<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Novellus Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
LOGO
NOVELLUS SYSTEMS, INC.
April 16, 1998
To the Shareholders of
NOVELLUS SYSTEMS, INC.
You are cordially invited to attend the Annual Meeting of Shareholders of
Novellus Systems, Inc. (the "Company") on May 15, 1998 at 8:00 a.m., California
time. The Annual Meeting will be held at the Company's principal executive
offices, 3970 North First Street, San Jose, California 95134.
A description of the business to be conducted at the Annual Meeting is set
forth in the attached Notice of Annual Meeting and Proxy Statement. Also
enclosed is a copy of our Annual Report to Shareholders.
Whether or not you plan to attend the Annual Meeting, please mark, sign,
date and return the enclosed proxy card promptly in the accompanying envelope.
If you attend the Annual Meeting and wish to change your proxy vote, you may do
so simply by voting in person at the Annual Meeting.
RICHARD S. HILL
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
NOVELLUS SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 15, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Novellus
Systems, Inc. (the "Company") will be held on May 15, 1998 at 8:00 a.m.,
California time, at the Company's principal executive offices, 3970 North First
Street, San Jose, California 95134, for the following purposes:
1. To elect seven directors of the Company to serve for the ensuing year
and until their successors are elected and qualified.
2. Approve an amendment to the Company's Bylaws to change the range of the
authorized number of directors from a minimum of four and maximum of
seven to a minimum of six and a maximum of eleven.
3. To ratify and approve an amendment to the Company's Amended and Restated
1992 Stock Option Plan to increase the number of shares reserved for
issuance thereunder from 6,680,000 shares to 7,780,000 shares.
4. To ratify and approve an amendment to the Company's Amended and Restated
1992 Employee Stock Purchase Plan to increase the number of shares
reserved for issuance thereunder from 700,000 shares to 950,000 shares.
5. To ratify and approve the Company's 1998 Senior Executive Bonus Plan.
6. To ratify and approve the appointment of Ernst & Young LLP as the
independent auditors for the Company for the fiscal year ending December
31, 1998.
7. To transact such other business as may properly come before the meeting.
The foregoing items of business, including the nominees for directors, are
more fully described in the Proxy Statement which is attached and made a part
hereof.
Shareholders of record at the close of business on March 31, 1998 are
entitled to vote at the Annual Meeting.
FOR THE BOARD OF DIRECTORS
ROBERT H. SMITH
Secretary
San Jose, California
April 16, 1998
YOUR VOTE IS IMPORTANT
TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK, SIGN, DATE
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ACCOMPANYING
ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU RETURNED
A PROXY.
<PAGE> 4
NOVELLUS SYSTEMS, INC.
PROXY STATEMENT
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Novellus Systems, Inc. (the "Company") for use at the Annual Meeting of
Shareholders to be held on May 15, 1998 at 8:00 a.m., California time (the
"Annual Meeting"), or at any adjournment or postponement thereof. The Annual
Meeting will be held at the Company's principal executive offices, 3970 North
First Street, San Jose, California 95134.
This Proxy Statement, the form of proxy, and the Company's 1997 Annual
Report are first being mailed to shareholders on or about April 16, 1998.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (to the
attention of Robert H. Smith, Secretary) a written notice of revocation or a
duly executed proxy bearing a later date or by attending the meeting and voting
in person.
RECORD DATE, SHARE OWNERSHIP AND QUORUM
Shareholders of record at the close of business on March 31, 1998 are
entitled to vote at the Annual Meeting. At the record date, [ ] shares
of the Company's Common Stock, no par value (the "Common Stock") were issued and
outstanding. The presence of a majority of these shares of Common Stock will
constitute a quorum for the transaction of business at the Annual Meeting.
VOTING AND SOLICITATION
Each share outstanding on the record date is entitled to one vote. Under
the cumulative voting provisions in the Company's Bylaws, each shareholder may
cast for a single nominee for director, or distribute among up to six nominees,
a number of votes equal to six multiplied by the number of shares held by such
shareholder. However, cumulative voting will not be available unless, at the
meeting, at least one shareholder has given notice of his intention to cumulate
votes prior to the voting, and will apply only to those candidates whose names
have been placed in nomination prior to the voting.
The costs of soliciting proxies will be borne by the Company. Proxies may
be solicited by certain of the Company's directors, officers and regular
employees, without additional compensation, in person or by telephone or
telegram.
An automated system administered by the Company's transfer agent will
tabulate votes cast by proxy at the Annual Meeting and an officer of the Company
will tabulate votes cast in person. Abstentions and broker non-votes are each
included in the determination of the number of shares present and voting, and
each is tabulated separately. In determining whether a proposal has been
approved or a nominee has been elected as a director, abstentions are counted as
votes against a proposal or nominee and broker non-votes are not counted as
votes for or against a proposal or nominee. For Proposal No. 2 broker non-votes
are counted as votes against the proposal because Proposal No. 2 must be
approved by the affirmative vote of a majority of the outstanding shares of the
Company's Common Stock entitled to vote.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company that are intended to be presented
at the Company's Annual Meeting of Shareholders to be held in 1999 must be
received by the Company no later than December 17, 1998 to be included in the
proxy statement and form of proxy relating to that meeting.
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<PAGE> 5
PROPOSAL NO. 1
ELECTION OF DIRECTORS
As set by the Board of Directors (the "Board" or "Board of Directors")
pursuant to the Bylaws of the Company, the authorized number of directors is
currently set at seven. Seven directors will be elected at the Annual Meeting.
The seven nominees receiving the highest number of affirmative votes will be
elected as directors. Unless otherwise instructed, the proxy holders will vote
the proxies they receive for the six nominees of the Board of Directors named
below. In the event that any nominee of the Board is unable or declines to serve
as a director at the time of the Annual Meeting, the proxies will be voted for
any nominee designated by the present Board of Directors to fill the vacancy. It
is not expected that any nominee will be unable or will decline to serve as a
director. In the event that additional persons are nominated for election as
directors, the proxy holders intend to vote all proxies received by them in such
a manner in accordance with cumulative voting as will assure the election of as
many of the nominees listed below as possible, with any required selection among
such nominees to be determined by the proxy holders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES LISTED BELOW.
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------- --------
<S> <C> <C> <C>
Richard S. Hill...................... 46 Chairman of the Board and Chief Executive Officer 1993
of the Company
D. James Guzy........................ 62 Chairman, Chief Executive Officer and President 1990
of SRC Computer Corporation, a computer hardware
development company
J. David Litster..................... 59 Vice President for Research and Dean for Graduate 1998
Education at the Massachusetts Institute of
Technology
Tom Long............................. 66 Director of Programs, Planar Advance, Inc., a 1995
flat panel company engaged in the electronics
industry
Glen Possley......................... 57 Partner at International Technology Ventures and 1991
N-Able Group, a high-tech consulting firm
Robert H. Smith...................... 61 Executive Vice President, Finance and 1995
Administration, Chief Financial Officer and
Secretary of the Company
William R. Spivey.................... 51 Group President, Network Products Group of Lucent --
Technologies
</TABLE>
The term of office of each person elected as a director will continue until
the next Annual Meeting of Shareholders or until his successor has been elected
and qualified. The Company's Bylaws provide that no person may be elected or run
for reelection to the Board of Directors after having attained the age of 70
years. There is no family relationship between any director and any other
director or executive officer of the Company.
MR. HILL has been the Chief Executive Officer and member of the Board of
Directors of the Company since December 1993. In May 1996 he was appointed
Chairman of the Board of Directors. From 1981 to 1993, Mr. Hill was employed by
Tektronix, Inc., an electronics company, where he held positions such as
President of the Tektronix Development Company, Vice President of the Test &
Measurement Group, and President of Tektronix Components Corporation. Prior to
joining Tektronix, Mr. Hill held engineering management positions at General
Electric, Motorola and Hughes Aircraft Company. Since October 1997, Mr. Hill has
been a member of the Board of Directors of Speedfam International, Inc.
MR. GUZY joined the Board of Directors in January 1990. Since June 1997,
Mr. Guzy has been the Chairman, Chief Executive Officer and President of SRC
Computer Corporation. From 1969 to 1997 he was
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the President of the Arbor Company, a limited partnership engaged in the
electronics and computer industries. Mr. Guzy is also a director of Intel
Corporation, Cirrus Logic, Inc., Micro Component Technology, Inc., New York
Venture Fund, Venture Income Plus Fund, Venture Muni Fund, Retirement Planning
Funds and Alliance Capital Management Technology Fund.
DR. LITSTER joined the Board of Directors in February 1998. Dr. Litster is
Vice President for Research and Dean for Graduate Education at the Massachusetts
Institute of Technology ("MIT"). He was the director of the MIT Center for
Materials Science and Engineering from 1983 through 1988 and director of the
Francis Bitter National Magnet Laboratory at MIT from 1988 through 1992. Dr.
Litster is a fellow of the American Physical Society, the American Academy of
Arts and Sciences and the American Association for the Advancement of Science.
In 1993 Dr. Litster was awarded the Irving Langmuir Prize by the American
Physical Society. Dr. Litster holds a bachelor's degree in engineering from
McMaster University in Hamilton Ontario, Canada, and a Ph.D. in Physics from
MIT.
MR. LONG joined the Board of Directors in May 1995. Mr. Long currently is
the Director of Programs for Planar Advance, Inc. In this position he is
responsible for the management of product development. From August 1991 to
October 1994 Mr. Long retired from business to pursue personal goals. Prior to
August 1991 Mr. Long served as the Vice President and Chief Technical Officer of
Tektronix, Inc. for seven years.
DR. POSSLEY joined the Board of Directors in July 1991. His is currently a
partner at International Technology Ventures and N-Able Group. From June 1994 to
December 1997 Dr. Possley was President of SubMicron Technology, Inc., a
semiconductor company. From April 1992 to May 1994 he was Senior Vice President
of Manufacturing at Ramtron International, a semiconductor company. From January
1991 to March 1992, he was Vice President, Operations at Sandisk Technology, a
manufacturer of solid state memory systems. From January 1986 to December 1990,
Dr. Possley was Senior Vice President of Manufacturing for Philips, a
semiconductor company. Prior to joining Philips, he was Vice President, Wafer
Fabrication and Research and Development at United Technologies Mostek, and held
engineering positions with Texas Instruments, Inc., Fairchild Camera and
Instrument Corporation and the semiconductor division of General Electric
Company.
MR. SMITH joined the Board of Directors in May 1995. In October 1996 Mr.
