-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SE/voCfX4mEaVvCyXcyEtAu7voWQX/F2TSfyO8iBHuN1+ZPKkAllLzypQJB5UP75 /WPO0RUzfbjfYhNWG8gTFg== 0000891618-99-005806.txt : 19991224 0000891618-99-005806.hdr.sgml : 19991224 ACCESSION NUMBER: 0000891618-99-005806 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON VALLEY GROUP INC CENTRAL INDEX KEY: 0000712752 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942264681 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11348 FILM NUMBER: 99779499 BUSINESS ADDRESS: STREET 1: 277 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10172 BUSINESS PHONE: 4084416700 MAIL ADDRESS: STREET 1: 277 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10172 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K ------------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999* [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER: 0-11348 SILICON VALLEY GROUP, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2264681 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 101 METRO DRIVE, SUITE 400, SAN JOSE, CALIFORNIA 95110 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 441-6700 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by persons other than those who may be deemed affiliates of the Registrant, as of November 26, 1999, was approximately $386,227,325. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the Registrant's Common Stock as of November 26, 1999 was 33,336,829. * See Part II, Item 8A. of this report for information regarding Registrant's fiscal year. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the parts of this Form 10-K as indicated herein: Proxy Statement for Annual Meeting of Stockholders to be held on February 23, 2000........................................ Part III ================================================================================ 2 PART I The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to certain risks and uncertainties, including those discussed below that could cause actual results to differ materially from those described herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Forward-looking statements are indicated by an asterisk (*) following the sentence in which such statement is made. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 1. BUSINESS. Silicon Valley Group, Inc. (the "Company" or "SVG") primarily designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. The fabrication of integrated circuits involves repeating a complex series of process steps to a semiconductor wafer. The three broad categories of wafer processing steps are deposition, photolithography and etching. SVG has three principal product groups which focus primarily on photolithography, photoresist processing, and deposition for oxidation/diffusion and low-pressure chemical vapor deposition ("LPCVD") and with the acquisition of the Semiconductor Equipment Group of Watkins-Johnson Company, thermal processing products which address atmospheric pressure chemical vapor deposition ("APCVD"). In addition, a precision optics group supplies certain components for the Company's photolithography products, government markets and lens systems to the cinematography industry. The Company's products incorporate proprietary technologies and unique processes, and focus on providing process and product technologies and productivity enhancements to its customers. SVG works closely with its existing and potential customers in the development of new systems and technologies and supports its products through a network of worldwide service and technical support organizations. Herein the Company refers to its photolithography exposure products as SVG Lithography Systems, Inc. "SVGL" products, its photoresist processing products as "Track" products and its oxidation/diffusion, LPCVD and its newly acquired APCVD products from Watkins-Johnson Company as "Thermal" products. INDUSTRY BACKGROUND Continuous improvements in semiconductor process and design technologies have led to the production of smaller, more complex and more reliable semiconductor devices at a lower cost per function. As performance has increased and size and cost have decreased, the demand for semiconductors has expanded in computer systems, telecommunications systems, automotive products, consumer goods and industrial automation and control systems. Semiconductor content as a percentage of system cost has also increased. The Company believes that these long-term trends will continue and will be accompanied by a growing demand for semiconductor production equipment that can produce advanced integrated circuits in high volumes with a low cost of ownership.* The rapid development of advanced semiconductor applications requires semiconductor manufacturers to continually improve their core technology and manufacturing capabilities to remain competitive within the industry. As a consequence, semiconductor manufacturers demand increasingly sophisticated, highly productive and cost effective processing equipment from semiconductor equipment suppliers. The increasing diversity and complexity of semiconductor products, the demands of technological change and the costs associated with keeping pace with industry developments have contributed to the emergence of cooperative development and manufacturing alliances both amongst semiconductor manufacturers and between semiconductor manufacturers and semiconductor equipment suppliers. The Company believes it is essential to have customer alliances to provide access to valuable product and process technologies. These factors result in customers concentrating their business with a small number of key suppliers. The semiconductor industry into which the Company sells its products is highly cyclical and has, historically, experienced periodic downturns that have had a severe effect on the semiconductor industry's demand for semiconductor processing equipment. As a result of the Asian economic crisis which began in 1997, an oversupply of certain semiconductor products, the impact of low cost personal computers, and various other factors, semiconductor manufacturers reduced planned expenditures and cancelled or delayed the construction of new fabrication facilities. This slowdown in demand began to impact the Company during the first quarter of fiscal 1998 and continued to impact the Company throughout fiscal 1999. The slowdown in demand resulted in the Company experiencing lower new customer orders, customer deferrals of scheduled equipment delivery dates and, to a lesser extent, customer order cancellations. Last 2 3 year's lower bookings, order rescheduling and cancellations, have caused sales and net income during fiscal 1999 to decline from prior years amounts. Although, the Company has experienced a modest improvement in new bookings, as during the second half of fiscal 1999 the Company recorded new bookings of $324,213,000 up from new bookings of $254,444,000 and $237,451,000 during the first half of fiscal 1999 and the second half of fiscal 1998, respectively. There can be no assurance that the dollar amount of new bookings will continue to increase.* There can be no assurance that the Company will not experience further customer delivery deferrals, additional order cancellations or a prolonged period of customer orders at reduced levels, any or a combination of which would have a material adverse effect on the Company's business and results of operations.* STRATEGY The Company's objective is to strengthen its position as a leading worldwide semiconductor equipment supplier that offers a broad line of technologically advanced products. The Company's strategy incorporates the following key elements: - Future Technological Innovation. The Company is committed to developing new products, improving processes and enhancing existing products through substantial investment in research and development. In this regard, the Company has developed a roadmap for the development of next generation lithography technology well into the next decade. The Company's products incorporate proprietary technologies in photolithography, control software, optics and particulate control and unique processes focusing on providing process and product technologies and productivity enhancements to customers. Additionally, the Company works with universities and laboratories to leverage new concepts for its advanced projects. - Customer Commitment. The Company's objective is to strengthen its position as a leading worldwide semiconductor equipment supplier by offering a broad line of technologically advanced products. The Company works closely with its existing and potential customers, industry consortia and research institutions to improve current products and processes and to define new product development opportunities. These efforts enable the Company to participate in the development of new technologies, to influence the design of new fabrication processes and to position it as a principal supplier for volume equipment orders. The Company believes that cooperative working relationships with leading semiconductor manufacturers are critical to ensuring that its products are designed in conjunction with the development of the semiconductor manufacturers' advanced process requirements. - Continued Operational Efficiency and Improvement. The industry requires that equipment suppliers provide cost-effective products that are based on extendible technology. Cost of ownership and the ability to satisfy