no cause in bringing
the action, or to have acted in bad faith, which finding must be final with the
time to appeal therefrom having expired and no appeal having been taken.
(d) Except as provided in Section 4, the Company's obligation to pay to
Employee the compensation and to make the arrangements provided in this
Agreement shall be absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, any setoff, counterclaim,
recoupment, defense or other right which the Company may have against Employee
or anyone else. All amounts payable by the Company hereunder shall be paid
without notice or demand. Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment.
(e) The Company shall require any successor, whether direct or indirect, by
purchase, merger, consolidation or otherwise, to all or substantially all of the
business and/or assets of the Company, by written agreement to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place.
(f) This Agreement shall inure to the benefit of and be enforceable by
Employee's heirs, successors and assigns. If Employee should die while any
amounts would still be payable to Employee hereunder if Employee had continued
to live, all such amounts shall be paid in accordance with the terms of this
Agreement to Employee's heirs, successors and assigns.
(g) For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:
<PAGE>
If to Employee: If to the Company:
Varian, Inc.
35 Dory Road
Gloucester, MA 01930
Attn: Vice President, Human Resources
or to such other address as either party furnishes to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
(h) This Agreement shall constitute the entire agreement between Employee
and the Company concerning the subject matter of this Agreement.
(i) The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California without
giving effect to the provisions, principles or policies thereof relating to
choice or conflict of laws. The invalidity or unenforceability of any provision
of this Agreement in any circumstance shall not affect the validity or
enforceability of such provision in any other circumstance or the validity or
enforceability of any other provision of this Agreement, and, except to the
extent such provision is invalid or unenforceable, this Agreement shall remain
in full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof in such jurisdiction, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. This Section 6(i)
shall survive any termination of this Agreement.
(j) This Agreement may be terminated by the Company pursuant to a
resolution adopted by the Board at any time prior to a Potential Change in
Control Date. After a Change in Control Date or a Potential Change in Control
Date, this Agreement may only be terminated with the consent of Employee.
(k) No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement and this Agreement
shall supersede all prior agreements, negotiations, correspondence, undertakings
and communications of the parties, oral or written, with respect to the subject
matter hereof including, without limitation, the Amended and Restated Change in
Control Agreement between Employee and Varian Associates, Inc.
(l) In the event that the Company becomes party to a transaction that is
intended to qualify for "pooling of interests" accounting treatment and, but for
one or more of the provisions of this Agreement would so qualify, then this
Agreement shall be interpreted so as to preserve such accounting treatment, and
to the extent that any provision of this Agreement would disqualify the
transaction from pooling of interests accounting treatment, then such provision
shall be null and void. All determinations to be made in connection with the
preceding sentence shall be made by the independent accounting firm whose
opinion with respect to "pooling of
<PAGE>
interests" treatment is required as a condition to the Company's consummation of
such transaction.
IN WITNESS WHEREOF, the parties acknowledge that they have read and
understand the terms of this Agreement and have executed this Agreement to be
effective as of April 2, 1999.
VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC. EMPLOYEE
__________________________________ ______________________________
By:
Title:
<PAGE>
EXHIBIT 10.8
FORM OF INDEMNITY AGREEMENT FOR DIRECTORS AND OFFICERS
INDEMNITY AGREEMENT
-------------------
This Agreement made and entered into this ___ day of _______, 1999, by and
between Varian Semiconductor Equipment Associates, Inc., a Delaware corporation
(the "Company"), and _________________ ("Indemnitee"):
WHEREAS, there is a general awareness that competent and experienced
persons are becoming more reluctant to serve as directors or officers of a
publicly-held corporation unless they are provided with adequate protection
against claims and actions against them for their activities on behalf of the
corporation, generally through insurance and indemnification; and
WHEREAS, the uncertainties in the interpretations of the statutes and
regulations, laws and public policies, relating to indemnification of corporate
directors and officers are such as to make adequate, reliable assessment of the
risks to which directors and officers of publicly-held corporations may be
exposed difficult, particularly in light of the proliferation of lawsuits
against directors and officers; and
WHEREAS, the Board of Directors of the Company, based upon its business
experience, has concluded that the continuation of present trends in litigation
against corporate directors and officers will inevitably make it more difficult
for the Company to retain directors and officers of the highest competence
committed to the active and effective direction and supervision of the business
and affairs of the Company and its subsidiaries and affiliates and the operation
of their facilities, and the Board deems such consequences to be so detrimental
to the best interests of the Company's stockholders that it has concluded that
the Company should act to assure its directors and officers of maximum
protection against inordinate risks attendant on their positions in order to
ensure that the most capable persons otherwise available will be attracted to
such positions and, therefore, said directors have further concluded that it is
not only reasonable and prudent but necessary for the Company to contractually
obligate itself to indemnify to the fullest extent permitted by applicable law
its directors and officers and the directors and officers of its affiliates and
to assume to the maximum extent permitted by law liability for expenses and
liabilities which might be incurred by its directors and officers in connection
with claims lodged against them for their decisions and actions as directors or
officers; and
WHEREAS, Section 145 of the General Corporation Law of the State of
Delaware, under which law the Company is organized, empowers corporations to
indemnify persons serving as a director, officer, employee or agent of the
corporation or a person who serves at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, employee benefit plan, trust, or other enterprise, and further
specifies that the indemnification provided by said section "shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise", and further empowers a corporation to "purchase and