Smith became the Executive Vice President, Finance and Administration and Chief
Financial Officer and Secretary of the Company. Mr. Smith had been an industry
consultant since 1990. From June of 1994 through September 1994 Mr. Smith was
the Chairman of the Board of Directors of Micro Component Technology, Inc., a
semiconductor test equipment manufacturer. From 1988 through 1990, Mr. Smith was
the President of Maxwell Graphics, Inc., a printing company. From 1982 through
1988, Mr. Smith held Chief Financial Officer positions with Maxwell
Communications of North America Corporation and R.R. Donnelley and Sons,
printing companies. Mr. Smith also serves on the Board of Directors of Cirrus
Logic, Inc.
MR. SPIVEY has been nominated to fill the vacancy created by the retirement
of Mr. Joseph Van Poppelen who is retiring from the Board of Directors following
the Annual Meeting. He is currently the Group President, Network Products Group
of Lucent Technologies. From 1994 to 1997 he was the Vice President, Systems &
Components Group of AT&T Corporation. For the four years prior to that he was
the President of Tektronix Development Company and Vice President of Business
Alliances of Tektronix, Inc. Mr. Spivey is a member of the Board of Directors of
the Computer and Business Equipment Manufacturers Association.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held nine meetings during 1997.
During the last year, no incumbent director attended fewer than 75% of the
meetings of the Board of Directors and its committees on which he served that
were held during the period in which he was a director. The Board of Directors
has an Audit Committee, Compensation Committee, Stock Option Committee and
Technology Committee. It does not have a nominating committee or a committee
performing the functions of a nominating committee. Although there are no formal
procedures for shareholders to recommend nominations, the Board will consider
shareholder recommendations. Such recommendations should be addressed to Robert
H. Smith, the Company's Secretary, at the Company's principal executive offices.
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<PAGE> 7
During 1997, Messrs. Guzy and Joseph Van Poppelen (who is retiring from the
Board of Directors at this Annual Meeting) served on the Audit Committee. The
Audit Committee held four meetings during 1997. The Audit Committee recommends
the engagement of the Company's independent auditors and is primarily
responsible for approving the services performed by the Company's independent
auditors and for reviewing and evaluating the Company's accounting principles
and its system of internal accounting controls.
During 1997, Messrs. Guzy, Possley and Van Poppelen served on the
Compensation Committee. The Compensation Committee held two meetings during
1997. The Compensation Committee's principal functions are to review and approve
the Company's executive compensation policy.
During 1997, Messrs. Guzy, Possley, and Van Poppelen served on the Stock
Option Committee. The Stock Option Committee held two meetings during 1997. The
Stock Option Committee administers the issuance of stock and the grant of
options to purchase stock of the Company pursuant to the Company's stock plans
and, in accordance with the terms of the respective stock plans, determines the
terms and conditions of such issuances and grants.
During 1997, Mr. Long and Dr. Possley served on the Technology Committee.
The Technology Committee held one meeting during the 1997. The Technology
Committee reviews, guides and approves the Company's technology plans.
Directors are reimbursed for out-of-pocket travel expenses associated with
their attendance at meetings of the Board. In addition, during 1997, Messrs.
Guzy, Van Poppelen and Long and Dr. Possley received a fee of $5,000 each per
quarter, $1,000 for each Board meeting attended and $500 for each Committee
meeting attended which was not held on the same day as a Board meeting.
PROPOSAL NO. 2
APPROVAL OF AN AMENDMENT TO THE COMPANY'S BYLAWS
It is proposed that Article II Section 2.2 of the Company's Bylaws be
amended to provide that the Company's Board of Directors would consist of a
range of between six and eleven members. Prior to this amendment, Section 2.2 of
the Company's Bylaws provided that the Board of Directors consisted of between
four and seven members.
The proposed amendment to Article II Section 2.2 of the Company's Bylaws
reads as follows:
"The number of directors of the corporation shall not be less than six (6)
nor more than eleven (11) until changed by amendment of the Articles of
Incorporation or by a Bylaw amending this Section 2.2 duly adopted by the
vote or written consent of holders of a majority of the outstanding shares.
The exact number of directors may be fixed from time to time, within the
limits specified in the Articles of Incorporation or in this Section 2.2,
by (i) a bylaw or amendment thereof duly adopted by (a) the vote of a
majority of the shares entitled to vote represented at a duly held meeting
at which a quorum is present, or (b) the written consent of the holders of
a majority of the outstanding shares entitled to vote, or (c) the Board of
Directors, or (ii) resolution of the Board of Directors.
Subject to the foregoing provisions for changing the number of directors,
the number of directors of the corporation has been fixed at seven (7)."
The proposed amendment to Article II Section 2.2 of the Company's Bylaws is
therefore being submitted to the shareholders for their consideration and
approval. The exact number of directors within the range can be set by the
shareholders or by the Board acting alone. Under California law a corporation's
bylaws may provide for a range of the number of directors with the maximum
number being no more than one less than twice the minimum number in the range.
For this reason the proposed range is a maximum of eleven and a minimum of six.
This amendment would give the Board the flexibility to add as many as four
new members. The Company believes this flexibility will permit increased
diversity, depth of experience and expertise in the Board membership.
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<PAGE> 8
The Board and management of the Company have no purposes other than those
described in creating the opportunity for additional directors. The Board and
management have no current knowledge of and do not anticipate at this time any
attempt to acquire control of the Company, nor do they believe that the proposed
increase in the size of the Board would have a material effect in discouraging
or preventing any such effort.
A vote of a majority of the outstanding shares of the Company entitled to
vote as of the record date is required for adoption of Proposal No. 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND
ARTICLE II SECTION 2.2 OF THE COMPANY'S BYLAWS.
PROPOSAL NO. 3
RATIFICATION AND APPROVAL OF AN AMENDMENT TO
THE COMPANY'S 1992 STOCK OPTION PLAN
The Company's shareholders are being asked to act upon a proposal to
approve the action of the Board of Directors amending the Company's Amended and
Restated 1992 Stock Option Plan (the "Option Plan"). Ratification and approval
of the proposal requires the affirmative vote of a majority of the shares of
Common Stock voting on the proposal in person or by proxy.
The Board of Directors amended the Option Plan in March 1998, subject to
shareholder approval, to increase the number of shares reserved for issuance
under the Option Plan from 6,680,000 shares to 7,780,000 shares.
The Board of Directors believes that the attraction and retention of high
quality personnel are essential to the Company's continued growth and success
and that an incentive plan such as the Option Plan is necessary for the Company
to remain competitive in its compensation practices. In the absence of
shareholder approval of this increase in the available shares, no additional
shares will be available for future option grants under the Option Plan, except
to the extent that shares become available upon termination or cancellation of
outstanding options.
AMENDED PLAN BENEFITS. As of the date of this Proxy Statement, no
non-employee directors ("Outside Directors") and no associates of any director,
executive officer or nominee for director has been granted any options subject
to shareholder approval of the proposed amendment. The benefits to be received
pursuant to the Option Plan amendment by the Company's directors, executive
officers and employees are not determinable at this time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION AND APPROVAL OF
THE AMENDMENT TO THE
COMPANY'S 1992 AMENDED AND RESTATED STOCK OPTION PLAN.
GENERAL DESCRIPTION OF THE OPTION PLAN
The following summary of the Option Plan, including the proposed amendment,
is subject in its entirety to the specific language of the Option Plan, a copy
of which is available to any shareholder upon request.
The Option Plan was adopted by the Board of Directors in April 1992 and
approved by the shareholders in May 1992. The purpose of the Option Plan is to
attract and retain qualified personnel and to provide additional incentives to
the Company's employees, officers, directors and consultants. In November 1993,
the Board of Directors approved, and in May 1994 the shareholders ratified, an
amendment to the Option Plan to increase the number of shares available for
grant thereunder from 550,000 shares to 1,300,000 shares. In January 1995, the
Board of Directors approved, and in May 1995 the shareholders ratified, an
amendment to the Option Plan to increase the number of shares available for
grant thereunder from 1,300,000 shares to 2,000,000 shares. In March 1996, the
Board of Directors approved, and in May 1996 the shareholders ratified, an
amendment to the Option Plan to increase the number of shares available for
grant thereunder from 2,000,000 shares to 2,680,000 shares. The Board of
Directors and shareholders also adopted an amendment allowing for Restricted
Shares and Bonuses. In April 1997, the Board of Directors approved, and in May
1997
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<PAGE> 9
the shareholders ratified, an amendment to the Option Plan to increase the
number of shares available for grant thereunder from 2,680,000 to 3,340,000. In
September 1997, the Company declared a two-for-one split (the "Stock Split") of
its Common Stock, thus increasing the number of shares reserved for issuance
under the Option Plan to 6,680,000 shares. In March 1998, the Board of Directors
approved an amendment to the Option Plan to increase the number of shares
available for grant thereunder from 6,680,000 to 7,780,000. As of March 31,
1998, options to purchase [ ] shares had been granted under the Option
Plan of which options to purchase [ ] shares were outstanding.
The Option Plan provides for the grant to employees (including officers and
employee directors) of "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, (the "Code") and for the
grant to employees, non-employee directors ("Outside Directors") and consultants
of nonstatutory stock options. As of March 31, 1998, the number of executive
officers, employees, consultants and directors of the Company and its
subsidiaries that were eligible to receive grants under the Option Plan was
approximately 1,750 persons. The Company cannot grant an incentive stock option
if as a result of the grant the optionee would have the right in any calendar
year to exercise for the first time one or more incentive stock options for
shares having an aggregate fair market value (under all plans of the Company and
determined for each share as of the date the option to purchase the share was
granted) in excess of $100,000.
The Option Plan currently is administered by the Stock Option Committee of
the Board of Directors (the "Stock Option Committee"), which, subject to the
terms of the Option Plan, determines the terms of the options granted under the
Option Plan, including the exercise price, the number of shares subject to the
option and exercisability. During any taxable year, an employee may be granted
options to purchase up to 200,000 shares and newly hired employees may be
granted options to purchase up to 400,000 shares. Generally, options granted
under the Option Plan in connection with the commencement of employment with the
Company or options granted after such initial grants become exercisable at the
rate of 25% of the shares subject to the option one year after grant and
thereafter, 25% of the shares subject to the option each subsequent year. No
option may be transferred by the optionee other than by will or the laws of
descent or distribution.
The exercise price of all stock options granted under the Option Plan must
equal at least the fair market value of the Common Stock of the Company on the
date of grant. The fair market value of the Common Stock on a given date is
determined by the Board of Directors based upon the last sale price of the
Common Stock on the Nasdaq National Market System as of such date. On March 31,
1998, the fair market value of the Company's Common Stock was $[ ]. The
exercise price of any incentive stock option granted to an optionee who owns
stock possessing more than 10% of the voting power of the Company's outstanding
capital stock must equal at least 110% of the fair market value of the Common
Stock on the date of grant. The Option Plan may provide that payment of the
exercise price may be made in cash, promissory notes, other shares of the
Company's Common Stock (subject to certain conditions) or such other
consideration determined by the Board of Directors.