customer delivery requirements are critical ingredients in the selection process for advanced equipment. To address these issues, the Company has in the past and is continuing to respond to this issue by expanding certain of its facilities and deploying capital for manufacturing and test equipment to respond to the long term requirements of the semiconductor industry. The Company continues to implement programs to improve operational efficiency to improve the effectiveness of its material procurement, reduce manufacturing cycle times and improve production methods and processes to gain additional efficiencies. - Expansion of Its Customer Base. The Company is committed to expanding its worldwide customer base to address the needs of the global semiconductor market. Continuous improvement programs and timely introduction of new technology tools are key elements of the Company's strategy. The Company remains focused on leveraging the strength of its products and customer base to satisfy the diverse requirements of the Logic, Memory and ASIC markets on a worldwide basis. SVG LITHOGRAPHY SYSTEMS, INC. (SVGL) SVGL designs, manufactures, markets and services advanced photolithography exposure systems. Photolithography is one of the most critical and expensive steps in integrated circuit fabrication, representing approximately one-third or more of the fabrication cost. Consequently, integrated circuit manufacturers focus on obtaining advanced photolithography equipment to help them produce critical layers for increasingly complex devices reliably, efficiently and cost-effectively. In the photolithography step of the fabrication process, the integrated circuit patterns are projected through masks, or reticles, onto the silicon wafers. As semiconductors have become more complex, the patterns have become finer, with line widths as narrow as 0.15 micron and below in many of today's more advanced integrated circuits. As the patterns become finer, photolithography exposure systems must be capable of projecting the patterns through the masks with ever-finer resolution. The resolution capability of a photolithography exposure system is a function of numerical aperture (a measure of its light gathering characteristics) and the 3 4 wavelength of the light used in exposure. With the advancement of photolithography technology there has come a trend toward the reduction in wavelength from G-line (436-nanometer) to I-line (365-nanometer) to DUV (248 and 193-nanometer) and the increase in numerical aperture from 0.2 to approximately 0.7. During fiscal 1999, the Company entered into an agreement with Intel Corporation for the development of 157-nanometer lithography technology capable of producing line widths as fine as .10 microns. Historically, there have been two major approaches to photolithography exposure systems: full field scanning projection aligners ("scanners") and refractive steppers ("steppers"). Scanners project a full scale mask image onto a moving full wafer, while steppers sequentially expose a small section of a wafer in a stepped sequence of exposures, but do so by reducing the size of a mask image by several fold (typically 5 times). Thus, scanners offer large exposure fields while steppers offer masks that are easier to make and have a lower cost. These strengths are combined in the step-and-scan system, a technology pioneered by SVGL. Micrascan. The Company believes that its Micrascan photolithography step-and-scan exposure system provides the increased resolution required for current advanced logic and memory devices and for succeeding generations of complex, fine geometry integrated circuits through its use of DUV lamp or laser light source and unique projection optics design. Micrascan overcomes the line width limitations of steppers over a large exposure field by combining the elements of both steppers and scanners into the Micrascan's step-and-scan technology.* The Micrascan combines advantages of scanning projection aligners and steppers by projecting a light through a very narrow slit and scanning a portion of the wafer, then "stepping" to another portion of the wafer and repeating the process as necessary. Each scan has the capability to expose a large segment of the wafer. The large exposure field enables Micrascan to fabricate larger devices in a single scan than steppers, thus avoiding the necessity of "stitching" a circuit together through two different exposures, and depending on the size of the chip provides the ability to expose more than one device in an exposure field. In addition, Micrascan continuously modifies the position of the wafer surface during the scan, using its on-the-fly focus system to keep the wafer in the optimal focal plane, thus providing a larger usable depth of focus. The larger the usable depth of focus field is, the more tolerant of variations in the wafer surface the equipment will be. The Company believes Micrascan's greater tolerance of wafer surface variations can reduce the number of defective devices on a wafer, thereby contributing to higher yields.* It further believes that scanning across the field instead of exposing the entire field at one time also enables Micrascan to achieve greater uniformity of resolution across the entire exposure field and contributes to higher yields of faster devices.* The Company believes that SVGL has substantial technological expertise and process knowledge in developing deep ultraviolet ("DUV") step-and-scan photolithography systems.* SVGL has developed internal capability to design and fabricate optical lenses, mirrors and coatings. This includes a combination of purchased and proprietary optical metrology using phase measuring interferometry to precisely measure and test the optical elements it produces. Micrascan incorporates both mirrors and lenses in its optical system, which the Company believes allows for an optical projection system that is less sensitive to environmental variants and accommodates the use of light sources with broader spectral bandwidth (than refractive optics), with the additional benefits of reduced operational cost and increased reliability.* In addition to the optical system technology described above, SVGL has developed certain proprietary mechanical systems incorporated in the Micrascan to control the position of the wafer and the reticules prior to and during the wafer exposure step. The Company believes that these servo controlled systems contribute to the Micrascan's ability to scan the exposure field at high speeds with no substantial loss of resolution, thereby increasing the throughput capability of the machine.* The Company believes that the photolithography exposure equipment market is one of the largest segments of the semiconductor processing equipment industry and that SVGL's Micrascan family of photolithography systems are currently the most technically advanced step-and-scan machines shipping in multiple quantities to global semiconductor manufacturers.* The Micrascan QML lamp-based systems and Micrascan III laser-based systems, each capable of printing sub .30 micron line widths, sell for up to approximately $4,300,000, depending upon configuration. Micrascan III+ capable of producing line widths of sub .18 micron sells for approximately $6,000,000. The Micrascan 193-nanometer system capable of producing line widths of sub .15 micron sells for approximately $10,500,000 depending on configuration. Although the Company specifies that its systems produce certain line widths, it is commonplace that the combination of the tool's robustness and the customer's process technology achieves finer line widths than those specified. Uncertain Market for Micrascan Products. The Company believes that the photolithography exposure equipment market is one of the largest segments of the semiconductor processing equipment industry.* To address the market for advanced photolithography exposure systems, the Company has invested and expects to continue to invest substantial resources in SVGL's Micrascan technology and its family of Micrascan DUV step-and-scan photolithography systems, which is currently capable of producing line widths of .15 4 5 micron and below and which the Company believes eventually will be capable of producing line widths of .10 micron and below.* The development of a market for the Company's Micrascan step-and-scan photolithography products will be highly dependent on the continued trend towards finer line widths in integrated circuits and the ability of other lithography manufacturers to keep pace with this trend through either enhanced technologies or improved processes.* The Company believes DUV lithography is required to fabricate devices with line widths below 0.3 micron.* Semiconductor manufacturers can purchase DUV steppers to produce product at .25 micron line widths. However, the Company believes that as devices increase in complexity and size and require finer line widths, the technical advantages of DUV step-and-scan systems, as compared to DUV steppers, will enable semiconductor manufacturers to achieve finer line widths with improved critical dimension control which will result in higher yields of faster devices.* The Company also believes that the industry transition to DUV step-and-scan systems has accelerated in calendar 1999 and that advanced semiconductor manufacturers are beginning to require volume quantities of production equipment as advanced as the current and pending versions of Micrascan to produce both critical and to some degree sub-critical layers of semiconductor devices.