maintain insurance" (on behalf of such persons) "against any liability asserted
against him or incurred by him in any such capacity, or arising out of
Indemnitee's status as such,
<PAGE>
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of" (said laws); and
WHEREAS, the Company has investigated the type of insurance available, to
insure the directors and officers of the Company and of its affiliates against
expenses (including attorneys' fees), costs, judgments, fines and amounts paid
in settlement actually and reasonably incurred by them in connection with any
action, suit or proceeding to which they are or are threatened to be made a
party by reason of their status and/or decisions or actions in such positions,
has studied the nature and extent of the coverage provided by such insurance and
the cost thereof to the Company, and has purchased such insurance to the extent
reasonably available; however, upon receiving such information, and
notwithstanding the purchase of such insurance when reasonably available, which
insurance is subject to certain significant exclusions and may cease to be
available (even with such exclusions), the directors of the Company have
concluded that it would be in the best interests of the stockholders for the
Company to contract to indemnify such persons as hereinafter provided; and
WHEREAS, the Company desires to have Indemnitee serve or continue to serve
as a director or officer of the Company and/or a director, officer, partner,
trustee, agent or fiduciary of such other corporations, partnerships, joint
ventures, employee benefit plans, trusts or other enterprises (herein
collectively called "Affiliate of the Company") of which Indemnitee has been or
is serving, or will serve at the request of or for the convenience of or to
represent the interests of the Company, free from undue concern for
unpredictable, inappropriate or unreasonable claims for damages by reason of
Indemnitee's being a director or officer of the Company or a director, officer,
employee, trustee, partner, agent or fiduciary of an Affiliate of the Company,
or by reason of Indemnitee's decisions or actions on their behalf; and
WHEREAS, Indemnitee is willing to serve, or to continue to serve, or to
take on additional service for, the Company and/or the Affiliates in such
aforesaid capacities on the condition that Indemnitee be indemnified as provided
for herein;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
1. SERVICES TO THE COMPANY. Indemnitee will serve and/or continue to serve,
-----------------------
at the will of the Company or under separate contract, if any such contract
exists, as a director and/or officer of the Company and/or as a director,
officer, employee, trustee, partner, agent or fiduciary of an Affiliate of the
Company faithfully and to the best of Indemnitee's ability so long as Indemnitee
is duly elected and qualified in accordance with the provisions of the Bylaws or
other applicable constitutive documents thereof; provided that Indemnitee may at
any time and for any reason resign from such position (subject to any
contractual obligation which Indemnitee shall have assumed apart from this
Agreement) and further provided that neither the Company nor any Affiliate shall
have any obligation under this Agreement to continue the Indemnitee in any such
position.
2. INDEMNIFICATION. The Company shall indemnify Indemnitee to the fullest
---------------
extent permitted, and in the manner required, by applicable law as in effect as
of the date hereof or as
<PAGE>
such laws may from time to time, be amended:
(a) If Indemnitee is a person who was or is made a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative in
nature, other than an action by or in the right of the Company, by reason of the
fact that Indemnitee is or was a director, officer, employee, trustee, partner,
agent, or fiduciary of the Company or is or was serving at the request of the
Company as a director, officer, employee, trustee, partner, agent or fiduciary
of an Affiliate of the Company, or by reason of anything done or not done by
Indemnitee in any such capacity, against expenses (including attorneys' fees),
costs, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with such action, suit or
proceeding (including, but not limited to, the investigation, defense or appeal
thereof) if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
Indemnitee's conduct was unlawful, or
(b) If Indemnitee is a person who was or is made a party or is
threatened to be made a party to any threatened, pending or completed action or
suit brought in the right of the Company to procure a judgment in its favor by
reason of the fact that Indemnitee is or was a director, officer, employee,
trustee, partner, agent or fiduciary of the Company or an Affiliate of the
Company or by reason of anything done or not done by Indemnitee in any such
capacity, against expenses (including attorneys' fees) and costs actually and
reasonably incurred by Indemnitee in connection with such action or suit
(including, but not limited to, the investigation, defense, settlement or appeal
thereof) if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company, except
that no such indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for gross
negligence or misconduct in the performance of Indemnitee's duty to the Company
unless, and only to the extent that, the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for such expenses and costs as such court shall deem proper.
(c) Notwithstanding any other provisions of this Agreement, to the
extent Indemnitee (i) has prepared to serve or has served as a witness or (ii)
has been successful on the merits or otherwise in defense of any action, suit,
investigation or proceeding referred to in subsections (a) or (b) of this
section, or in the defense of any claim, issue or matter described therein, the
Company shall indemnify Indemnitee against expenses (including attorneys' fees)
and costs actually and reasonably incurred by Indemnitee in connection therewith
(including, but not limited to, the preparation, service, investigation, defense
or appeal of such action, suit, investigation or proceeding).
(d) Notwithstanding anything to the contrary in the foregoing
provisions of this Section 2, Indemnitee shall not be entitled, as a matter of
right, to indemnification pursuant to this Section 2 (i) against costs and
expenses incurred in connection with any action, suit or proceeding commenced by
Indemnitee against the Company or any person who is or was a director or officer
of the Company or any of its affiliates, as defined in Rule 405 under the
<PAGE>
Securities Act of 1933 ("Securities Act Affiliate") or any Affiliate of the
Company, but such indemnification may be provided by the Company in a specific
case as contemplated by Section 6 hereof; or (ii) in the event that Indemnitee
has served as a witness in cooperation with any party or entity which has
threatened or brought any action, suit or proceeding, whether civil, criminal,
administrative, or investigative, against the Company, any Securities Act
Affiliate, any Affiliate of the Company, or any director, officer, employee,
trustee, partner, agent or fiduciary of any thereof, but such indemnification
may be provided by the Company in a specific case as contemplated by Section 6
hereof.