In March of 1996, the Board approved an amendment to the Option Plan which
provides that the Stock Option Committee may not, without prior approval of the
shareholders of the Company, authorize the amendment of any outstanding option
to reduce the option price or authorize the amendment of any outstanding stock
appreciation right ("SAR") to reduce the base price. In addition, the Company
may not, without the approval of the shareholders, cancel an option or SAR and
replace it with an award having a lower price or base price unless the vesting
period is restarted to the period designated for new options or SARs.
The Option Plan provides for automatic and non-discretionary grants of
options to Outside Directors. Pursuant to the Option Plan, on the day
immediately following the date of each annual meeting of shareholders of the
Company, each Outside Director will be automatically granted an option to
purchase 6,000 shares (the "Director Options"). Shares subject to the Director
Options are immediately exercisable.
The Option Plan provides that, in the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, outstanding options shall be
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<PAGE> 10
assumed or an equivalent option or right shall be substituted by the successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the optionee shall have the right to exercise
the option as to all shares of stock subject to such option, including shares as
to which the option would not otherwise be exercisable.
The Board may at any time amend, alter, suspend, or discontinue the Plan,
but no amendment, alteration, suspension, or discontinuation shall be made which
would impair the rights of any Optionee under any grant theretofore made,
without his or her consent. In addition, to the extent necessary to comply with
Rule 16b-3 under the Securities Exchange Act of 1932, as amended (the "Exchange
Act") or Section 422 of the Code (or any other applicable law or regulation), or
to the extent necessary to avoid non-deductibility of compensation income
recognized upon exercise of an Option under Section 162(m) of the Code, the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
Restricted Shares. A grant of Restricted Shares consists of the sale of a
specified number of shares of Common Stock which are contingently awarded in
amounts determined by the Stock Option Committee to those employees, directors,
and consultants selected by the Stock Option Committee. Outside Directors are
not eligible for a grant of Restricted Shares. Restricted Shares are subject to
certain restrictions on transfer, forfeiture, repurchase, and vesting as the
Stock Option Committee may determine pursuant to the terms of a Restricted Stock
Purchase Agreement. An individual who has been awarded Restricted Shares has the
right to vote and receive dividends on Restricted Shares, but can not sell,
assign, transfer, pledge or otherwise encumber Restricted Shares except in
accordance with the Restricted Stock Purchase Agreement. The purchase price of
Restricted Shares is at least the fair market value of the Common Stock of the
Company on the date of grant of the Restricted Shares. Payment for Restricted
Shares is made in any combination of cash or Common Stock as determined by the
Stock Option Committee.
Stock Bonuses. A grant of a Stock Bonus consists of a specified number of
shares of Common Stock which are awarded in amounts determined by the Stock
Option Committee to those employees, directors, and consultants selected by the
Stock Option Committee. Outside Directors are not eligible for awards of Stock
Bonuses. Shares awarded as Stock Bonuses are subject to restrictions on
transfer, forfeiture, repurchase, and vesting as the Stock Option Committee may
determine pursuant to the terms of a Restricted Stock Bonus Agreement. The
individual receiving a Stock Bonus does not pay for the shares received as a
Stock Bonus, although the fair market value of the shares received is deemed
compensation to the individual upon the lapsing of any restrictions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summarizes only the federal income tax consequences of stock
options granted under the Option Plan. State and local tax consequences may
differ.
Stock Options. The grant of a nonqualified stock option under the Option
Plan will not result in any federal income tax consequences to the optionee or
to the Company. Upon exercise of a nonqualified stock option, the optionee is
subject to income taxes at the rate applicable to ordinary compensation income
on the difference between the option price and the fair market value of the
shares on the date of exercise. This income is subject to withholding for
federal income and employment tax purposes. The Company is entitled to an income
tax deduction in the amount of the income recognized by the optionee. Any gain
or loss on the optionee's subsequent disposition of the shares will receive long
or short-term capital gain or loss treatment depending on whether the shares are
held for more or not more than one year, respectively, following exercise. The
Company does not receive a tax deduction for any such gain. The maximum marginal
rate at which ordinary income is taxed to individuals is currently 39.6% and the
maximum rate at which long-term capital gains are taxed is 28%. For shares held
more than eighteen months, maximum rate at which long-term capital gains are
taxed falls to 20%.
The grant of an incentive stock option ("ISO") under the Option Plan will
not result in any federal income tax consequences to the optionee or to the
Company. An optionee recognizes no federal taxable
7
<PAGE> 11
income upon exercising an ISO (subject to the alternative minimum tax rules
discussed below), and the Company receives no deduction at the time of exercise.
In the event of a disposition of stock acquired upon exercise of an ISO, the tax
consequences depend upon how long the optionee has held the shares. If the
optionee does not dispose of the shares within two years after the ISO was
granted, nor within one year after the ISO was exercised and shares were
purchased, the optionee will recognize a long-term capital gain (or loss) equal
to the difference between the sale price of the shares and the exercise price.
The Company is not entitled to any deduction under these circumstances.
If the optionee fails to satisfy either of the foregoing holding periods,
he or she must recognize ordinary income in the year of the disposition
(referred to as a "disqualifying disposition"). The amount of such ordinary
income generally is the lesser of (i) the difference between the amount realized
on the disposition and the exercise price, or (ii) the difference between the
fair market value of the stock on the exercise date and the exercise price. Any
gain in excess of the amount taxed as ordinary income will be treated as a long-
or short-term capital gain, depending on the holding period. The Company, in the
year of the disqualifying disposition, is entitled to a deduction equal to the
amount of ordinary income recognized by the optionee.
The "spread" under an ISO -- i.e., the difference between the fair market
value of the shares at exercise and the exercise price -- is classified as an
item of adjustment in the year of exercise for purposes of the alternative
minimum tax.
Section 162(m) of the Code contains special rules regarding the federal
income tax deductibility of compensation paid to the Company'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, the Company can preserve the deductibility of
certain compensation in excess of $1 million if it complies with conditions
imposed Section 162(m) of the Code, including the establishment of a maximum
number of shares which may be granted to any one employee during a specified
time period. The Company has established the maximum number of shares with
respect to which options can be granted. Those limits are 200,000 shares per
fiscal year, with a 400,000 share limitation for grants to new hires.
Payment of Withholding Taxes. The Company may withhold, or require a
participant to remit to the Company, an amount sufficient to satisfy any
federal, state or local withholding tax requirements associated with awards
under the Option Plan.
The following summarizes only the federal income tax consequences to
participants and the Company of the acquisition and disposition of Restricted
Shares and Stock Bonuses under the Plan. State and local tax consequences may
differ.
Restricted Shares. A participant who receives Restricted Shares will
generally recognize ordinary income at the time the restrictions on
transferability and the Company's repurchase rights lapse. The amount of
ordinary income so recognized will be the fair market value of the Common Stock
at the time the income is recognized less the amount the participant paid for
the Restricted Shares, determined without regard to any restrictions other than
restrictions which by their terms will never lapse. This amount is deductible
for federal income tax purposes by the Company. Dividends paid with respect to
the Restricted Shares will be ordinary compensation income to the participant
(and generally deductible by the Company).
In lieu of the treatment described above, a participant may elect immediate
recognition of income under Section 83(b) of the Code. In such event, the
participant will recognize as income the fair market value of the Restricted
Shares at the time of grant less the amount the participant paid for the
Restricted Shares, determined without regard to any restrictions other than
restrictions which by their terms will never lapse, and the Company will be
entitled to a corresponding deduction. Dividends paid with respect to shares as
to which a proper Section 83(b) election has been made will not be deductible to
the Company. If a Section 83(b) election is made and the Restricted Shares are
subsequently forfeited, the participant will not be entitled to any offsetting
tax deduction.
Stock Bonuses. With respect to Stock Bonuses under the Option Plan
described above, generally, when a participant receives a Stock Bonus, the fair
market value of the Common Stock on the date the restrictions,
8
<PAGE> 12
if any, are removed will be ordinary income to such participant and will be
allowed as a deduction for federal income purposes to the Company. A participant
may make a Section 83(b) election, under the Code, with respect to Stock Bonuses
with the same tax consequences as described for Restricted Shares.
PROPOSAL NO. 4
RATIFICATION AND APPROVAL OF AN AMENDMENT TO
THE COMPANY'S 1992 EMPLOYEE STOCK PURCHASE PLAN
The Company's shareholders are being asked to act upon a proposal to
approve the action of the Board of Directors amending the Company's 1992 Amended
and Restated Employee Stock Purchase Plan (the "Purchase Plan"). Ratification
and approval of the proposal requires the affirmative vote of a majority of the
shares of Common Stock voting on the proposal in person or by proxy.
Subject to shareholder approval, the Board of Directors of the Company
amended the Purchase Plan in March 1998, to increase the number of shares
reserved for issuance under the Purchase Plan from 700,000 shares to 950,000
shares.
The Board of Directors believes that the attraction and retention of high
quality personnel are essential to the Company's continued growth and success
and that an incentive plan such as the Purchase Plan is necessary for the
Company to remain competitive in its compensation practices. In the absence of
an increase in the available shares, no additional shares will be available for
purchase under the Purchase Plan, except to the extent that shares are not
purchased during the current offering period due to the withdrawal of a plan
participant.
Amended Plan Benefits. As of the date of this Proxy Statement no executive
officer or employee of the Company has been granted any rights to purchase stock
pursuant to the Purchase Plan subject to shareholder approval of the proposed
amendment. The benefits to be received pursuant to the Purchase Plan amendment
by the Company's executive officers and employees are not determinable at this
time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION AND APPROVAL OF
THE AMENDMENT
TO THE COMPANY'S 1992 AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN.
GENERAL DESCRIPTION OF THE PURCHASE PLAN
The following summary of the Purchase Plan, including the proposed
amendment, is qualified in its entirety by the specific language of the Purchase
Plan, a copy of which is available to any shareholder upon request.