* Currently, competitive DUV step-and-scan equipment capable of producing .25 micron line widths and below is available in limited quantities from three competitors.* Further, if manufacturers of DUV steppers are able to further enhance existing technology to achieve finer line widths sufficiently to erode the competitive and technological advantages of DUV step-and-scan systems, or other manufacturers of step-and-scan systems are successful in supplying sufficient quantities of product in a timely manner that are technically equal to or better than the Micrascan, demand for the Micrascan technology may not develop as the Company expects.* The Company believes that advanced logic devices, DRAMs and ASICs will require increasingly finer line widths.* Consequently, SVGL must continue to develop advanced technology equipment capable of meeting its customers' current and future requirements while offering those customers a progressively lower cost of ownership.* In particular, the Company believes that it must continue its development of future systems capable of printing line widths finer than .10 micron and processing 300mm wafers.* Any failure by the Company to develop the advanced technology required by its customers at progressively lower costs of ownership and supply sufficient quantities to a worldwide customer base could have a material adverse impact on the Company's financial condition and results of operations.* The Company believes that for SVGL to succeed in the long term, it must sell its Micrascan products on a global basis.* The Japanese and Pacific Rim markets (including fabrication plants located in other parts of the world which are operated by Japanese and Pacific Rim semiconductor manufacturers as well as foundries located primarily in Taiwan) represent a substantial portion of the overall market for photolithography exposure equipment. To date, the Company has not been successful in penetrating either of these markets. (See "Importance of the Japanese and Pacific Rim Markets"). Micralign. SVGL also sells a family of scanning projection aligners known as "Micralign." The most advanced product in this family, the Micralign 700, is used primarily in the production of semiconductor devices with minimum feature sizes above 1.25 microns, or in the fabrication of less critical layers within more sophisticated semiconductor devices. Micralign products are a mature product family and sales of Micralign products have declined in recent years as steppers have supplanted scanning projection aligners. The Company anticipates that such sales will continue to decline.* A large installed base of Micralign systems exists throughout the world and a majority of SVGL's Micralign related revenues is derived from servicing that installed base and the sales of spare parts. The list price of the Micralign 700 is approximately $1,350,000. TRACK SYSTEMS (TRACK) Track designs, manufactures, markets and services photoresist processing equipment which performs all the steps necessary to process semiconductor wafers prior to photolithography exposure, including cleaning, adhesion promotion and photoresist coating, and which performs all the steps required to treat wafers after photolithography exposure prior to etching, including developing and baking. As photoresist processing technology has evolved, the Company has developed increasingly advanced products for this market, which are capable of handling integrated circuits with line widths as narrow as 0.18 micron. Each product line includes the principal processing capabilities described above and is generally sold in customer-specified configurations that can include specially engineered features and capabilities. All Track products are available in fully automated cassette-to-cassette configurations either as stand-alone processing stations or as in-line integrated manufacturing systems. The equipment is modular in design to allow configuration to customer requirements. Each semiconductor manufacturer may require certain of the processing stations to effect its proprietary or specialized processes. As a result of being able to supply its customers with both SVGL's Micrascan photolithography systems and Track's photoresist processing products, the Company believes it offers the only clustered solution manufactured by a single supplier. Additionally, Track's 90 Series is designed to interface with all other lithography exposure products, regardless of the manufacturer. 5 6 Track's product lines correspond to the development of successive generations of wafer processing technologies. In general, it has been the Company's experience that introduction of new Track products has been followed by lower order levels for older products. ProCell. Announced in June 1999, the ProCell is designed for 200-mm advanced fabrication processes with line widths of .18 micron and beyond. The ProCell, which can process more than 40 wafers simultaneously offers scalability from 200-mm to-300-mm wafers and significant productivity improvement for the coat and develop process through the use of ProCell's symmetrical cluster configuration. The ProCell has enhanced reliability, uniformity in process results and serviceability due to the use of a single software platform, cell based design and the use of isolated process and coat environments. Prices for the ProCell range from approximately $2,200,000 to $3,500,000. 90 Series. The 90 Series, the 90-S and the 90-SE photoresist processing systems are designed for use in fabrication processes for integrated circuits with line widths as narrow as 0.25 micron, such as is required for 64 megabit DRAMs. The 90 Series incorporates a proprietary wafer transfer system to increase throughput and provides features allowing it to interface with factory automation systems, such as those using automated guided vehicles. The 90 Series can process wafers up to eight inches in diameter. The 90-S and the more recent 90-SE offer improved cost of ownership through increased productivity and a smaller floor space requirement. Prices of the 90 Series range from approximately $650,000 to $1,700,000. 8800 Series. The 8800 Series is designed to meet market needs for photoresist contamination control and photoresist processing down to 0.8 micron line widths. The 8800 Series incorporates such automation features as beltless wafer handling, compatibility with low contamination wafer storage and movement techniques, advanced software and communications capabilities and certain process control improvements. The 8800 Series can process wafers from three to six inches in diameter. The 8800 series is a mature product and sales have declined in recent years. The Company anticipates that such sales will continue to decline.* Prices of the 8800 Series range from approximately $200,000 to $550,000. THERMAL SYSTEMS (THERMAL) Thermal Systems product line includes large batch thermal processing products which address the oxidation/diffusion and LPCVD steps of the semiconductor fabrication process, and with the acquisition of the Semiconductor Equipment Group of Watkins-Johnson Company, thermal processing products that deposit thin dielectric films by using the process of atmospheric-pressure chemical-vapor-deposition ("APCVD"). Thermal products are used for a broad range of processing applications required in the fabrication of most semiconductor devices, including growing insulating layers on the wafers, diffusing dopants into the silicon structure and depositing insulating or conducting films on the wafer surface. Thermal's products incorporate proprietary technology the Company has developed or acquired in the areas of thermal control, gas handling, particle control and automated wafer handling. There are two major configurations of oxidation/diffusion and LPCVD processing equipment, commonly referred to as vertical and horizontal, corresponding to the orientation of their reaction chamber(s). Vertical processing systems represent an increasing portion of the market for oxidation/diffusion and LPCVD processing equipment. Vertical reactors generally consist of a single, fully automated cylindrical reaction chamber, individually controlled by a dedicated computer control system. Vertical systems generally provide greater process uniformity and lower particle contamination than do horizontal systems, due to improved thermal control and an increased ability to maintain environmental integrity, thereby achieving higher yields in wafer processing. Additionally, vertical systems provide more flexibility in manufacturing configurations. Horizontal thermal processing systems, which are typically much larger and less automated than vertical reactors, were the standard of the semiconductor processing equipment industry and are still used for a broad range of processes. Rapid Vertical Processor -- 300 ("RVP-300"). Announced in 1997, the RVP-300 is the latest addition to the vertical furnace product line. RVP-300 is designed for processing of 300mm (12 inch) wafers addressing requirements for 0.18 micron technology and beyond. The design of RVP-300 focuses on maximizing productivity and throughput. This is done by utilizing features such as fast temperature ramp up and ramp down capability, Model Based Temperature Control (MBTC) for optimized temperature control across the wafer, and a dual boat configuration. Initial shipments of the RVP-300 occurred in the second quarter