3. PARTIAL INDEMNIFICATION. If Indemnitee is only partially successful in
-----------------------
the defense, investigation, settlement or appeal of any action, suit,
investigation or proceeding described in Section 2 hereof and therefore not
entitled hereunder to indemnification by the Company for the total amount of the
expenses (including attorneys' fees), costs, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by Indemnitee, the
Company shall nevertheless indemnify Indemnitee to the extent Indemnitee has
been partially successful.
4. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
-----------------------------------------------
(a) Upon written request by Indemnitee for indemnification pursuant to
Section 2 hereof, the determination as to whether or not Indemnitee shall be
entitled to indemnification by reason of satisfying the applicable standard of
conduct as set forth in Section 2 shall be made (i) by the Board of Directors of
the Company by a majority vote of a quorum consisting of Disinterested Directors
(as hereinafter defined) or, (ii) if such a quorum is not obtainable or, even if
obtainable, if the Board of Directors by the majority vote of Disinterested
Directors so directs, by Independent Counsel in a written opinion to the Board
of Directors, a copy of which shall be delivered to the Indemnitee, or (iii) by
the stockholders. A determination as to the entitlement of Indemnitee to
indemnification pursuant to Section 2 hereof shall be made as aforesaid not
later than 60 days after the Company shall have received a written request for
indemnification. Indemnitee shall cooperate with the Company in making its
determination as aforesaid of Indemnitee's entitlement to indemnification,
including providing to the Company upon reasonable advance request any
documentation or information reasonably available to Indemnitee and material to
such determination. Any costs (including attorneys' fees) or expenses incurred
by Indemnitee in so cooperating with the Company shall be borne by the Company
and the Company hereby indemnifies and agrees to hold Indemnitee harmless
therefrom irrespective of the outcome of the determination as to Indemnitee's
satisfaction of the applicable standard of conduct set forth in Section 2.
(b) The termination of any action, suit, investigation or proceeding
described in Section 2 hereof by judgment, order, settlement or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption for the purposes of this Agreement that Indemnitee did not act in
good faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
(c) In making a determination pursuant to Section 4(a) hereof as to
whether or not
<PAGE>
Indemnitee satisfied the applicable standard of conduct set forth in Section 2
hereof, the person or persons making such determination shall presume that
Indemnitee met the applicable standard of conduct set forth in Section 2(a),
2(b), or 2(c), as the case may be, absent evidence to the contrary and the
absence or unavailability of evidence on the matter to be decided Indemnitee
shall be entitled to the benefit of such presumption. The Company shall have the
burden of proof in the making of any determination contrary to such presumption.
(d) For purposes of this Agreement:
(i) "Disinterested Director" with respect to any request by
Indemnitee for indemnification hereunder shall mean a director of the Company
who is or was not a party to or a subject of the action, suit, investigation or
proceeding in respect of which indemnification is being sought by Indemnitee.
(ii) "Independent Counsel" shall mean a law firm or a member of a
law firm that neither is nor in the past five years has been retained to
represent in any material matter the Company or any Securities Act Affiliate or
Indemnitee or any other party to the action, suit, investigation or proceeding
giving rise to a claim for indemnification hereunder and which, under applicable
standards of professional conduct then prevailing, would not have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's right to indemnification under this Agreement and that is
reasonably acceptable to the Company and Indemnitee. For purposes hereof,
counsel shall not be deemed to regularly represent any government or
governmental entity which may have commenced any action, suit, investigation or
proceeding or be asserting any claim against Indemnitee solely by reason of
having regularly represented any department, commission, authority, subdivision
or public benefit corporation of or created by such government or governmental
entity which is a party to such action, suit, investigation or proceeding or
before which it is being prosecuted or which is making any such claim. In the
event that the parties are unable to agree on the selection of Independent
Counsel, such counsel shall be selected by lot from among the Wilmington,
Delaware law firms having more than ten attorneys and having a rating of "av" or
better in the then current Martindale-Hubbell Law directory. Such selection
shall be made in the presence of Indemnitee (or Indemnitee's representative),
and the parties shall contact, in the order of their selection by lot, such law
firms, requesting each such firm to accept engagement to make the determination
required hereunder until one of such firms accepts such engagement. The fees and
expenses of counsel in connection with making any determination contemplated
hereunder shall be paid by the Company and, if requested by such counsel, the
Company shall give such counsel an appropriate written agreement with respect to
the payment of their fees and expenses and such other matters as may be
reasonably requested by counsel.