In May 1992 the Board of Directors adopted, and the shareholders approved,
the Purchase Plan. The purpose of the Purchase Plan is to provide employees of
the Company who participate in the Plan with an opportunity to purchase Common
Stock of the Company through payroll deductions. The Purchase Plan, and the
right of participants to make purchases thereunder, is intended to qualify under
the provisions of Sections 421 and 423 of the Code. In January 1995 the Board of
Directors adopted, and in May 1995 the shareholders ratified, an amendment to
the Purchase Plan to increase the number of shares available for issuance under
the Purchase Plan from 150,000 to 250,000 shares. In March 1996, the Board of
Directors approved, and in May 1996 the shareholders ratified, an amendment to
the Purchase Plan to increase the number of shares available for issuance
thereunder from 250,000 shares to 290,000 shares. In April 1997, the Board of
Directors approved, and in May 1997 the shareholders ratified, an amendment to
the Purchase Plan increasing the number of shares available for issuance
thereunder from 290,000 shares to 350,000 shares. In September 1997, the Company
declared a Stock Split, thus increasing the number of shares reserved for
issuance under the Purchase Plan to 700,000 shares. In March 1998, subject to
shareholder approval, the Board of Directors approved an amendment to the
Purchase Plan increasing the number of shares available for issuance thereunder
from 700,000 shares to 950,000 shares. As of March 31, 1998, 670,843 shares of
Common Stock had been sold pursuant to the Purchase Plan at a weighted average
price of $15.49 per share, with 29,157 shares available for future issuance
under the Purchase Plan.
9
<PAGE> 13
Any person who is employed by the Company (or any of its majority-owned
subsidiaries for whom the appropriate regulatory filings have been made) for at
least 20 hours per week and more than five months in a calendar year is eligible
to participate in the Purchase Plan provided that the employee is employed on
the first day of an offering period and subject to certain limitations imposed
by Section 423(b) of the Code. Eligible employees become participants in the
Purchase Plan by delivering to the Company a subscription agreement authorizing
payroll deductions prior to the applicable offering date, unless a later time
for filing the subscription agreement has been set by the Board of Directors for
all eligible employees with respect to a given offering.
The Purchase Plan may be administered by the Board of Directors or a
committee appointed by the Board, and is currently being administered by the
Board of Directors. All questions of interpretation of the Purchase Plan are
determined by the Board of Directors or its committee, whose decisions are final
and binding upon all participants.
The Purchase Plan is implemented by one offering during each six-month
period of the Purchase Plan. The Board of Directors may alter the duration of
the offering periods without shareholder approval.
The price per share at which shares are sold under the Purchase Plan is
equal to the lower of (i) 85% of the fair market value of the Common Stock on
the date of commencement of the six-month offering period and (ii) 85% of the
fair market value of the Common Stock on the last day of the offering period.
The fair market value of the Common Stock on a given date is determined by the
Board of Directors based upon the last sale price of the Common Stock on the
Nasdaq National Market System as of such date.
The purchase price of the shares is accumulated by payroll deductions
during the offering period. The deductions may not exceed the lesser of (i) 15%
of a participant's eligible compensation, which is defined in the Purchase Plan
to include the regular straight time gross salary in effect at the beginning of
the offering period, exclusive of any payments for overtime, shift premium,
bonuses, commissions, incentive compensation, incentive payments, or other
compensation or (ii) $5,000 for each offering period. A participant may
discontinue his or her participation in the Purchase Plan or may decrease, but
not increase, the rate of payroll deductions at any time during the offering
period. Payroll deductions shall commence on the first payday following the
offering date, and shall continue at the same rate until the end of the offering
period unless terminated sooner as provided in the Purchase Plan.
The maximum number of shares placed under option to a participant in an
offering is that number determined by dividing the amount of the participant's
total payroll deductions to be accumulated during the offering period (not to
exceed an amount equal to 15% of the participant's actual eligible compensation
during the offering period) by the lower of 85% of the fair market value of the
Common Stock at the beginning or end of the offering period. Unless a
participant withdraws from the Purchase Plan, such participant's option for the
purchase of shares will be exercised automatically at the end of the offering
period for the maximum number of shares at the applicable price.
Notwithstanding the foregoing, (i) no employee will be permitted to
subscribe for shares under the Purchase Plan if, immediately after the grant of
the option, the employee would own 5% or more of the voting power or value of
all classes of stock of the Company or of a parent or of any of its subsidiaries
(including stock which may be purchased under the Purchase Plan or pursuant to
any other options), and (ii) no employee shall be permitted to subscribe for
shares which would permit the employee to buy pursuant to the Purchase Plan more
than $25,000 worth of stock (determined at the fair market value of the shares
at the time the option is granted) in any calendar year.
A participant's interest in a given offering may be terminated in whole,
but not in part, by signing and delivering to the Company a notice of withdrawal
from the Purchase Plan. Such withdrawal may be elected at any time prior to the
end of the applicable six-month offering period. Any withdrawal by the
participant of accumulated payroll deductions for a given offering automatically
terminates the participant's interest in that offering. The failure to remain in
the continuous employ of the Company for at least 20 hours per week during an
offering period will be deemed to be a withdrawal from that offering.
10
<PAGE> 14
In the event any change is made in the Company's capitalization, such as a
stock split or stock dividend, which results in an increase or decrease in the
number of outstanding shares of Common Stock without receipt of consideration by
the Company, appropriate adjustments will be made by the Board of Directors to
the shares subject to purchase under the Purchase Plan and in the purchase price
per share.
No rights or accumulated payroll deductions of a participant under the
Purchase Plan may be pledged, assigned or transferred for any reason and any
such attempt may be treated by the Company as an election to withdraw from the
Purchase Plan.
The Board of Directors may at any time amend or terminate the Purchase
Plan, except that such termination shall not affect options previously granted
prior thereto which adversely affects the rights of any participant. No
amendment may be made to the Purchase Plan without prior approval of the
shareholders of the Company if such amendment would increase the number of
shares reserved under the Purchase Plan, permit payroll deductions in excess of
15% of the participant's compensation, materially modify the eligibility
requirements or materially increase the benefits which may accrue under the
Purchase Plan.
CERTAIN FEDERAL TAX CONSEQUENCES
The following summarizes only the federal income tax consequences of
participation under the Purchase Plan. State and local tax consequences may
differ.
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Section 421 and 423
of the Code. Under these provisions, no income will be taxable to a participant
at the time of grant of the option or purchase of shares. Upon disposition of
the shares, the participant will generally be subject to tax and the amount of
the tax will depend upon the participant's holding period. If the shares have
been held by the participant for more than two years after the date of option
grant, the lesser of (i) 15% of the fair market value of the shares on the date
the option was granted or (ii) the difference between the fair market value of
the shares on the date of the disposition of the shares and the purchase price
will be treated as ordinary income, and any further gain will be treated as
long-term capital gain. If the shares are disposed of before the expiration of
these holding periods, the excess of the fair market value of the shares on the
exercise date over the purchase price will be treated as ordinary income, and
any further gain or loss on such disposition will be long-term or short-term
capital gain or loss, depending on the holding period. The Company is not
entitled to a deduction for amounts taxed as ordinary income or capital gain to
a participant except to the extent of ordinary income reported by participants
upon disposition of shares within two years from date of grant or within one tax
year of the date of purchase.
PROPOSAL NO. 5
RATIFICATION AND APPROVAL OF THE COMPANY'S
1998 SENIOR EXECUTIVE BONUS PLAN
The Compensation Committee of the Board of Directors has approved, and the
Board of Directors has ratified, the adoption of a new 1998 Senior Executive
Bonus Plan (the "Plan"). Adoption of the Plan is subject to the approval of a
majority of the shares of the Company's Common Stock which are present in person
or by proxy and entitled to vote at the Annual Meeting. The Plan provides the
Company's key executives with the opportunity to earn incentive awards based on
the achievement of goals relating to the performance of the Company and its
business units.
BACKGROUND AND REASONS FOR ADOPTION
The Company currently has a performance-based bonus plan similar to the
Plan, pursuant to which the Company rewards management for achieving certain
performance objectives. However, under Section 162(m) of the Code, the federal
income tax deductibility of compensation paid to the Company's Chief Executive
Officer and to each of its four other most highly compensated executive officers
may be limited to the extent that such compensation exceeds $1 million in any
one year. Under Section 162(m), the Company may deduct compensation in excess of
that amount if it qualifies as "performance-based compensation," as defined in
Section 162(m). The Plan is designed to qualify payments thereunder as
performance-based
11
<PAGE> 15
compensation, so that the Company may continue to receive a federal income tax
deduction for the payment of incentive bonuses to its executives. The Company
will continue to operate its current bonus plan, as well, for the compensation
of executives for whom Section 162(m) is not an issue.
DESCRIPTION OF THE PLAN
The following paragraphs provide a summary of the principal features of the
Plan and its operation. The Plan is set forth in its entirety as Exhibit A to
this Proxy Statement. The following summary is qualified in its entirety by
reference to Exhibit A.
PURPOSE OF THE PLAN
The Plan is intended to increase shareholder value and the success of the
Company by motivating key executives to perform to the best of their abilities
and achieve the Company's objectives.
ADMINISTRATION OF THE PLAN
The Plan will be administered by the Compensation Committee in accordance
with the express provisions of the Plan and the requirements of Section 162(m).
ELIGIBILITY TO RECEIVE AWARDS
All officers of the Company and its affiliates are eligible to participate
in the Plan. Participation in the Plan by any particular officer is determined
annually in the discretion of the Compensation Committee. In selecting
participants for the Plan, the Compensation Committee will choose officers of
the Company and its affiliates who are likely to have a significant impact on
Company performance. For 1998, the participants in the Plan are Messrs. Hill,
Smith, Benzing, Chenault and van den Hoek and Drs. Hanley and Harrus.
Participation in future years will be in the discretion of the Compensation
Committee, but it currently is expected that five to ten officers will
participate each year.
TARGET AWARDS AND PERFORMANCE GOALS
For each year, the Compensation Committee will establish in writing: (1) a
target award for each participant, (2) the performance goals which must be
achieved in order for the participant to be paid the target award, and (3) a
formula for increasing or decreasing a participant's target award depending upon
how actual performance compares to the pre-established performance goals.
Each participant's target award will be expressed as a percentage of his or
her base salary. Base salary under the Plan means the participant's annual
salary rate on the last day of the year.
There are ten performance measures which the Compensation Committee may use
in setting the performance goals for any year. Specifically, the performance
goals applicable to any participant will provide for a targeted level of
achievement using one or more of the following measures: (1) annual revenue, (2)
controllable profits, (3) customer satisfaction management by objectives, (4)
earnings per share, (5) individual management by objectives, (6) net income, (7)
new orders, (8) pro forma net income, (9) return on designated assets, and (10)
return on sales. Each of these measures is defined in the Plan. The Compensation
Committee may set performance goals which differ from participant to
participant. For example, the Compensation Committee may choose performance
goals which apply on either a corporate or business unit basis, as deemed
appropriate in light of the participant's responsibilities.
For 1998, the Compensation Committee has established for the seven Plan
participants a combined performance goal with respect to: (1) return on sales
(i.e. 1998 profit after-tax as a percentage of revenue), (2) revenue growth from
1997 to 1998 and (3) individual management by objectives. The Compensation
Committee has also established a formula, with such measurements as variables,
which will determine actual awards.