of fiscal 1998. Prices of the RVP-300 range from $900,000 to $1,500,000, depending on configuration. Series 9000 Rapid Vertical Processor ("RVP"). Introduced in 1996, the RVP is based on the Advanced Vertical Processor ("AVP") platform, processes both eight-inch and six-inch wafers and meets .25 micron technology requirements. The RVP features a proprietary and patented design that enables it to ramp up and ramp down temperatures anywhere between twice and ten times as fast 6 7 as the AVP and offers faster throughput and tighter junction depth control for critical anneals. By utilizing the AVP platform, the Company believes that the RVP, which incorporates key features of the AVP, such as 16-cassette wafer handling and model based temperature control (MBTC), offers the high reliability of the established AVP product line. The typical price range of an RVP system is $1,000,000 to $1,200,000, depending on process configuration. Series 8000 Advanced Vertical Processor ("AVP"). Initially shipped in September 1992, the AVP is a vertical furnace designed to meet the eight and six inch wafer requirements of sub-.50 micron processing. The Series 8000 single tube systems include advanced process control, data acquisition software, advanced automation, a proprietary process chamber design and an option for atmospheric control within the wafer handling area. Key features of the AVP system include storage capacity for sixteen 25-wafer cassettes (400 wafers), and model based temperature control (MBTC) for accurate wafer temperature regulation. The AVP system is designed to offer customers a low cost of ownership, through high productivity and a low square footage requirement. The typical price range of an AVP system is $500,000 to $1,200,000, depending on process configuration. Vertical Thermal Reactor ("VTR"). Thermal's VTR processes wafers from 100mm to 200mm in diameter. It operates under computer control, providing specialized process recipe introduction, cassette-to-cassette automation, monitoring of critical system functions and automated loading of wafers into the reaction chamber. In general, the VTR offers comparable reliability, lower contamination and better process uniformity than horizontal reactors. The VTR can be installed through-the-wall in a customer's clean room facility and is compatible with industry standard software interfaces. The VTR 7000PLUS, in comparison to earlier versions of VTR's, offers improved process control, uniformity, reduced particle levels, higher throughput, internal storage capabilities and the industry's standard mechanical interface (SMIF). Typical prices for the Company's VTR products range from approximately $600,000 to $900,000. Horizontal Processing Systems. The typical horizontal system consists of four separately controlled cylindrical reaction chambers which are mounted horizontally, one directly above the other. Horizontal systems are a mature product family. Sales of these systems have been declining in recent years, as semiconductor manufacturers have increasingly installed vertical reactors in their newer fabrication facilities and the Company expects this trend to continue.* However, the Company believes that manufacturers of less complex devices will continue to have some need for horizontal processing systems for the foreseeable future, but at successively declining rates.* In addition, the existing installed base of horizontal processing systems enables the Company to generate revenues through the sale of spare parts and upgrades. Prices for horizontal systems range from approximately $400,000 to $900,000. The Company's ("APCVD") products acquired from Watkins-Johnson Company utilize a propriety approach to the APCVD process. The substrates are transported under injectors on a continuously moving conveyor belt through a resistance heated muffle. This approach allows high deposition rates with a simpler reactor design yielding higher reliability operations and high wafer throughput. 1500 System. The 1500 APCVD system processes 200mm wafers addressing design-rule fabrication capability of 0.15 micron. It offers low cost of ownership with a new process muffle design and an improved MonoBlok injector assembly resulting in improved reliability, performance and serviceability through enhanced film uniformity, reduced consumables, improved system availability and ultra-low film metal levels. The 1500 system provides both doped and undoped deposition of TEOS based silicon dioxide and can be utilized in a broad range of dielectric film applications for both Logic and Memory manufacturing requirements. Typical prices for the 1500 System range from approximately $2,200,000 to $2,500,000 depending on process configuration. 1000 System. The 1000 APCVD system offers either hybrid or TEOS reactant processes and is specifically designed for high-productivity on 200mm wafer processing lines. The 1000 system provides both doped and undoped deposition of TEOS based silicon dioxide and can be utilized in a broad range of dielectric film applications for both Logic and Memory manufacturing requirements. Typical prices for the 1000 System range from approximately $1,500,000 to $2,200,000 depending on process configuration. 999 Systems. The 999 and TEOS999 APCVD systems are for production lines utilizing between 100mm to 150mm wafers and are capable of simultaneous processing two wafers in parallel. Both systems offer doped and undoped silicon dioxide. Typical prices for the 999 System range from approximately $1,500,000 to $2,300,000 depending on process configuration. 7 8 CUSTOMERS The Company's customer base includes companies that manufacture semiconductor devices primarily for sale to others and companies that manufacture semiconductor devices primarily for internal use. Repeat sales to existing customers represent a significant portion of the Company's processing equipment sales. The Company believes that its installed customer base represents a significant competitive advantage.* By working closely with its established customer base, the Company is able to identify new product development opportunities. The Company's customers during fiscal 1999 included the following: IBM Microchip Technology Intel Motorola LSI Logic Philips Semiconductor Maxim ST Microelectronics The Company relies on a limited number of customers for a substantial percentage of its sales. In fiscal 1999, Intel represented 56% of the Company's net sales with the Company's five largest customers accounting for 74% of net sales. For fiscal 1998, Intel, IBM and Motorola represented 40%, 17% and 13%, respectively, of sales and the Company's largest five customers represented 76% of sales. During fiscal years 1999 and 1998, no other customer represented more than 10% of net sales for the Company. In fiscal 1999 and 1998, Intel represented a substantial portion of the total sales of both Track and SVGL products with Intel representing approximately 78% of SVGL's fiscal 1999 net sales. The loss of a significant customer (and in particular the loss of Intel as a Track or SVGL customer -- See "Manufacturing and Raw Materials"), a delay in shipment due to customer rescheduling or any substantial reduction in orders by a significant customer, including reductions in orders due to market, economic or competitive conditions in the semiconductor industry, would adversely affect the Company's business and results of operations.* MARKETING, SALES AND SERVICE The Company markets and sells its products primarily to independent manufacturers of semiconductor devices and computer, telecommunications and other companies that manufacture semiconductor devices for their own use. The market for the Company's products is worldwide. The Company sells its products in the United States principally through its direct sales organization. The Company sells its products overseas through a direct sales staff, independent distributors and independent representatives. The following table sets forth the Company's revenues by geographic area as a percentage of net sales for the three fiscal years ended September 30:
YEARS ENDED SEPTEMBER 30, ------------------------- 1997 1998 1999 ---- ---- ---- United States.................. 72% 65% 68% Europe......................... 18 31 26 Pacific Rim.................... 10 4 6