(e) In the event that a determination shall be made pursuant to (i)
Section 4(a) hereof that Indemnitee shall not be entitled to indemnification
hereunder in respect of any claim made by Indemnitee therefor by reason of
Indemnitee's failing to satisfy the applicable standard set forth in Section 2
hereof, or (ii) Section 5 hereof not to pay Indemnitee's expenses and costs, or
in the event such determination is not made, Indemnitee shall be entitled, at
Indemnitee's option, to a final judicial determination or determination in
arbitration of Indemnitee's entitlement to indemnification hereunder in respect
of such claim (including application of the
<PAGE>
standards set forth in Section 4(b) and (c) hereof to the making of such
determination) or Indemnitee's entitlement to such an advancement of expenses
and costs pursuant to Section 5 hereof. In the event Indemnitee seeks a judicial
determination, Indemnitee may initially seek such determination by commencing an
appropriate action in an appropriate court of the State of Delaware or any other
court of competent jurisdiction. In the event Indemnitee seeks a determination
in arbitration, such arbitration shall be conducted pursuant to the rules of the
American Arbitration Association and any such determination shall be made within
60 days of following the filing of the demand for arbitration. The Company shall
not raise as a defense in any such judicial determination or determination in
arbitration of the entitlement of Indemnitee to indemnification hereunder any
prior determination made pursuant to this Agreement of Indemnitee's right to
indemnification under this Agreement or advancement of expenses and costs on
such claim or any other claim, and for all purposes of this Agreement any such
judicial determination or determination in arbitration shall be made de novo and
without prejudice by reason of any such prior determination. The Company further
agrees to stipulate to any court or arbitrator in which such action or
arbitration shall have been commenced or appealed that the Company agrees to be
bound, for the purposes of such judicial determination or determination in
arbitration, by the presumption and burden of proof provisions set forth in
Section 4(c) hereof. If the court or arbitrator shall determine that Indemnitee
is entitled to indemnification or advancements hereunder as to any expenses
(including attorneys' fees) costs, judgments, penalties, fines and amounts paid
in settlement in respect of any claim, issue or matter involved in the action,
suit, investigation or proceeding in respect of which indemnification is sought
hereunder, the Company shall pay all expenses (including attorneys' fees) and
costs actually incurred by Indemnitee in connection with such judicial
determination or determination in arbitration (including, but not limited to,
any appellate proceedings).
(f) If, and to the extent it is finally determined hereunder that
Indemnitee is not entitled to indemnification, or is entitled only to partial
indemnification, Indemnitee agrees to reimburse the Company for all expenses and
costs advanced or prepaid hereunder, or the proper proportion thereof, as the
case may be, within 180 days after receipt of an itemized written statement
therefor from the Company, other than the expenses of (i) obtaining the judicial
determination referred to in Sections 4(e) and 5 hereof, (ii) cooperating with
the Company in making its determination, as set forth in Section 4(a) hereof, or
(iii) obtaining the opinion of Independent Counsel pursuant to Section 4(a)
hereof.
5. ADVANCEMENT OF EXPENSES AND COSTS. All reasonable expenses (including
---------------------------------
attorneys' fees) and costs incurred by Indemnitee in preparing to serve or
serving as a witness or in investigating, defending, or appealing any
threatened, pending or completed civil or criminal action, suit or proceeding,
administrative or investigative, described in Section 2 hereof and not excluded
by clauses (i) or (ii) of Section 2(d), or in connection with a judicial
determination or determination in arbitration pursuant to Section 4(e) or 5
hereof, shall be paid by the Company (in advance of the final disposition of
such action, suit or proceeding) at the request of Indemnitee within 20 days
after the receipt by the Company from the Indemnitee of a statement reasonably
evidencing the expenses and costs incurred by Indemnitee in connection
therewith, and averring that they do not relate to matters described in the
aforesaid clauses (i) or (ii) of Section 2(d), together with a written
undertaking by or on behalf of Indemnitee to repay such amount if it is
ultimately determined that Indemnitee is not entitled to be indemnified against
<PAGE>
such expenses and costs by the Company as provided by this Agreement, the
Company's Certificate of Incorporation or By-Laws, applicable law or otherwise.
Except when such advances relate to service as a witness only, the Board of
Directors shall make a determination in the specific case regarding Indemnitee's
entitlement to such advancements of expenses and costs within 14 days after
receipt of the aforesaid statement and undertaking. In the event the Board of
Directors determines not to so pay Indemnitee's expenses and costs, Indemnitee
shall be entitled, at Indemnitee's option, to a judicial determination or
determination in arbitration Indemnitee's right to such advancement of expenses
and costs as set forth in Section 4(e) hereof.
6. OTHER RIGHTS TO INDEMNIFICATION. The indemnification and advancement of
-------------------------------
expenses (including attorneys' fees) and costs provided by this Agreement shall
not be deemed exclusive of any other rights to which Indemnitee may now or in
the future be entitled under any provision of law, the Certificate of
Incorporation or any Bylaw of the Company or any other agreement or any vote of
stockholders or directors or otherwise, whether as to action in Indemnitee's
official capacity or in another capacity while occupying any of the positions or
having any of the relationships referred to in Section 2 of this Agreement;
provided, however, that Indemnitee hereby acknowledges and agrees that the
reorganization transactions and the distribution of shares of the Company's
common stock to the stockholders of Varian Associates, Inc. ("Varian") pursuant
to the Distribution Agreement by and among the Company, Varian and Varian
Semiconductor Equipment Associates, Inc. dated January 14, 1999 (the
"Distribution") does not constitute a transaction contemplated by Section 7(b)
of the Indemnity Agreement by and between Indemnitee and Varian dated
______________, 19__ and that such Section 7(b) does not apply to the
Distribution.
7. MERGER OR CONSOLIDATION OF THE COMPANY.
--------------------------------------
(a) In the event that the Company or a Securities Act Affiliate of the
Company shall be a constituent corporation in a consolidation or a merger,
whether or not the Company or such Securities Act Affiliate of the Company, as
the case may be, is the resulting or surviving corporation, Indemnitee shall
stand in the same position under this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to the Company if
its separate existence had continued or with respect to the Securities Act
Affiliate of the Company if such affiliation had continued.