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<PAGE> 16
DETERMINATION OF ACTUAL AWARDS
After the end of each year, the Compensation Committee must certify in
writing 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
has been certified by the Compensation Committee. 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. Also, no participant's actual award under the Plan may exceed $3
million for any year.
The Plan contains a continuous employment requirement. If a participant
terminates employment with the Company prior to the award payment date, he or
she generally will not be entitled to the payment of an award for the year.
However, if the participant's termination is due to disability or death, the
Compensation Committee will proportionately reduce (or eliminate) his or her
actual award based on the date of termination and such other considerations as
the Compensation Committee deems appropriate.
Awards under the Plan generally will be payable in cash after the end of
the year during which the award was earned. However, the Compensation Committee
reserves the right to declare any award wholly or partially payable in an
equivalent amount of restricted stock issued under the Company's 1992 Stock
Option Plan. Any restricted stock so granted would vest over a period not longer
than four years.
PRO-FORMA BENEFITS FOR THE PLAN
Given that payments under the Plan are determined by comparing actual
performance to the annual performance goals established by the Compensation
Committee, it is not possible to conclusively state the amount of benefits which
will be paid under the Plan. The following table sets forth the target awards
that would be payable to the Named Executive Officers and to all current
executive officers as a group, if the performance goals established by the
Compensation Committee for 1998 are exactly 100% achieved. There can be no
assurance that the pre-established performance goals actually will be achieved
in whole or in part, and therefore there can be no assurance that the target
awards shown below actually will be paid in the amounts shown. Amounts paid, if
any, may be greater or lesser than the amounts shown below depending upon the
Company's financial performance compared to the stated goals.
<TABLE>
<CAPTION>
1998 TARGET
NAME AND PRINCIPAL POSITION AWARDS
--------------------------- -----------
<S> <C>
Richard S. Hill -- Chairman of the Board and Chief Executive
Officer of the Company.................................... $ 574,328
Peter Hanley -- Executive Vice President, Worldwide
Operations................................................ 265,000
Robert H. Smith -- Executive Vice President, Finance and
Administration, Chief Financial Officer and Secretary of
the Company............................................... 262,500
Jeffrey Benzing -- Vice President, Engineering and Product
Development............................................... 200,000
John Chenault -- Executive Vice President, Metals Business
Group..................................................... 200,000
All current executive officers, as a group.................. 1,937,328
All directors who are not executive officers, as a group.... N/A
All employees, including all current officers who are not
executive officers, as a group............................ N/A
</TABLE>
The award (if any) paid under the Plan generally will be the only annual
cash incentive bonus the participant will receive. Officers who are not
participants in the Plan will be eligible for an incentive bonus under the
Company's regular performance-based bonus plan. See "Compensation Committee and
Compensation Committee Report on Executive Compensation."
AMENDMENT AND TERMINATION OF THE PLAN
The Board may amend or terminate the Plan at any time and for any reason,
but in accordance with Section 162(m) of the Code, certain material amendments
to the Plan will be subject to shareholder approval.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION
AND APPROVAL OF THE COMPANY'S 1998 SENIOR EXECUTIVE BONUS PLAN.
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<PAGE> 17
PROPOSAL NO. 6
RATIFICATION AND APPROVAL OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent
auditors, to audit the financial statements of the Company for 1998 and
recommends that the shareholders ratify such selection. In the event that a
majority of the outstanding shares are not voted in favor of ratification, the
Board will reconsider its selection. Unless otherwise instructed, the proxy
holders will vote the proxies they receive for the ratification of Ernst & Young
LLP as the independent auditors for 1998. Representatives of Ernst & Young LLP
will be present at the Annual Meeting, will have the opportunity to make a
statement if they so desire and will be available to respond to appropriate
questions.
Ernst & Young LLP (or one of its predecessor firms, Arthur Young & Company)
has audited the Company's financial statements since the year ended December 31,
1986.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF ERNST & YOUNG
LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR 1998.
OTHER INFORMATION
EXECUTIVE OFFICERS
In addition to Messrs. Hill and Smith the other executive officers of the
Company as of March 31, 1998, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey Benzing...................... 41 Vice President, Engineering and Product Development
John Chenault........................ 49 Executive Vice President, Metals Business Group
Linus Cordes......................... 60 Vice President, Human Resources
J. Michael Dodson.................... 37 Vice President, Corporate Controller
Peter Hanley......................... 58 Executive Vice President, Worldwide Operations
Alain Harrus......................... 42 Vice President and Chief Technical Officer
Wilbert van den Hoek................. 41 Group Vice President, Dielectrics Business Group
Robert Wagner........................ 41 Vice President, Customer Satisfaction
</TABLE>
MR. BENZING joined the Company in July 1988 as Director of Special Projects
and has been the Company's Vice President in charge of product development since
July 1992. From 1984 to 1988 he was co-founder and Vice President of Engineering
of Benzing Technologies. From 1979 to 1984 he held various positions at Hewlett
Packard Company.
MR. CHENAULT joined the Company in September 1991 as Vice President,
Operations. From April 1993 through April 1996 he served as Vice President,
Customer Satisfaction, was the Executive Vice President, Operations from May
1996 to June 1997, and is currently its Executive Vice President, Metals
Business Group. From October 1988 to July 1991 he was the Vice President and
General Manager of Veeco Instruments, an electronics company. From 1986 to
October 1988 Mr. Chenault was Vice President and General Manager for Carroll
Touch, an electronics company. Mr. Chenault has also held various positions with
Texas Instruments, Inc. and Recognition Equipment, Inc.
14
<PAGE> 18
DR. CORDES joined the Company in November 1995 as Vice President, Human
Resources. From 1992 to 1995 he served as assistant director of the Microsystems
Technology Laboratories of the Massachusetts Institute of Technology. Prior to
that he was a member of the Corporate Engineering Staff of Raytheon Company, an
electronics company, and also served as the General Manager of Raytheon
Company's Advanced Device Center and Microelectronics Center. Dr. Cordes has
also held various research and management positions with General Electric
Company.
MR. DODSON joined the Company in May 1996 as Corporate Controller and was
appointed Vice President in December 1997. From 1984 to April 1996, he held
various positions with the public accounting firm of Ernst & Young LLP in San
Jose, California. Mr. Dodson is a certified public accountant within the state
of California.
DR. HANLEY joined the Company as Executive Vice President, Sales and
Marketing in June 1992, and currently serves as its Executive Vice President,
Worldwide Operations. From 1985 to June 1992, Dr. Hanley held various positions
at Applied Materials, Inc., most recently Group Vice President responsible for
sales, service and process for all North American accounts. Previously, Dr.
Hanley was President of Tegal, a division of Motorola, Inc., an electronics
company, and held positions at Varian, Inc.
DR. HARRUS joined the Company in April 1994 as Director of Strategic
Marketing and is currently its Vice President and Chief Technical Officer. From
March 1993 to April 1994 he was Director of CVD Technology at Lam Research
Corporation. From 1989 to 1993 he was Director of Dielectric Technology at the
Company. Prior to joining the Company, Dr. Harrus spent five years at AT&T Bell
Laboratories, where he was responsible for the development of materials and
processes for CMOS applications, with an emphasis on CVD.
DRS. VAN DEN HOEK joined the Company in May 1990 as Director of Technology
of Nippon Novellus Systems and is currently the Group Vice President,
Dielectrics Business Group. From 1980 to May 1990 he held a variety of positions
at the Philips Research Laboratories in Eindhoven, the Netherlands and
Sunnyvale, California. The last position Drs. van den Hoek held at Philips was
group manager of the Si Technology Research group.
MR. WAGNER joined the Company in October 1987 as Account Executive, was
promoted to Director of Global Accounts in November 1991 and is currently the
Vice President, Customer Satisfaction. From 1982 to 1987 he held several
positions including Product Marketing Manager at Applied Materials. Previously,
Mr. Wagner held various positions at General Electric, Nuclear Business Group in
San Jose, California.
15
<PAGE> 19
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
of (i) each person that served as the Company's Chief Executive Officer during
the last fiscal year of the Company, (ii) the four other most highly compensated
executive officers of the Company, and (iii) each former executive officer of
the Company who would have been one of the Company's four most highly
compensated executive officers had such executive officer been serving as such
at the end of the Company's last fiscal year (collectively, the "named executive
officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------ ------------
AWARDS ALL OTHER
OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) (#)(2)(3) ($)(4)
--------------------------- ---- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard S. Hill.................... 1997 $358,641 $727,481(6) 100,000 $ 12,523(5)(6)
Chairman of the Board and 1996 344,744 347,287 200,000 5,548
Chief Executive Officer 1995 328,327 443,021 70,000 5,000(5)(6)
Robert H. Smith.................... 1997 241,345 308,857 55,000 295,735(5)(8)
Executive Vice President, Finance 1996 38,943 112,500 172,000 23,600(9)
and Administration, Chief Financial 1995 -- -- 8,000 10,900(9)
Officer and Secretary(7)
Peter Hanley....................... 1997 248,076 266,633(10) 80,000 4,615(5)
Executive Vice President, 1996 234,231 191,689(11) 50,000 1,952
Worldwide Operations 1995 228,461 302,790(11) 40,000 --
John Chenault...................... 1997 189,808 241,249 38,000 2,899(5)
Executive Vice President, 1996 176,326 152,954 70,000 1,667(5)
Metals Business Group 1995 163,846 198,421 17,000 850(5)
Jeffrey Benzing.................... 1997 180,885 238,731(12) 45,000 3,636(6)
Vice President, Engineering 1996 171,769 149,959 20,000 4,386(5)(6)
and Product Development 1995 152,308 251,301(12) 27,000 3,000(6)
</TABLE>
- ---------------
(1) Includes amounts earned in 1997 and paid in 1998.
(2) Amounts represent stock option grants. See Option/SAR Grants in Last Fiscal
Year Table.
(3) Number of Awards Options/SARs adjusted to reflect the two-for-one stock
split of the Company's Common Stock declared by the Board of Directors in
September 1997.
(4) Amounts include life insurance premiums paid by the Company on behalf of
the named executive officers.
(5) Includes tax preparation fees paid for by the Company.
(6) Includes financial advice fees paid for by the Company.
(7) Mr. Smith joined the Company as Executive Vice President, Finance and
Administration, Chief Financial Officer and Secretary in October 1996.
(8) Includes $288,060 in relocation expenditures for which the Company
reimbursed Mr. Smith.
(9) Includes Board of Director's fees.
(10) Includes commission based compensation in the amount of $36,248 in 1997.
Commission based compensation of $23,315 is not reflected in these amounts
but may be paid in 1998 if product revenue is recognized.
(11) Includes commission based compensation in the amount of $102,419 and
$164,158 in 1996 and 1995, respectively.