Reliability, which is commonly measured in up-time and mean time between failure, and performance are increasingly important factors by which customers evaluate the potential suppliers of sophisticated processing systems. The Company believes that its field service and process support capabilities are major factors in its selection as an equipment supplier. Increasingly, semiconductor manufacturers are requiring seven-day, around the clock, on site or on call support. To meet this need, the Company continues to enhance its training programs and deploy spare part inventories at both customer sites and regional field depots. Service personnel are based in field offices throughout the United States, Western Europe, Japan and the Pacific Rim and increasingly on site at particularly large customer locations. The Company warrants its products against defects in design, materials and workmanship, generally for periods ranging from one to two years. BACKLOG At September 30, 1999 and 1998, the Company had a backlog of approximately $357,455,000 and $254,129,000, respectively. The Company includes in backlog only those orders to which a purchase order number has been assigned by the customer and for which delivery has been specified within 12 months. Such orders are subject to cancellation by the customer with limited charges. Because of the possibility of customer changes in delivery schedules, cancellation of orders and potential delays in product shipments, the 8 9 Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. As a result of the slow down in demand which began to impact the Company during the first quarter of fiscal 1998 and continued to impact the Company through out fiscal 1999, the Company has received customer deferrals and order cancellations of product with scheduled delivery dates which resulted in reduced levels of shipments during these periods. There can be no assurance that the Company will not in the future continue to experience customer delivery deferrals, order cancellations or a prolonged period of customer orders at reduced levels, any or a combination of which would have an adverse effect on its operating results.* RESEARCH, DEVELOPMENT AND RELATED ENGINEERING The market served by the Company is characterized by rapid technological change. Accordingly, the Company's product and process development programs are devoted to the development of new systems and processes, including new generations of products for existing markets, enhancements and extensions of existing products and custom engineering for specific customers. The Company believes that its future success will depend upon its ability to continue to enhance its existing products and their process capabilities and to successfully develop, introduce and manufacture new and enhanced products and processes which satisfy a broad range of customer needs and achieve market acceptance.* Accordingly, the Company works closely with semiconductor manufacturers, industry consortia, and research institutions to respond to the industry's evolving product and process requirements. The Company's research staff collaborates with key customers in order to evaluate designs, specifications and prototypes of the Company's new products. The Company believes that in selecting a photolithography equipment manufacturer, customers look for a supplier with a long-term product development strategy and the ability to fund that development since photolithography exposure equipment can represent a substantial portion of the equipment cost of a fabrication facility. Semiconductor manufacturers may be unwilling to rely on a relatively small supplier, such as the Company, for a critical element of the fabrication process if they believe that the Company does not have sufficient capital to implement its product development strategy. The Company depends in part on external sources to fund its photolithography development efforts. During fiscal 1996, the Company entered into agreements with certain customers (the "Participants") whereby each agreed to assist in funding the Company's development of an advanced technology 193-nanometer Micrascan system. In exchange for such funding, each Participant received the right to purchase one such system and, in addition, received a right of first refusal (ratable among such Participants) to all such machines manufactured during the first two years following the initial system shipments. For each initial system ordered, each Participant agreed to fund $5,000,000 in such development costs. The agreements call for each Participant to pay $1,000,000 of initial development funding and four subsequent payments of $1,000,000 upon the completion of certain development milestones. The Participants may withdraw from the development program without penalty, but payments made against completed development milestones are not refundable and all rights to future equipment are forfeited. At September 30, 1999, the Company had received and recognized $20,000,000 in funding from program Participants against research and development expenditures. Three competitors of the Company have either announced the development of, or have shipped 193-nanometer products. In June 1999, certain Participants decided that their product needs have changed for initial 193-nanometer machines and have withdrawn from the program and chosen to use or are evaluating other solutions. At September 30, 1999, the Company's obligations under these agreements are complete and no additional funding is expected or required from the Participants.* As a result, the Company expects to use its own funds to continue development of an advanced technology 193-nanometer Micrascan system, which will result in an increase in the Company's research and development expenses and a decrease in the Company's operating income.* In May 1999, the Company entered into an agreement with Intel Corporation ("Intel") for the development of 157-nanometer lithography technology. This agreement obligates the Company among other things to develop and sell to Intel a predetermined number of initial tools. Intel has agreed to provide advanced payments for the development and manufacture of these machines, based upon predetermined milestones. Separately, Intel has invested approximately $15,000,000 in the Company in the form of a purchase of Series 1 Convertible Preferred Stock (see Note 11 to the Consolidated Financial Statements). The Company is obligated to dedicate a certain amount of its 157-nanometer unit production output to Intel. The Company is required to use the proceeds from the Series 1 Preferred investment and funds received under the agreement for the development of technology for use on 157-nanometer lithography equipment. There can be no assurance that the Company will be successful in developing 157-nanometer technology or will be able to manufacture significant quantities of machines to satisfy its obligations to Intel or other customers.* There is no assurance that the Company will receive all funding which it currently anticipates under its agreement with Intel.* If the Company were required to use its own funds, its research and development expenses would increase and its operating income would be reduced correspondingly.* 9 10 The Company anticipates that it will need to continue to make substantial research and development expenditures, particularly in its photolithography products, in order to remain competitive in the semiconductor equipment industry. There is no assurance that the Company will receive all funding which it currently anticipates or that it will be able to obtain future outside funding beyond that which it is currently receiving. If the Company were not able to secure additional external funding, its new product development and product enhancement efforts would either be impaired or would have a material adverse effect on the Company's results of operations.* In connection with the Company's acquisition of SVGL in 1990, SVGL received an equity investment and research and development funding commitments for Micrascan from IBM. Under the terms of the related research and development agreement, SVGL owed IBM certain royalties based on future operating results. During the second quarter of fiscal 1997, the Company satisfied its obligation, recognized an expense of $32,582,000, which represented royalties related to products currently under development, and recorded a prepayment of $5,418,000, which represented royalties related to existing products which are being amortized through fiscal 2000. The Company has historically devoted a significant portion of its personnel and financial resources to research and development programs. For fiscal years 1999, 1998, and 1997, total research and development expenditures were approximately $98,000,000, $99,000,000, and $82,000,000, respectively, of which approximately $3,000,000, $12,000,000, and $8,000,000, respectively, was funded by outside parties. Substantially all development funding received by SVGL has been for the development of its Micrascan technology and systems. During prior years, the majority of development funding was received from the industry consortium of semiconductor manufacturers, SEMATECH. In fiscal 1999, 1998 and 1997 the funding was received primarily from the Participants for the development of the advanced technology 193-nanometer system. COMPETITION The semiconductor equipment industry is intensely competitive. The Company faces substantial competition both in the United States and other countries in all of its products. The Company's competitors include Tokyo Electron, Ltd. ("TEL") and DaiNippon Screen Mfg. Co., Ltd. in photoresist processing equipment; TEL and Kokusai Electric Co., Ltd. in oxidation/diffusion, LPCVD equipment; Applied Materials and Quester in its newly acquired APCVD products from Watkins-Johnson; and Nikon, Canon, ASM Lithography and other suppliers in photolithography exposure equipment, and projection aligners. The trend toward consolidation in the semiconductor processing equipment industry has made it increasingly important to have the financial resources necessary to compete effectively across a broad range of product offerings, to fund customer service and support on a worldwide basis and to invest in both product and process research and development. Significant competitive factors include technology and cost of ownership, a formula which includes such data as initial price, system throughput and reliability, use of consumables and time to maintain or repair. Other competitive factors include familiarity with particular manufacturers' products, established relationships between suppliers and customers, product availability and technological differentiation. Occasionally, the Company has encountered intense price competition with respect to particular orders and has had difficulty establishing new relationships with certain customers who have long-standing relationships with other suppliers. The Company believes that outside Japan and the Pacific Rim it competes favorably with respect to most of these factors.