(b) In addition to any other provision of this Agreement, the Company
hereby covenants and agrees that it will not consummate any consolidation,
merger or other business combination nor will it transfer 50% or more of its
assets (in one or a series of related transactions) unless the ultimate parent
of the other party to such transaction, whether or not in the event of a
business combination the Company is the surviving entity, shall have executed an
agreement stating that such party (i) shall use its best efforts to maintain any
director and officer insurance policy in an amount and with coverage no less
favorable than that which exists as of the date hereof, or the closest
practicable equivalent thereto, (ii) shall indemnify Indemnitee, except in the
circumstances set forth in Section 2(d)(i) and (ii) of this Agreement against
any expenses (including attorneys' fees), costs, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by Indemnitee in
connection with any suit or proceeding, whether civil, criminal, administrative
or investigative in nature, to which
<PAGE>
Indemnitee was or is made a party or witness or is threatened to be made a party
or witness, by reason of the fact that Indemnitee is or was a director, officer,
employee, trustee, partner, agent or fiduciary of the Company or is or was
serving at the request of the Company as a director, officer, employee, trustee,
partner, agent or fiduciary of an Affiliate of the Company, or by reason of
anything done or not done by Indemnitee in such capacity, and (iii) shall pay,
except in the circumstances set forth in Section 2(d)(i) and (ii) (in advance of
the final disposition of the action, suit or proceeding) all reasonable expenses
(including attorneys' fees) and costs incurred by Indemnitee in preparing to
serve or serving as a witness or in investigating, defending or appealing any
threatened, pending or completed civil or criminal action, suit or proceeding,
administrative or investigative, in each case within 20 days of the submission
by Indemnitee of a statement requesting the payment of such expenses and costs
and reasonably evidencing the expenses and costs incurred by Indemnitee in
connection therewith, and (iv) shall maintain irrevocable standby letters of
credit in the aggregate amount of $5 million for all directors and officers.
8. ATTORNEYS' FEES. In the event that Indemnitee is subject to or
---------------
intervenes in any legal action in which the validity or enforceability of this
Agreement is at issue or institutes any legal action to enforce Indemnitee's
rights under, or to recover damages for breach of, this Agreement (other than an
action referred to in Section 4(e) hereof), Indemnitee, if Indemnitee prevails
in whole or in part in such action, shall be entitled to recover from the
Company and shall be indemnified by the Company against, any actual expenses for
attorneys' fees and disbursements reasonably incurred by Indemnitee.
9. DURATION OF AGREEMENT; SUCCESSORS AND ASSIGNS.
---------------------------------------------
(a) This Agreement shall continue until and terminate upon the
later of: (i) ten years after Indemnitee has ceased to occupy any of the
positions or have any of the relationships referred to in Section 2 of this
Agreement or (ii) the termination of all pending or threatened actions, suits,
proceedings or investigations.
(b) This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of Indemnitee and
Indemnitee's spouse, heirs, devisees, executors and administrators.
10. SEVERABILITY. If any provision or provisions of this Agreement shall
------------
be held to be invalid, illegal or unenforceable for any reason whatsoever (i)
the validity, legality and enforceability of the remaining provisions of this
Agreement (including, without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable that are not themselves invalid, illegal
or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable.
11. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more
----------------------
<PAGE>
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute one and the same Agreement. Only one
such counterpart signed by the party against whom enforceability is sought needs
to be produced to evidence the existence of this Agreement.
12. HEADINGS. The headings of the paragraphs of this Agreement are
--------
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
13. USE OF CERTAIN TERMS. As used in this Agreement, the words "herein,"
--------------------
"hereof," and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular Section, paragraph, subparagraph
or other subdivision. For purposes of this Agreement, references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to any
employee benefit plan; and references to "serving at the request of the Company"
shall include any service as a director, officer, employee, trustee, partner,
agent or fiduciary of the Company which imposes duties on, or involves services
by, Indemnitee with respect to any employee benefit plan, its participants or
beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan Indemnitee shall be deemed to have acted in a manner
"not opposed to the best interests of the Company" as referred to in this
Agreement.
14. MODIFICATION AND WAIVER. No supplement, modification or amendment of
-----------------------
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
15. NOTICE BY INDEMNITEE. Indemnitee agrees to promptly notify the Company
--------------------
in writing upon being served with any summons, citation, subpoena, complaint,
indictment, information or other document relating to any matter which maybe
subject to indemnification covered hereunder, either civil, criminal or
investigative.
16. NOTICES. All notices, requests, demand and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered by hand and receipted for by the party to whom said notice or other
communication shall have been directed or if (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed:
(a) If to Indemnitee, at the address indicated on the signature
page hereof.
(b) If to the Company to:
Varian Semiconductor Equipment Associates, Inc.
35 Dory Road
Gloucester, MA 01930
Attn: Vice President and General Counsel
<PAGE>
or to such other address as either may subsequently furnish to the other in
writing.
17. GOVERNING LAW. The parties hereto agree that this Agreement shall be
-------------
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware, without regard to the conflicts of law principles thereof.
18. SUBROGATION. In the event of any payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
VARIAN SEMICONDUCTOR EQUIPMENT INDEMNITEE
ASSOCIATES, INC.