16
<PAGE> 20
(12) Includes commission based compensation in the amount of $8,254 and $55,670
in 1996 and 1995, respectively.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides certain information with respect to stock
options granted to the named executive officers in 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS/SARS ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION
NUMBER OF EMPLOYEES EXERCISE FOR OPTION TERM(2)
OPTIONS/SARS IN FISCAL PRICE PER EXPIRATION ------------------------
NAME GRANTED (#) YEAR SHARE(#/$) DATE 5%($) 10%($)
---- ------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Hill......... 100,000 6.8% $27.75 01/02/07 $1,745,183 $4,422,635
Robert H. Smith......... 20,000 1.4% 41.00 05/23/07 515,694 1,306,869
35,000 2.4% 33.25 12/19/07 731,876 1,854,718
Peter Hanley............ 50,000 3.5% 41.00 05/23/07 1,289,234 3,267,172
30,000 2.0% 33.25 12/19/07 627,332 1,589,758
John Chenault........... 20,000 1.4% 41.00 05/23/07 515,694 1,306,869
18,000 1.2% 33.25 12/19/07 376,393 953,855
Jeffrey Benzing......... 45,000 3.0% 33.25 12/19/07 940,984 2,384,637
</TABLE>
- ---------------
(1) As adjusted to reflect two-for-one stock split of the Company's Common Stock
declared by the Board of Directors in September 1997.
(2) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their terms, assuming the specified compounded rates
of appreciation on the Company's Common Stock over the term of the options.
Actual gains, if any, on stock option exercise are dependent upon a number
of factors, including the future performance of the Common Stock, overall
stock market conditions, and the timing of option exercises, if any. There
can be no assurance that amounts reflected in this table will be achieved.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information with respect to stock
options exercised by the named executive officers during 1997, including the
aggregate value of gains on the date of exercise. In addition, the table sets
forth the number of shares covered by stock options as of December 31, 1997, and
the value of "in-the-money" stock options, which represents the positive spread
between the exercise price of a stock option and the market price of the shares
subject to such option on December 31, 1997, as adjusted to reflect the two-
for-one stock split of the Company's Common Stock declared by the Board of
Directors in September 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AT FISCAL YEAR END(#) AT FISCAL YEAR END(#)(1)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Hill........ 160,000 $6,229,450 164,740 390,000 $2,454,456 $1,607,070
Robert H. Smith........ 20,000 187,900 40,000 175,000 465,000 1,395,000
Peter Hanley........... 100,000 3,765,596 101,500 200,500 1,542,942 734,154
John Chenault.......... 23,000 897,694 59,250 114,000 656,139 496,101
Jeffrey Benzing........ 48,000 2,022,581 27,500 113,752 376,100 503,681
</TABLE>
- ---------------
17
<PAGE> 21
(1) Calculated on the basis of the last reported sales price per share for the
Company's Common Stock on the Nasdaq National Market System of $32.313 on
December 31, 1997.
COMPENSATION COMMITTEE AND STOCK OPTION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings, including this Proxy Statement,
in whole or in part, the following report and the Performance Graph which
follows shall not be deemed to be filed with the Securities and Exchange
Commission nor incorporated by reference into any such filings.
COMPENSATION PHILOSOPHY
The Company applies a consistent philosophy to compensation for all
employees, including senior management. The premise of this philosophy is to pay
for performance. The Company sets aggressive goals and objectives at the
beginning of each year and makes a significant percentage of executive
compensation dependent on performance against these goals and objectives. By
linking a significant percentage of pay to performance, the Company seeks to
ensure that the interests of its employees, including the named executive
officers, are closely aligned with those of its shareholders.
The Company strives to be in a leadership position within the semiconductor
industry for overall compensation. Competition for qualified personnel within
the semiconductor industry is intense and a leadership position in compensation
is necessary to attract, hire and retain persons of the highest caliber.
COMPENSATION VEHICLES
Compensation at the Company has three principal components: Salary, Bonus
and Stock Options.
1. Salary
The salary program is structured to position the Company in up to the
seventy-fifth percentile within the semiconductor industry. To ensure
this position, the Company consults surveys that track other leading
companies in the semiconductor and semiconductor equipment industries,
many of whom are included in the Hambrecht & Quist Technology Index used
to compare five year stock price history.
2. Bonus
Bonuses are designed to be a significant part of compensation. Bonuses
are based on achievement of corporate goals and individual objectives.
Corporate goals are expressed in a financial plan containing growth and
profitability targets; individual objectives depend on the role of each
employee, and include such matters as sales within a particular market
or to specific customers, inventory turns and technological
achievements. Upon the achievement of profitability goals, the Board of
Directors will approve the allocation of a certain percentage of pre-tax
income to a bonus pool. This pool is distributed to the named executive
officers and all other employees based on their individual performance.
In addition to cash bonuses, the Company intends to utilize grants of
Restricted Shares and awards of Stock Bonuses to provide additional
incentives for the named executive officers and other employees, and to
provide additional incentives to such persons in a manner that is
consistent with the Company's long-term goals and objectives through
equity ownership.
3. Stock Options
The Company grants stock options to the majority of employees upon
hiring to allow everyone to achieve an ownership position in the Company
and thus provide employees the opportunity to share
18
<PAGE> 22
in the Company's achievements. Yearly, additional stock options are
granted to those named executive officers and other employees who have
done an exemplary job of meeting their objectives or have had other
accomplishments of note.
PERFORMANCE MEASURES AND CEO COMPENSATION
In December 1996, the Compensation Committee established a 15% after-tax
profit margin and a three-year rolling average revenue growth of 15% as the
goals for the Company in 1997. Several one-time write-offs and the surrounding
circumstances were considered by the Compensation Committee for the purpose of
calculating the 1997 bonus awards. Based on the Compensation Committee's review
and conclusions, the one-time expenses associated with the acquisition of the
Thin Film Systems business from Varian Associates, the effect of the Applied
Materials, Inc. litigation settlement, and the write-off of certain receivables
owed to the Company were excluded from the calculation for bonus awards. In
addition, the results of the Thin Films System business were not taken into
account for 1997. In determining whether the goals had been met the Compensation
Committee took into account only the results posted by the Company's Chemical
Vapor Deposition ("CVD") business. Based upon the Compensation Committee's
guidelines the Company's CVD businesses profit margin exceeded the goal set by
the Compensation Committee at the beginning of the year by approximately one
percentage point. In addition, the Company's CVD business' three-year rolling
average revenue growth exceeded the goal set by the Compensation Committee at
the beginning of the year by approximately nine percentage points.
In December 1996, the bonus plan for Richard Hill, the Company's Chairman
and Chief Executive Officer, was established to reflect the current market
trends in Chief Executive Officer compensation for the Company's industry group.
Mr. Hill received an annual bonus equal to approximately 200% of his base
salary.
The other named executives received bonuses based on the Company's
performance and on their performance against the specific goals and objectives
established for them at levels ranging from 50% to 133% of their base salaries.
COMPENSATION POLICY REGARDING DEDUCTIBILITY
It is the Company's policy to make reasonable efforts to cause executive
compensation to be eligible for deductibility under Section 162(m) of the Code.
Section 162(m) of the Code provides that, for purposes of the regular income tax
and the alternative minimum tax, the otherwise allowable deduction for
compensation paid or accrued with respect to a covered employee of a
publicly-held corporation is limited to no more than $1 million per year
(certain performance-based compensation is not counted towards this limit). In
the past, all qualifying executive compensation, other than immaterial amounts
paid in 1997, has been eligible for deductibility under Section 162(m) of the
Code.
In the future, in order to insure that executive compensation to be paid
under the Senior Executive Bonus Plan is deductible for the purposes of Section
162(m), the Company has asked the shareholders to approve the Senior Executive
Bonus Plan. If the Senior Executive Bonus Plan is approved by the shareholders,
the Company does not expect cash compensation paid to officers subject to
Section 162(m) to exceed the limitations of Section 162(m) for fiscal 1998, and
therefore expects all such cash compensation to be deductible.
<TABLE>
<S> <C>
STOCK OPTION COMMITTEE COMPENSATION COMMITTEE
D. James Guzy D. James Guzy
Glen Possley Glen Possley
Joseph Van Poppelen Joseph Van Poppelen
</TABLE>
Mr. Van Poppelen will be resigning from the Stock Option and the Compensation
Committees following the Annual Meeting.
19
<PAGE> 23
PERFORMANCE GRAPH
The following line graph compares the yearly percentage change in (i) the
cumulative total shareholder return on the Company's Common Stock since December
31, 1992 with (ii) cumulative total shareholder return on (a) the Nasdaq Stock
Market -- U.S. Index and (b) the Hambrecht & Quist Technology Index. The
comparison assumes an investment of $100 on December 31, 1992 and reinvestment
of dividends, if any. The stock price performance shown on the graph is not
necessarily indicative of future price performance.
LOGO
EMPLOYMENT AGREEMENTS
In June 1992, the Company entered into an employment agreement with Peter
Hanley pursuant to which the Company retained Dr. Hanley as its Executive Vice
President, Sales and Marketing for an annual salary (subject to adjustment) of
$200,000 plus a bonus to be determined by the Board of Directors. In the event
the Company terminates Dr. Hanley's employment without cause, the Company is
required to pay Dr. Hanley up to 12 months of salary after the six-month notice
period and provide continued life, disability and medical benefits during such
period. In the event Dr. Hanley voluntarily terminates his employment, unless he
commences employment with a competitor, the Company is required to pay his
salary and provide continued benefits during the six-month notice period. In the
event of termination of Dr. Hanley's employment, certain adjustments will be
made to the vesting schedule for Dr. Hanley's options.
In December 1993, the Company entered into an employment agreement with
Richard S. Hill pursuant to which the Company retained Mr. Hill as its Chief
Executive Officer for an annual salary of $315,000, plus a bonus to be
determined by the Board of Directors. In connection with the agreement, the
Company granted Mr. Hill options to purchase 200,000 shares of Common Stock at
an exercise price of $23.75 (pre Stock Split). Such options vested at the rate
of 25% per over a four-year period and are now fully vested. Commencing in
January 1994, the Company agreed to establish a deferred bonus program for Mr.