* (See "Importance of Japanese and Pacific Rim Markets".) Many of the Company's competitors are Japanese corporations. Although the economic conditions in Asia are improving, the Company believes that an oversupply of equipment from certain Japanese competitors may continue to cause more severe price competition in its non-Asian markets.* To compete effectively in these markets, the Company may be forced to reduce prices, which could cause further reduction in net sales and gross margins and, consequently, have a material adverse effect on the Company's financial condition and results of operations.* Certain of the Company's existing and potential competitors have substantially greater name recognition, financial, engineering, manufacturing and marketing resources and customer service and support capabilities than the Company. Additionally, the Company is a relative newcomer in the commercial photolithography exposure market. Nikon, and to a lesser extent Canon, have long established relationships as suppliers of photolithography equipment to most of the semiconductor manufacturers. Although the Company has supplied Track and Thermal equipment to many of these customers, it has not previously sold meaningful quantities of Micrascan photolithography equipment to most of them. The Company's competitors can be expected to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price/performance characteristics. 10 11 The Micralign products manufactured by SVGL are generally not competitive with steppers for fabrication of semiconductor devices with line widths smaller than 1.25 micron. In marketing Micrascan systems, SVGL continues to face competition from suppliers employing other technologies, principally I-Line and DUV steppers, including Nikon Corp., Canon and ASM Lithography who have begun shipping initial quantities of .25 micron step-and-scan photolithography systems which utilize DUV light sources. The Company believes DUV lithography is required to fabricate devices with line widths below 0.3 micron.* Semiconductor manufacturers can purchase DUV steppers to produce product at .25 micron line widths. However, the Company believes that as devices increase in complexity and size and require finer line widths, the technical advantages of DUV step-and-scan systems, as compared to DUV steppers, will enable semiconductor manufacturers to achieve finer line widths with improved critical dimension control which will result in higher yields of faster devices.* The Company also believes that the industry transition to DUV step-and-scan systems has accelerated in calendar 1999 and that advanced semiconductor manufacturers are beginning to require volume quantities of production equipment as advanced as the current and pending versions of Micrascan to produce both critical and to some degree sub-critical layers of semiconductor devices.* Currently, competitive DUV step-and-scan equipment capable of producing .25 micron line widths and below is available in limited quantities from Nikon, Canon and ASM Lithography. There can be no assurance that the Company will be successful in competing with such systems.* Further, if manufacturers of DUV steppers are able to further enhance existing technology to achieve finer line widths sufficiently to erode the competitive and technological advantages of DUV step-and-scan systems, or other manufacturers of step-and-scan systems are successful in supplying sufficient quantities of product in a timely manner that are technically equal to or better than the Micrascan, demand for the Micrascan technology may not develop as the Company expects.* IMPORTANCE OF THE JAPANESE AND PACIFIC RIM MARKETS The Company's customers are heavily concentrated in the United States and Europe. The Japanese and Pacific Rim markets (including fabrication plants located in other parts of the world which are operated by Japanese and Pacific Rim semiconductor manufacturers) represent a substantial portion of the overall market for semiconductor manufacturing equipment. To date, neither the Company's shipments into Japan nor the Pacific Rim have been significant. The Company believes that the Japanese companies with which it competes have a competitive advantage because their dominance of the Japanese and Pacific Rim semiconductor equipment market provides them with the sales and technology base to compete more effectively throughout the rest of the world.* The Company is not engaged in any significant collaborative effort with any Japanese or Pacific Rim semiconductor manufacturers. As a result, the Company may be at a competitive disadvantage to the Japanese equipment suppliers that are engaged in such collaborative efforts with Japanese and Pacific Rim semiconductor manufacturers. The Company believes that it must substantially increase its share of these markets if it is to compete as a global supplier.* Further, in many instances, Japanese and Pacific Rim semiconductor manufacturers fabricate devices such as dynamic random access memory devices ("DRAMs"), with potentially different economic cycles than those affecting the sales of devices manufactured by the majority of the Company's U.S. and European customers. Failure to secure customers in these markets may limit the global market share available to the Company and may increase the Company's vulnerability to industry or geographic downturns.* In the past, several of the Company's larger customers have entered into joint ventures ("JV") with European, Japanese or Pacific Rim semiconductor manufacturers. In such cases, the Company has encountered intense price competition from foreign competitors who are suppliers to the non-U.S. member of the JV. Further, in certain instances the Company has not secured the equipment order when the non-U.S. member has had the responsibility for selecting the equipment to be used by the JV in its U.S. operations. There can be no assurance that as the Company's customers form additional alliances, whether in the U.S. or in other parts of the world, that the Company will be successful in obtaining equipment orders or that it will be able to obtain orders with sufficient gross margin to generate profitable transactions, either of which could have an adverse effect on the Company's results of operations.* Throughout the Pacific Rim, the Company is attempting to compete with major equipment suppliers having significant market share and established service and support infrastructures in place. The Company has invested in the staffing and facilities that it believes are necessary to sell, service and support customers in the Pacific Rim and with the acquisition of SEG, the Company acquired from Watkins-Johnson Company a 36,000 square foot customer demonstration facility in Kawasaki City, Japan. However, the Company anticipates that it will continue to encounter significant price competition as well as competition based on technological ability.* There can be no assurance that the Company's Pacific Rim operations will be profitable, even if it is successful in obtaining significant sales into this region.* Further, due to recent economic issues in certain Asian countries, particularly Korea, the Company's ability to penetrate such markets has been more difficult. Failure to secure customers in these markets would have an adverse effect on the Company's business and results of operations.* 11 12 MANUFACTURING AND RAW MATERIALS The Company manufactures its products from standard components and from components manufactured by others according to the Company's design specifications. Track products are manufactured in San Jose, California. Thermal products are primarily manufactured in Orange and Scotts Valley, California. Tinsley manufactures optical components in Richmond and North Hollywood, California. SVGL photolithography exposure products are manufactured in Wilton and Ridgefield, Connecticut. From time-to-time, the Company has experienced delays in the introduction of its products and product enhancements due to technical, manufacturing and other difficulties and may experience similar delays in the future.* For example, during fiscal 1996, the Company announced the subsequently terminated 200-APS Track product. Initial shipments of the 200-APS were scheduled to commence during the second quarter of fiscal 1997, and were delayed until the second quarter of fiscal 1998. This delay, as well as industry developments, caused the Company to implement a plan, which was announced on September 30, 1998, to terminate future development and shipments of its 200-APS products, and to concentrate its efforts on completing the ProCell product which had been in development for approximately one year. There can be no assurance that the Company will not experience delays in completing the development or manufacturing problems related to the ProCell product as a result of instability of the design of either the hardware or software elements of the new technology, or be able to efficiently manufacture the new product or other products.