- ----------------------------------- -----------------------------------
[Name] [Name]
[Title] [Address]
ATTEST:
- -----------------------------------
[Name]
[Title]
<PAGE>
EXHIBIT 10.12
SUPPLEMENTAL RETIREMENT PLAN
OF VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
(As Adopted Effective At the Spinoff Date)
SECTION 1: ESTABLISHMENT AND PURPOSE OF THE PLAN
The Plan was established by the Company effective as of the "Spinoff Date,"
which is the effective date of the establishment of the Company as a public
corporation separate from Varian Associates, Inc. The purpose of the Plan is to
provide deferred compensation consisting of (a) allocations of Matching
Contributions that exceed the amounts that the Retirement Plan formula and the
Dollar Limitations permit to be allocated under the Retirement Plan and (b)
Profit Sharing Contributions that exceed the amounts that the Dollar Limitations
permit to be allocated under the Retirement Plan.
Capitalized terms used in the Plan are defined herein or, if not, are
defined in the Retirement Plan.
SECTION 2: ELIGIBILITY AND PARTICIPATION
Participation in the Plan shall be limited to:
(a) Officers of the Company; and
(b) Any other participant in the Retirement Plan who is designated by the
Committee.
SECTION 3: RESERVE ACCOUNTS AND CREDITS
(a) Reserve Account. The Company shall establish on its books a special
----------------
unfunded Reserve Account for each Participant. As of each December 31, the
Company shall credit interest on the balance in each Reserve Account (not
including any amounts credited under Subsections (b) and (c) below for the
calendar year then ending). The interest credited to the Reserve Account shall
be at a rate equal to the long-term applicable federal rate for December, plus
two percentage points.
(b) Matching Contributions. As of each December 31, for each Participant
-----------------------
whose contributions to the Retirement Plan for the calendar year reach
-1-
<PAGE>
the limitation in effect under Code section 402(g) (which limitation is $10,000
for 1999), the Company shall credit to a Participant's Reserve Account an amount
determined as follows:
(i) First, the hypothetical amount of the Participant's Matching
Contribution for the Plan Year ended immediately prior to such December 31
crediting date shall be calculated, based on the assumptions (A) that the
Dollar Limitations do not apply and (B) that the Matching Contribution
formula equals 9.5% of the Participant's Eligible Earnings;
(ii) Second, the amount calculated under Paragraph (i) above shall be
reduced (but not below zero) by the actual amount of the Participant's
Matching Contribution for the Plan Year; and
(iii) The remainder (if any) shall be the amount credited to the
Participant's Reserve Account under this Subsection (b).
(c) Profit-Sharing Contributions. As of the close of each Plan Year for
-----------------------------
which the Company makes a Profit-Sharing Contribution under the Retirement Plan,
the Company shall credit to a Participant's Reserve Account an amount determined
as follows:
(i) First, the hypothetical amount of the Participant's share of the
Profit-Sharing Contribution shall be calculated, based on the assumption
that the Dollar Limitations do not apply;
(ii) Second, the amount calculated under Paragraph (i) above shall be
reduced (but not below zero) by the actual amount of the Participant's
share of the Profit-Sharing Contribution; and
(iii) The remainder (if any) shall be the amount credited to the
Participant's Reserve Account under this Subsection (c).
(d) Vesting. A Participant's Reserve Account shall become vested and
-------
nonforfeitable at the same time and to the same extent as the Participant
becomes vested in his or her Company contributions accounts under the Retirement
Plan. A Participant's Reserve Account shall be divided into subaccounts to the
extent necessary to allocate interest credits properly between vested and
nonvested portions of the Participant's Plan benefit.
(e) Effect of Termination of Employment on Reserve Account Crediting. If a
----------------------------------------------------------------
Participant is otherwise entitled to have an amount credited to his or her
Reserve Account under Subsection (a), (b) or (c), but the Participant's
-2-
<PAGE>
employment with the Company and its subsidiaries terminates before the crediting
date, such amount shall nevertheless be credited to his or her Reserve Account
unless, before that crediting date, the Participant's entire vested Reserve
Account has been distributed.
SECTION 4: DISTRIBUTIONS
(a) In General. Following the termination of a Participant's employment
----------
with the Company and its subsidiaries, the Company shall pay to the Participant
the vested balance credited to his or her Reserve Account. Payment shall be
made in the form of cash installments, payable quarterly, over a period of 15
years. The amount of any installment payment to be distributed from a Reserve
Account shall be determined by dividing the vested balance remaining in such
Reserve Account by the number of installments then remaining to be distributed.
(f) Accelerated Payment in Case of Disability or Emergency. In the event
------------------------------------------------------
of a Participant's Total Disability or an Unforeseeable Emergency, upon
application by the Participant, the Committee may determine in its sole
discretion that distribution of all or a portion of the Participant's vested
Reserve Account shall be made in a different form or on an earlier date than
provided for in Subsection (a) (including, in the case of Unforeseeable
Emergency, a date prior to the Participant's termination of employment).
Distributions on account of Total Disability or an Unforeseeable Emergency shall
be permitted only to the extent reasonably needed to satisfy the Participant's
need.
(g) Early Distribution With Penalty. Upon application by a Participant,
-------------------------------
the Committee may determine in its sole discretion that distribution of all or a
portion of the Participant's vested Reserve Account shall be made in a different
form or on an earlier date than provided for in Subsection (a) (even in the
absence of a Total Disability or Unforeseeable Emergency, and including a date
prior to the Participant's termination of employment). All distributions under
this Subsection shall be reduced by a penalty equal to six percent of the amount
otherwise distributable, which penalty shall be forfeited to the Company.