Hill. Interest on such program accrues monthly using the month-end closing
weekly average interest rate of five-year treasury notes plus 2%. The deferred
bonus amount was earned over a four-year period. Mr. Hill will
20
<PAGE> 24
receive the entire deferred bonus amount on January 31, 2004. In the event of
death, the entire balance owed Mr. Hill will be paid to his estate.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Glen Possley, a director of the Company, was the President of SubMicron
Technology, Inc. ("SubMicron") from June 1994 through December 1997, which was
one of the Company's customers. For the years ended December 31, 1997 and 1996,
the Company sold $5.4 million and $20.2 million of CVD systems to SubMicron,
respectively. Management believes that these transactions were under terms no
less favorable to the Company than those arranged with other parties. There were
no material transactions with SubMicron prior to 1996. Trade receivables from
SubMicron at December 31, 1996 were $10.2 million. In June 1997, the Company
determined that due to the financial difficulties facing SubMicron the
outstanding accounts receivable balance of $15.6 million at that time was at
risk for collection. Accordingly, the Company recorded a write-off of $17.7
million, representing the outstanding accounts receivable balance and other
related expenses for the repossession of its equipment.
In July 1997, the Company made a relocation loan to Mr. Hill, the Company's
Chairman of the Board and Chief Executive Officer, in the aggregate of $1.5
million. The loan is evidenced by two promissory notes (the "Notes"). The Notes
incur interest at a rate not to exceed six percent per year and are repayable on
July 1, 2000. The Notes are secured by a first priority lien on the Deed of
Trust and Assignment of Rents and interest in Mr. Hill's property.
21
<PAGE> 25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of March 31, 1998 as to (a) each director and nominee, (b) each named executive
officer, (c) all directors and officers as a group, and (d) for each person
known by the Company, as of December 31, 1997, to beneficially own more than 5%
of the outstanding shares of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER PERCENT
BENEFICIAL OWNER OF SHARES OF TOTAL
---------------- ---------- ---------
<S> <C> <C>
FMR Corp.................................................... 5,051,000
82 Devonshire Street
Boston, MA 02109(2)
J. & W. Seligman & Co., Incorporated........................ 3,311,600
100 Park Avenue, 8th Floor
New York, NY 10006(3)
The Capital Group Companies, Inc............................ 2,589,500
333 South Hope Street 52nd Floor
Los Angeles, CA 90071(4)
Davis Selected Advisers, L.P................................ 1,725,400
124 East Marcy Street
Santa Fe, NM 87501(5)
Richard S. Hill(6).......................................... 214,653
Peter Hanley(7)............................................. 169,524
D. James Guzy(8)............................................ 104,000
John Chenault(9)............................................ 62,580
Jeffrey Benzing(10)......................................... 61,976
Joseph Van Poppelen(11)..................................... 50,000
Robert H. Smith(12)......................................... 46,542
Glen Possley(13)............................................ 32,000
Tom Long(14)................................................ 12,000
J. David Litster............................................ --
William R. Spivey........................................... --
All officers and directors as a group (14 persons)(15)...... 851,036
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of March 31, 1998 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.
Applicable percentages are based on [ ] shares outstanding on March
31, 1998 adjusted as required by the rules. To the Company's knowledge,
except as set forth in the footnotes to this table and subject to applicable
community property laws, each person named in the table has sole voting and
investment power with respect to the shares set forth opposite such person's
name.
22
<PAGE> 26
(2) As reported in a Schedule 13G filed by FMR Corp. as of December 31, 1997,
includes 177,700 shares as to which FMR Corp. has sole voting power and
5,051,100 shares as to which FMR Corp. has sole investment power.
(3) As reported in a Schedule 13G filed by J. & W. Seligman & Co., Incorporated,
as of December 31, 1997, includes 3,311,600 shares as to which J. & W.
Seligman & Co., Incorporated has sole voting and investment power.
(4) As reported in a Schedule 13G filed by The Capital Group Companies, Inc., as
of December 31, 1997, includes 2,589,500 shares as to which The Capital
Group Companies, Inc. has sole voting and investment power.
(5) As reported in a Schedule 13G filed by Davis Selected Advisers, L.P., as of
January 29, 1997, includes 1,725,400 shares as to which the Davis Selected
Advisors, L.P. has sole voting and investment power.
(6) Includes options to purchase an aggregate of 181,320 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
(7) Includes options to purchase an aggregate of 101,500 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
(8) Includes options to purchase an aggregate of 40,000 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
(9) Includes options to purchase an aggregate of 59,250 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
(10) Includes options to purchase an aggregate of 27,500 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
(11) Includes options to purchase an aggregate of 40,000 shares which will be
fully vested and exercisable within 60 days of March 31, 1998. Mr. Van
Poppelen is retiring from the Company's Board of Directors at the 1998
Annual Meeting.
(12) Includes options to purchase an aggregate of 45,000 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
(13) Includes options to purchase an aggregate of 32,000 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
(14) Includes options to purchase an aggregate of 12,000 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
(15) Includes options to purchase an aggregate of 629,170 shares which will be
fully vested and exercisable within 60 days of March 31, 1998.
OTHER MATTERS
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than ten percent of a registered class
of the Company's equity securities, to file an initial report of ownership on
Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange
Commission (the "SEC") and The Nasdaq Stock Market. Such officers, directors and
ten-percent shareholders are also required by SEC rules to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for such persons, the Company believes that its executive officers,
directors and ten-percent shareholders complied with all Section 16(a) filing
requirements applicable to them.
23
<PAGE> 27
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the shares they represent as
the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Dated: April 16, 1998
24
<PAGE> 28
EXHIBIT A
NOVELLUS SYSTEMS, INC.
1998 SENIOR EXECUTIVE BONUS PLAN
SECTION 1
ESTABLISHMENT AND PURPOSE
1.1 Purpose. Novellus Systems, Inc. hereby establishes the Novellus
Systems, Inc. 1998 Senior Executive Bonus Plan (the "Plan"). The Plan is
intended to increase shareholder value and the success of the Company by
motivating key executives (a) to perform to the best of their abilities, and (b)
to achieve the Company's objectives. The Plan's goals are to be achieved by
providing such executives with incentive awards based on the achievement of
goals relating to performance of the Company and its individual business units.
The Plan is intended to qualify as performance-based compensation under Code
Section 162(m).
1.2 Effective Date. The Plan is effective as of December 18, 1997, subject
to the approval of a majority of the shares of the Company's common stock which
are present in person or by proxy and entitled to vote at the 1998 Annual
Meeting of Shareholders. As long as the Plan remains in effect, it shall be
resubmitted to shareholders as necessary to enable the Plan to continue to
qualify as performance-based compensation under Code Section 162(m).
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
2.1 "Actual Award" means as to any Plan Year, the actual award (if any)
payable to a Participant for the Plan Year. Actual Award is determined by the
Payout Formula for the Plan Year, subject to the Committee's authority under
Section 3.5 to reduce the award otherwise determined by the Payout Formula.
2.2 "Annual Revenue" means the Company's or business unit's net sales for
the Plan Year, determined in accordance with generally accepted accounting
principles; provided, however, that prior to each Plan Year, the Committee shall
determine whether any significant item(s) shall be excluded or included from the
calculation of Annual Revenue with respect to one or more Participants. In
addition, Annual Revenue will be calculated without regard to any change in
accounting standards that may be required by the Financial Accounting Standards
Board that occurs during the Plan Year.
2.3 "Base Salary" means as to any Plan Year, 100% of the Participant's
annualized salary rate on the last day of the Plan Year. Such Base Salary shall
be before both (a) deductions for taxes or benefits, and (b) deferrals of
compensation pursuant to Company-sponsored plans.
2.4 "Board" means the Company's Board of Directors.
2.5 "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 or regulation amending, supplementing or superseding such Section or
regulation.
2.6 "Committee" means the committee appointed by the Board to administer
the Plan. The Committee shall consist of no fewer than two members of the Board.
The members of the Committee shall be appointed by, and serve at the pleasure
of, the Board. Each member of the Committee shall qualify as an "outside
director" under Code Section 162(m).
2.7 "Company" means Novellus Systems, Inc., a California corporation.
2.8 "Controllable Profits" means as to any Plan Year, a business unit's
Annual Revenue minus (a) cost of sales, (b) research, development, and
engineering expense, (c) marketing and sales expense, (d) general
25
<PAGE> 29
and administrative expense, (e) extended receivables expense, and (f) shipping
requirement deviation expense.
2.9 "Customer Satisfaction MBOs" means as to any Participant for any Plan
Year, the objective and measurable individual goals set by a "management by
objectives" process and approved by the Committee, which goals relate to the
satisfaction of external or internal customer requirements.
2.10 "Determination Date" means as to any Plan Year, (a) the first day of
the Plan Year, or (b) if later, the latest date possible which will not
jeopardize the Plan's qualification as performance-based compensation under Code
Section 162(m).
2.11 "Disability" means a permanent and total disability determined in
accordance with uniform and nondiscriminatory standards adopted by the Committee
from time to time.
2.12 "Earnings Per Share" means as to any Plan Year, the Net Income or Pro
Forma Net Income, divided by a weighted average number of shares of Company
common stock outstanding and dilutive common stock equivalent shares deemed
outstanding.
2.13 "Individual MBOs" means as to a Participant for any Plan Year, the
objective and measurable goals set by a "management by objectives" process and
approved by the Committee (in its discretion).
2.14 "Maximum Award" means as to any Participant for any Plan Year, $3
million. The Maximum Award is the maximum amount which may be paid to a
Participant for any Plan Year.
2.15 "Net Income" means as to any Plan Year, the income after taxes of the
Company and its consolidated subsidiaries for the Plan Year determined in
accordance with generally accepted accounting principles, provided that prior to
each Plan Year, the Committee shall determine whether any significant item(s)
shall be included or excluded from the calculation of Net Income with respect to
one or more Participants. In addition, Net Income will be calculated without
regard to the following events during the Plan Year: (i) any change in
accounting standards that may be required by the Financial Accounting Standards
Board, (ii) all one-time charges and write-offs, and (iii) all expenses and
income attributable to any acquisition of or merger with a business (other than
those anticipated acquisitions or mergers that the Committee determines prior to
the Plan Year should be included in the calculation of Net Income).
2.16 "New Orders" means as to any Plan Year, the firm orders for a system,
product, part, or service that are being recorded for the first time as defined
in the Company's Order Recognition Policy.
2.17 "Participant" means as to any Plan Year, an officer of the Company who
has been selected by the Committee for participation in the Plan for that Plan
Year.
2.18 "Payout Formula" means as to any Plan Year, the formula or payout
matrix established by the Committee pursuant to Section 3.4, below, in order to
determine the Actual Awards (if any) to be paid to Participants. The formula or
matrix may differ from Participant to Participant.
2.19 "Performance Goals" means the goal(s) (or combined goal(s)) determined
by the Committee (in its discretion) to be applicable to a Participant for a
Plan Year. As determined by the Committee, the Performance Goals applicable to
each Participant shall provide for a targeted level or levels of achievement
using one or more of the following measures: (a) Annual Revenue, (b)
Controllable Profits, (c) Customer Satisfaction MBOs, (d) Earnings Per Share,
(e) Individual MBOs, (f) Net Income, (g) New Orders, (h) Pro Forma Net Income,
(i) Return on Designated Assets, and (j) Return on Sales. The performance Goals
may differ from Participant to Participant.