* In June of 1999 the Company introduced the ProCell product for shipment in fiscal 2000. The Company believes that protracted delays in delivering initial quantities of this newly introduced product or any new product to multiple customers could result in semiconductor manufacturers electing to install competitive equipment and could preclude industry acceptance of the ProCell product or any of the Company's products.* The inability to produce such products or any failure to achieve market acceptance could have a material effect on the Company's business, results of operations and could result in a subsequent loss of future sales.* In June of 1999, five participants in the 193 Development Program decided that their product needs have changed for initial 193-nanometer machines and have withdrawn from the development program and declined delivery of initial tools. These participants withdrew in part due to delays in product introduction and changes in participant's technical requirements. As the Lithography demands continue, the Company is responding by accelerating the development of a very high numerical aperture ("VHNA") version of its 193 product. In order to address a broader market with this tool, the Company is also redesigning its stage technology to optimize cost of ownership. Although the Company believes that the timing of the introduction of the product will be sufficient to meet volume production requirements of .13 micron, there can be no assurance that the product will be introduced on time or that customers will wait for the product to commit for their production needs.* The absence of a successful implementation of the product or obtaining sufficient orders for this product could have a material adverse impact on the future profitability of the Company.* Semiconductor manufacturers tend to select either a single supplier or a primary supplier for a certain type of equipment. The Company believes that prolonged delays in delivering initial quantities of newly developed products to multiple customers, whether due to the protracted release of product from engineering into manufacturing or due to manufacturing difficulties, could result in semiconductor manufacturers electing to install competitive equipment in their fabrication facilities and could preclude industry acceptance of the Company's products.* For example, the Company's largest Track customer has decided to secure deliveries from another source, a decision the Company believes is primarily due to the delay and subsequent termination of the 200-APS. Initial shipments into the market of a new technology Track product, the ProCell, is not expected until fiscal 2000.* As a result, competitors will increase their market share, and it will be increasingly more difficult for the Company to regain market position.* The Company's inability to effect the timely production of new products or any failure of these products to achieve market acceptance could have a material adverse effect on the Company's business and results of operations.* Historically, the unit cost of the Company's products has been the highest when they are newly introduced into production and cost reductions have come over time through engineering improvements, economies of scale and improvements in the manufacturing process.* As a result, new products have, at times, had an unfavorable impact on the Company's gross margins and results of operations. There can be no assurance that the initial shipments of new products will not have an adverse effect on the Company's profitability or that the Company will be able to attain design improvements, manufacturing efficiencies or manufacturing process improvements over time.* Further, the potential unfavorable effect of newly introduced products on profitability can be exacerbated when there is intense price competition in the marketplace. The time required to build a Micrascan system is significant. If SVGL is to be successful in supplying increased quantities of Micrascan systems, it will not only need to be able to build more systems, it will need to build them faster.* SVGL will require additional trained personnel, additional raw materials and components and improved manufacturing and testing techniques to both facilitate volume increases and shorten manufacturing cycle time.* To that end, SVGL is continuing to develop its vendor supply infrastructure, and implement manufacturing improvements.* Additionally, the Company believes that as it increases its penetration 12 13 of the Micrascan product, it must resume increasing its factory, field service and technical support organization staffing and infrastructure to support the anticipated customer requirements.* There can be no assurance that the Company will successfully increase its penetration of the Micrascan product or that the Company will not experience manufacturing difficulties or encounter problems in its attempt to increase production and upgrade or expand existing operations.* One of the most critical components of the Micrascan systems is the projection optics, which are primarily manufactured by SVGL. As part of its overall investment in capacity, the Company has increased SVGL's optical manufacturing floor space. The Company believes that in order for SVGL to be a viable supplier of advanced lithography systems in the future, it must successfully reduce the cycle times required to build projection optics.* In November 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI") in exchange for approximately 1,091,000 shares of Company common stock. TLI designs, manufactures and sells precision optical components, assemblies and systems to customers in a variety of industries and research endeavors. The primary reasons for the acquisition were TLI's technology and expertise relating to aspherical lenses, a key component of SVGL's photolithography products, the adaptation of certain of TLI's manufacturing processes by SVGL and TLI's commencement of the fabrication of non-aspherical lenses which are currently produced by SVGL. However, there can be no assurance that TLI's manufacturing technology is scaleable, or that such expertise can be transferred without substantial time or expense, if at all.* The inability of SVGL to transfer this production technology for use in processes of a substantially larger scale or the inability of TLI to manufacture non-aspherical lenses for SVGL in sufficient quantities to realize efficiencies of scale could adversely affect the Company's ability to realize any significant benefits from the acquisition of TLI.* The Company believes that protracted delays in delivering quantities of both current and future generations of Micrascan products to multiple worldwide customers could result in semiconductor manufacturers electing to install competitive equipment in their advanced fabrication facilities, and could preclude industry acceptance of the Micrascan technology and products.* In addition, the Company's operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity and field service and technical support activities if net sales do not increase commensurately.* Most raw materials and components not produced by the Company are available from more than one supplier. However, certain raw materials, components and subassemblies are obtained from single sources or a limited group of suppliers. Although the Company seeks to reduce its dependence on these sole and limited source suppliers, and the Company has not experienced significant production delays due to unavailability or delay in procurement of component parts or raw materials to date, disruption or termination of certain of these sources could occur and such disruptions could have at least a temporary adverse effect on the Company's business and results of operations.* Moreover, a prolonged inability to obtain certain components could have a material adverse effect on the Company's business and results of operations and could result in damage to customer relationships.* The raw material for a proprietary component of the optical system for the Micrascan is available from only one supplier. The supplier has expanded its capacity to meet SVGL's projected long-term requirements and has created and stored agreed upon quantities of safety stock. There can be no assurance that the supplier will be able to provide acceptable quantities of material required by SVGL.* Additionally, a version of the Company's Micrascan III photolithography system utilizes an Excimer laser that is manufactured in volume by only one supplier. In fiscal 1999 SVGL qualified an additional source of lasers for its current and future versions of Micrascan products, allowing the potential for the integration of such lasers into its system configurations.* However, there can be no assurance that its customers will be receptive to procuring products with lasers from this supplier, or the supplier will be able to provide product of sufficient quantity and quality.* If these suppliers were unable to meet their commitments, SVGL would be unable to manufacture the quantity of products required to meet the anticipated future demand, which would have a material adverse effect on the Company's business and results of operations.* It is anticipated that a critical component of the optical system for the 157-nanometer lithography product, which is currently under development, will utilize Calcium Fluoride.