(h) Death of the Participant. In the event of a Participant's death
------------------------
before the entire vested Reserve Account has been distributed to him or her, the
unpaid vested balance remaining in the Participant's Reserve Account shall be
paid to his or her beneficiary or beneficiaries under the Retirement Plan, at
such time(s) and in such form as the Committee shall determine in its sole
discretion.
SECTION 5: NO FUNDING
The Plan shall be unfunded and shall represent an unsecured obligation of
-3-
<PAGE>
the Company. Benefits hereunder shall be paid only from the general assets of
the Company, and the Participants shall have no rights to any segregated funds
or property of the Company.
SECTION 6: ADMINISTRATION
The Plan shall be administered by the Committee (or its delegate). The
Committee shall make such rules, interpretations, and computations as it may
deem appropriate. Any decision of the Committee with respect to the Plan,
including (without limitation) any determination of eligibility to participate
in the Plan and any calculation of benefits hereunder, shall be conclusive and
binding on all persons.
SECTION 7: CLAIMS AND REVIEW PROCEDURES
(a) Application for Benefits. Any application for benefits under the Plan
-------------------------
shall be submitted to the Committee at the Company's principal office. Such
application shall be in writing and on the prescribed form, if any, and shall be
signed by the applicant.
(b) Denial of Applications. In the event that any application for
-----------------------
benefits is denied in whole or in part, the Committee shall notify the applicant
in writing of the right to a review of the denial. Such written notice shall set
forth, in a manner calculated to be understood by the applicant, specific
reasons for the denial, specific references to the Plan provisions on which the
denial was based, a description of any information or material necessary to
perfect the application, an explanation of why such material is necessary, and
an explanation of the Plan's review procedure. Such written notice shall be
given to the applicant within 90 days after the Committee receives the
application, unless special circumstances require an extension of time for
processing the application. In no event shall such an extension exceed a period
of 90 days from the end of the initial 90-day period. If such an extension is
required, written notice thereof shall be furnished to the applicant before the
end of the initial 90-day period. Such notice shall indicate the special
circumstances requiring an extension of time and the date by which the Committee
expects to render a decision. If written notice is not given to the applicant
within the period prescribed by this Section 7(b), the application shall be
deemed to have been denied for purposes of Section 7(c) upon the expiration of
such period.
(c) Request for Review. Any person whose application for benefits is
-------------------
denied in whole or in part (or such person's duly authorized representative) may
appeal the denial by submitting to the Committee a request for a review of such
application within 90 days after receiving written notice of denial. The
Committee
-4-
<PAGE>
shall give the applicant or such representative an opportunity to review
pertinent documents (except legally privileged materials) in preparing such
request for review and to submit issues and comments in writing. The request for
review shall be in writing and shall be addressed to the Committee at the
Company's principal office. The request for review shall set forth all of the
ground on which it is based, all facts in support of the request, and any other
matters which the applicant deems pertinent. The Committee may require the
applicant to submit such additional facts, documents, or other material as it
may deem necessary or appropriate in making its review.
(d) Decision on Review. The Committee shall act upon each request for
-------------------
review within 60 days after receipt thereof, unless special circumstances
require an extension of time for processing, but in no event shall the decision
on review be rendered more that 120 days after the Committee receives the
request for review. If such an extension is required, written notice thereof
shall be furnished to the applicant before the end of the initial 60-day period.
The Committee shall give prompt, written notice of its decision to the applicant
and to the Company. In the event that the Committee confirms the denial of the
application for benefits in whole or in part, such notice shall set forth, in a
manner calculated to be understood by the applicant, the specific reasons for
such denial and specific references to the Plan provisions on which the decision
is based. To the extent that the Committee overrules the denial of the
application for benefits, such benefits shall be paid to the applicant.
(e) Rules and Procedures. The Committee shall adopt such rules and
---------------------
procedures, consistent with ERISA and the Plan, as it deems necessary or
appropriate in carrying out its responsibilities under this Section 7.
(f) Exhaustion of Administrative Remedies. No legal or equitable action
--------------------------------------
for benefits under the Plan shall be brought unless and until the claimant (i)
has submitted a written application for benefits in accordance with Section
7(a), (ii) has been notified that the application is denied, (iii) has filed a
written request for a review of the application in accordance with Section 7(c),
and (iv) has been notified in writing that the Committee has affirmed the denial
of the application; provided, however, that an action may be brought after the
Committee has failed to act on the claim within the time prescribed in Section
7(b) and Section 7(d), respectively.
SECTION 8: AMENDMENT AND TERMINATION
The Company expects to continue the Plan indefinitely. Future conditions,
however, cannot be foreseen, and the Company shall have the authority to amend
or terminate the Plan at any time. The Company shall also have the authority to
-5-
<PAGE>
distribute all or a portion of any Participant's Reserve Account at any time,
regardless of whether the Plan is then being terminated. In the event of an
amendment or termination of the Plan, the amount of a Participant's benefits
hereunder shall not be less than the amount to which the Participant would have
been entitled if his or her employment had terminated immediately prior to such
amendment or termination.
SECTION 9: EMPLOYMENT RIGHTS
Nothing in the Plan shall be deemed to give any person a right to remain in
the employ of the Company or of any of its subsidiaries. The Company and its
subsidiaries reserve the right to terminate any person's employment, with or
without cause.