2.20 "Plan Year" means the 1998 fiscal year of the Company and each
succeeding fiscal year of the Company.
2.21 "Pro Forma Net Income" means as to any business unit for any Plan
Year, the Controllable Profits of such business unit, minus allocations of
corporate taxes, interest, and other expenses.
26
<PAGE> 30
2.22 "Return on Designated Assets" means as to any Plan Year, the Pro Forma
Net Income, divided by the average of beginning and ending business unit
designated assets, or Net Income, divided by the average of beginning and ending
designated corporate assets.
2.23 "Return on Sales" means as to any Plan Year, the percentage equal to
Net Income or Pro Forma Net Income, divided by the Company's or the business
unit's Annual Revenue.
2.24 "Target Award" means the target award payable under the Plan to a
Participant for the Plan Year, expressed as a percentage of his or her Base
Salary, as determined by the Committee in accordance with Section 3.3.
SECTION 3
SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS
3.1 Selection of Participants. On or prior to the Determination Date, the
Committee, in its sole discretion, shall select the officers of the Company who
shall be Participants for the Plan Year. In selecting Participants, the
Committee shall choose officers who are likely to have a significant impact on
the performance of the Company. Participation in the Plan is in the sole
discretion of the Committee, and on a Plan Year by Plan Year basis. Accordingly,
an officer who is a Participant for a given Plan Year in no way is guaranteed or
assured of being selected for participation in any subsequent Plan Year or
Years.
3.2 Determination of Performance Goals. On or prior to the Determination
Date, the Committee, in its sole discretion, shall establish the Performance
Goals for each Participant for the Plan Year. Such Performance Goals shall be
set forth in writing.
3.3 Determination of Target Awards. On or prior to the Determination Date,
the Committee, in its sole discretion, shall establish a Target Award for each
Participant. Each Participant's Target Award shall be determined by the
Committee in its sole discretion, and each Target Award shall be set forth in
writing.
3.4 Determination of Payout Formula or Formulae. On or prior to the
Determination Date, the Committee, in its sole discretion, shall establish a
Payout Formula or Formulae for purposes of determining the Actual Award (if any)
payable to each Participant. Each Payout Formula shall (a) be in writing, (b) be
based on a comparison of actual performance to the Performance Goals, (c)
provide for the payment of a Participant's Target Award if the Performance Goals
for the Plan Year are achieved, and (d) provide for an Actual Award greater than
or less than the Participant's Target Award, depending upon the extent to which
actual performance exceeds or falls below the Performance Goals. Notwithstanding
the preceding, no participant's Actual Award under the Plan may exceed his or
her Maximum Award.
3.5 Determination of Actual Awards. After the end of each Plan Year, the
Committee shall certify in writing the extent to which the Performance Goals
applicable to each Participant for the Plan Year were achieved or exceeded. The
Actual Award for each Participant shall be determined by applying the Payout
Formula to the level of actual performance which has been certified by the
Committee. Notwithstanding any contrary provision of the Plan, (a) the
Committee, in its sole discretion, may eliminate or reduce the Actual Award
payable to any Participant below that which otherwise would be payable under the
Payout Formula, (b) if a Participant terminates employment with the Company
prior to the date the Actual Award for the Plan Year is paid for a reason other
than Disability or death, he or she shall not be entitled to the payment of an
Actual Award for the Plan Year, and (c) if a Participant terminates employment
with the Company prior to the date the Actual Award for the Plan Year is paid
due to Disability or death, the Committee shall reduce his or her Actual Award
proportionately based on the date of termination (and subject to further
reduction or elimination under clause (a) of this sentence).
SECTION 4
PAYMENT OF AWARDS
4.1 Right to Receive Payment. Each Actual Award that may become payable
under the Plan shall be paid solely from the general assets of the Company.
Nothing in this Plan shall be construed to create a trust or
27
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to establish or evidence any Participant's claim of any right other than as an
unsecured general creditor with respect to any payment to which he or she may be
entitled.
4.2 Timing of Payment. Payment of each Actual Award shall be made within
two and one-half calendar months after the end of the Plan Year during which the
Award was earned.
4.3 Form of Payment. Each Actual Award normally shall be paid in cash (or
its equivalent) in a single lump sum. However, the Committee, in its sole
discretion, may declare any Actual Award, in whole or in part, payable in the
form of a restricted stock bonus granted under the Company's 1992 Stock Option
Plan or successor equity compensation plan. The number of shares granted shall
be determined by dividing the cash amount of the Actual Award by the fair market
value of a share of Company common stock on the date that the cash payment
otherwise would have been made. For this purpose, "fair market value" shall be
defined as provided in the Company's 1992 Stock Option Plan or successor equity
compensation plan. Any restricted stock bonus so awarded shall vest over a
period of not more than four years, subject to acceleration for termination of
employment due to death or Disability.
4.4 Other Deferral of Actual Awards. The Committee may establish one or
more programs under the Plan to permit selected Participants the opportunity to
elect to defer receipt of Actual Awards. The Committee may establish the
election procedures, the timing of such elections, the mechanisms for payments
of, and accrual of interest or other earnings, if any, on amounts so deferred,
and such other terms, conditions, rules and procedures that the Committee deems
advisable for the administration of any such deferral program.
4.5 Payment in the Event of Death. If a Participant dies prior to the
payment of an Actual Award earned by him or her for a prior Plan Year, the
Actual Award shall be paid to his or her estate.
SECTION 5
ADMINISTRATION
5.1 Committee is the Administrator. The Plan shall be administered by the
Committee.
5.2 Committee Authority. The Committee shall have all discretion and
authority necessary or appropriate to administer the Plan and to interpret the
provisions of the Plan, consistent with qualification of the Plan as
performance-based compensation under Code Section 162(m). Any determination,
decision or action of the Committee in connection with the construction,
interpretation, administration or application of the Plan shall be final,
conclusive, and binding upon all persons, and shall be given the maximum
deference permitted by law.
5.3 Tax Withholding. The Company shall withhold all applicable taxes from
any payment, including any federal, foreign, state, and local taxes.
SECTION 6
GENERAL PROVISION
6.1 Nonassignability. A Participant shall have no right to assign or
transfer any interest under this Plan.
6.2 No Effect on Employment. The establishment and subsequent operation
of the Plan, including eligibility as a Participant, shall not be construed as
conferring any legal or other rights upon any Participant for the continuation
of his or her employment for any Plan Year or any other period. Generally,
employment with the Company is on an at will basis only. Except as may be
provided in an employment contract with the Participant, the Company expressly
reserves the right, which may be exercised at any time and without regard to
when during a Plan Year such exercise occurs, to terminate any individual's
employment without cause, and to treat him or her without regard to the effect
which such treatment might have upon him or her as a Participant.
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<PAGE> 32
6.3 No Individual Liability. No member of the Committee or the Board, or
any officer of the Company, shall be liable for any determination, decision or
action made in good faith with respect to the Plan or any award under the Plan.
6.4 Severability; Governing Law. If any provision of the Plan is found to
be invalid or unenforceable, such provision shall not affect the other
provisions of the Plan, and the Plan shall be construed in all respects as if
such invalid provision has been omitted. The provisions of the Plan shall be
governed by and construed in accordance with the laws of the Sate of California,
with the exception of California's conflict of laws provisions.
6.5 Affiliates of the Company. Requirements referring to employment with
the Company or payment of awards may, in the Committee's discretion, be
performed through the Company or any affiliate of the Company.
SECTION 7
AMENDMENT AND TERMINATION
7.1 Amendment and Termination. The Board may amend or terminate the Plan
at any time and for any reason; provided, however, that if and to the extent
required to ensure the Plan's qualification under Code Section 162(m), any such
amendment shall be subject to shareholder approval.
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<PAGE> 33
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
NOVELLUS SYSTEMS, INC.
ANNUAL MEETING OF SHAREHOLDERS
May 15, 1998
The undersigned hereby appoints Richard S. Hill and Robert H. Smith and
each of them, as proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote as designated below all of the
shares of Common Stock of Novellus Systems, Inc. that the undersigned is
entitled to vote at the Annual Meeting of Shareholders to be held at 8:00 a.m.,
local time on May 15, 1998, at the Company's principal executive offices, 3970
North First Street San Jose, California, 95134, or any adjournment or
postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED SHAREHOLDER. IF NO SUCH DIRECTIONS ARE MADE, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF THE NOMINEES LISTED ON THE REVERSE SIDE FOR THE BOARD
OF DIRECTORS AND FOR PROPOSALS 2, 3, 4, 5 and 6.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE> 34
<TABLE>
<S> <C> <C> <C> <C>
[ ] ___________________ ____________________ PLEASE MARK YOUR CHOICE LIKE PLAN TO ATTEND THE MEETING
ACCOUNT NUMBER COMMON THIS [ ] IN BLUE OR BLACK INK [ ]
</TABLE>
1. Election of Directors:
[ ] FOR ALL NOMINEES [ ] WITHHOLD AUTHORITY FOR ALL NOMINEES
If you wish to withhold authority to vote for any individual nominee,
strike a line through that nominee's name in the list below:
Richard S. Hill, D. James Guzy, Glen Possley, Robert H. Smith, Tom Long,
J. David Litster, William R. Spivey.
2. Approval of an amendment to the Company's Bylaws to change the range of the
authorized number of directors from a minimum of four and a maximum of
seven to a minimum of six and a maximum of eleven.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to ratify and approve an amendment to the Company's 1992 Stock
Option Plan (the "Option Plan") to increase the number of shares reserved
for issuance thereunder from 6,680,000 shares to 7,780,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal to ratify and approve an amendment to the Company's 1992 Employee
Stock Purchase Plan to increase the number of shares reserved for issuance
thereunder from 700,000 shares to 950,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Proposal to ratify and approve the Company's 1998 Senior Executive Bonus
Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Proposal to ratify the appointment of Ernst & Young LLP as the independent
auditors for the Company for the fiscal year ending December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Authority is hereby given to the proxies identified on the front of this card to
vote in their discretion upon such other business as may properly come before
the meeting.
(Please sign exactly as your name appears on
this proxy card. If shares are held jointly,
each holder should sign. When signing as
attorney, executor, administrator,
corporation, trustee or guardian, please
give full title as such. If a corporation
please sign in full corporate name by
President or other authorized officer. If a
partnership, please sign in partnership name
by authorized person.)
Date: _________, 1998
____________________________________________
Printed Name of Shareholder
____________________________________________
Signature
____________________________________________
Signature
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
REPLY ENVELOPE