SECTION 10: NO ASSIGNMENT
The rights of any person to payments or benefits under the Plan shall not
be transferable nor be made subject to option or assignment, either by voluntary
or involuntary assignment or by operation of law, including (without limitation)
bankruptcy, garnishment, attachment, or other creditor's process. Any act in
violation of this Section shall be void.
SECTION 11: APPLICABLE LAW
The validity, interpretation, construction, and performance of the Plan
shall be governed by ERISA, and by the laws of the State of Massachusetts to the
extent that they have not been preempted by ERISA.
SECTION 12: DEFINITIONS
(a) "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code shall include such section, any
valid regulation promulgated thereunder, and any comparable provision of any
future legislation amending, supplementing or superseding such section.
(b) "Committee" means the Compensation Committee of the Company's Board
---------
of Directors.
(c) "Company" means Varian Semiconductor Equipment Associates, Inc., a
-------
Delaware corporation.
(d) "Compensation Ceiling" means the limitation described in section
--------------------
401(a)(17) of the Code, adjusted as prescribed by the Code. The Compensation
Ceiling for plan years beginning in 1999 is $160,000.
-6-
<PAGE>
(e) "Dollar Limitations" means (i) the Compensation Ceiling and (ii) the
------------------
limitation on annual additions described in section 415(c)(1) of the Code,
adjusted in each case as prescribed by the Code.
(f) "Eligible Earnings" shall have the meaning given to such term in the
-----------------
Retirement Plan, except that Eligible Earnings for purposes of this Plan shall
not be subject to the Compensation Ceiling.
(g) "ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended. Reference to a specific section of ERISA shall include such section,
any valid regulation promulgated thereunder, and any comparable provision of any
future legislation amending, supplementing or superseding such section.
(h) "Participant" means an individual who is eligible to participate in
-----------
the Plan pursuant to Section 2 above and for whose benefit an amount is credited
to a Reserve Account pursuant to Section 3 above.
(i) "Plan" means this Supplemental Retirement Plan of Varian Semiconductor
----
Equipment Associates, Inc., as amended from time to time.
(j) "Plan Year" means the Retirement Plan's Plan Year.
---------
(k) "Reserve Account" means the unfunded bookkeeping account described in
---------------
Section 3(a).
(l) "Retirement Plan" means the Varian Semiconductor Equipment Associates,
---------------
Inc. Retirement Plan, as amended from time to time.
(m) "Spinoff Date" means the effective date of the establishment of the
------------
Company as a public corporation separate from Varian Associates, Inc.
(n) "Total Disability" means the inability of the Participant to engage in
----------------
any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to continue for life and that
has actually continued for at least six months. Whether a Participant has
incurred a Total Disability shall be determined by the Committee, based upon
medical evidence.
(o) "Unforeseeable Emergency" means a severe financial hardship to the
-----------------------
Participant resulting from a sudden and unexpected illness or accident of the
Eligible Participant or of a dependent of the Participant, from a loss of the
Participant's property due to casualty or from other similar extraordinary and
-7-
<PAGE>
unforeseeable circumstances arising as a result of events beyond the control of
the Participant. A hardship shall not constitute an Unforeseeable Emergency
under the Plan to the extent that it is or may be relieved:
(i) Through reimbursement or compensation, by insurance or
otherwise;
(ii) By liquidation of the Participant's assets, to the extent that
the liquidation of such assets would not itself cause severe financial
hardship; or
(iii) By discontinuing deferrals under this Plan or under any other
plan of the Company as soon as permissible.
An Unforeseeable Emergency under the Plan shall in no event include the need to
send a child to college or the desire to purchase a home.
-8-
<PAGE>
EXHIBIT 21
----------
Subsidiaries of Varian Semiconductor Equipment Associates, Inc.
<TABLE>
<CAPTION>
Country of
Subsidiaries Organization
- ------------ ------------
<S> <C>
Varian Semiconductor Equipment Associates Asia, Ltd. USA, DE
Varian Japan Holdings Ltd.* USA, DE
Varian Semiconductor Equipment Associates Pacific, Inc. USA, DE
Varian Semiconductor Equipment Associates China, Ltd. USA, DE
Varian Semiconductor Equipment Associates International, Inc. USA, DE
Varian Semiconductor Equipment Associates S.A.S. France
Varian Semiconductor Equipment Associates GmbH Germany
Varian Semiconductor Equipment Associates Italia S.r.l. Italy
Varian Semiconductor Equipment Associates Japan K.K. Japan, and USA, DE
Varian Korea, Ltd. Korea
Varian Semiconductor Equipment Associates Europe B.V. Netherlands
Varian Semiconductor Equipment Associates UK Limited United Kingdom
</TABLE>
________________________________
* To be merged or dissolved
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
STATEMENT OF EARNINGS AND COMBINED BALANCE SHEET FOR THE SEMICONDUCTOR
EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 61,813
<ALLOWANCES> 0
<INVENTORY> 56,402
<CURRENT-ASSETS> 156,778
<PP&E> 82,464
<DEPRECIATION> 45,862
<TOTAL-ASSETS> 216,578
<CURRENT-LIABILITIES> 104,620
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 102,971
<TOTAL-LIABILITY-AND-EQUITY> 216,578
<SALES> 47,355
<TOTAL-REVENUES> 47,355
<CGS> 35,195
<TOTAL-COSTS> 57,690
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,335)
<INCOME-TAX> (3,638)
<INCOME-CONTINUING> (6,697)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,697)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