* Calcium Fluoride is a raw material that has been known to be in short supply and is integral to the production of optics capable of producing quality line widths of .10 and below. The Company has or expects to shortly qualify three suppliers who could be sources of this raw material for the Company.* There can be no assurance that these suppliers will be able to supply the quality or quantity of the product necessary for the Company to meet expected future demand, which could have a material adverse effect on the Company's business and results of operations.* 13 14 PATENTS AND LICENSES The Company owns several domestic and foreign patents relating to the businesses of Track, Thermal and SVGL products. Although the Company has historically relied and continues to rely on the technical and marketing competence and creative ability of its personnel, rather than patents, to maintain its competitive position, it has begun to pursue both domestic and foreign patent protection more aggressively. As is typical in the semiconductor equipment industry, the Company has from time to time received, and may in the future receive, communications from third parties asserting patents or copyrights on certain of the Company's products and technologies. Two of the Company's customers have notified the Company that they have received a notice of infringement from Jerome H. Lemelson, alleging that equipment used in the manufacture of electronic devices infringes patents issued to Mr. Lemelson relating to "machine vision" or "barcode reader" technologies. The customers have put the Company on notice that it intends to seek indemnification from the Company for any damages and expenses resulting from this matter if found liable or if the customer settles the claim. The Company cannot predict the outcome of this or any similar claim or its effect upon the Company, and there can be no assurance that any such litigation or claim would not have a material adverse effect upon the Company's financial condition or results of operations.* EMPLOYEES At September 30, 1999, the Company had 2,815 full-time employees and 263 part-time employees and contract personnel, including 782 in research and development, 1,315 in manufacturing, 833 in marketing, sales and customer service and support and 148 in administration. None of the Company's employees are represented by a union. Management considers its relations with its employees to be good. The Company's future success will continue to depend to a large extent on the continued contributions of its executive officers and key management and technical personnel. In particular, SVGL's future growth is very dependent on the Company's ability to attract and retain key skilled employees, particularly those related to the optical segment of its business. The Company is a party to agreements with each of its executive officers to help ensure the officers' continual service to the Company in the event of a change-in-control. Each of the Company's executive officers, and key management and technical personnel would be difficult to replace. The loss of the services of one or more of the Company's executive officers or key personnel, or the inability to continue to attract qualified personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations.* EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- Papken S. Der Torossian....... 60 Chairman of the Board and Chief Executive Officer William A. Hightower.......... 56 President and Chief Operating Officer Russell G. Weinstock.......... 56 Vice President, Finance and Chief Financial Officer Steven L. Jensen.............. 50 Vice President, Worldwide Sales and Marketing Jeffrey M. Kowalski........... 46 Vice President, President, Thermal Systems Boris Lipkin.................. 52 Vice President, Corporate Larry W. Sonsini.............. 58 Secretary
Mr. Der Torossian became Chairman of the Board and Chief Executive Officer in July 1991, and has been a director of the Company since October 1984. Mr. Hightower became President and Chief Operating Officer in August 1997. He has been a member of the Board of Directors of the Company since 1994. From January 1996 to August 1997, Mr. Hightower was the Chairman of the Board of Directors and Chief Executive Officer of Cadnet Corporation and from August 1989 to December 1995, he was the President and Chief Executive Officer of Telematics International, Inc. Mr. Weinstock has been Vice President of Finance and Chief Financial Officer of the Company since July 1990. Mr. Jensen became a Vice President of the Company in July 1992 and Vice President, Worldwide Sales in April 1992. 14 15 Mr. Kowalski became a Vice President of the Company and President of Thermal Systems in January 1995. From November 1992 to January 1995 he was the Vice President of Marketing of Thermal Systems, as well as its Vice President of Technology from November 1993. Mr. Lipkin became a Vice President of the Company in March 1995. From August 1992 to March 1995 he was the Vice President and General Manager of the Thin Film Systems business unit of Varian Associates. Mr. Sonsini has been Secretary since November 1988. He was a member of the Board of Directors of the Company from 1991 to 1997. Mr. Sonsini is a member of the law firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to the Company, and is the Chairman of the firm's Executive Committee. Mr. Sonsini serves on the boards of directors of Lattice Semiconductor Corporation, Novell, Inc., and PIXAR. ITEM 2. PROPERTIES. The Company's corporate headquarters are located in San Jose, California in 36,000 square feet of office space. This space is under a lease that expires in 2006 and has a current base rental of approximately $69,000 per month. The Company's Track Systems Division has two leased facilities in San Jose, California. The first is a 90,000 square foot, two-story building with a current monthly base rental of approximately $95,000 and a lease expiration of 2004. The second is also a two-story building consisting of approximately 83,000 square feet. The monthly base rental for this facility is approximately $53,000 under a lease expiring in 2003. In March 1996, the Company purchased approximately nine acres of land adjacent to one of the Track facilities in San Jose, California. Although the Company currently has no plans to develop the parcel, it provides the flexibility for future expansion of the Company's Track operations and its thermal processing lab. The Thermal Systems Division has two facilities in Orange and one nine building facility in Scotts Valley, California. The first Orange facility consists of approximately 92,000 square feet with a base monthly rent expense of approximately $53,000 under a lease expiring in 2004. The second facility consists of approximately 77,000 square feet with a base monthly rental expense of approximately $46,000 under a lease expiring in 2000. The Scotts Valley facility consists of nine buildings comprising approximately 205,000 square feet with a base monthly rent expense of approximately $100,000 under a lease expiring in 2004. SVGL owns two facilities in Fairfield County, Connecticut. The first consists of approximately 29 acres of land and buildings totaling approximately 276,000 square feet, located in Wilton, Connecticut. The second consists of approximately 50 acres of land and a 201,000 square foot building located in Ridgefield, Connecticut The Company acquired a facility in Kawasaki, Japan from the Semiconductor Equipment Group of Watkins-Johnson Company. The facility consists of a 36,000 square foot, two-story building on approximately one acre of land. Tinsley owns two facilities in Richmond, California. The first consists of approximately three acres of land and buildings totaling 64,000 square feet. The second consists of two acres of land with a 32,000 square foot facility. Tinsley, which owns Century Precision Optics, has two facilities in North Hollywood, California. The first facility consists of approximately 21,000 square feet with a base monthly rent expense of approximately $21,300 under a lease expiring in 2004. The second facility consists of approximately 5,000 square feet with a base monthly rent expense of approximately $4,500. This lease is on a month to month basis. The Company also leases storage and warehouse space near its headquarters in San Jose, office and warehouse space near its Thermal facilities in Orange and Scotts Valley, sales and service offices in key locations throughout the United States, Western Europe and the Pacific Rim. 15 16 ITEM 3. LEGAL PROCEEDINGS. On or about August 12, 1998, Fullman International Inc. and Fullman Company LLC (collectively, "Fullman") initiated a lawsuit in the United States District Court for the District of Oregon alleging claims for fraudulent conveyance, constructive trust and declaratory relief in connection with a settlement the Company had previously entered into resolving its claims against a Thailand purchaser of the Company's equipment. In its complaint against the Company, Fullman, allegedly another creditor of the Thailand purchaser, alleges damages of approximately $11,500,000 plus interest. The Company has successfully moved to transfer the case to the United States District Court for the Northern District of California. The trail is tentatively scheduled for July 2000. While the outcome of such litigation is uncertain, the Company believes it has meritorious defenses to the claims and intends to conduct a vigorous defense. However, an unfavorable outcome in this matter could have a material adverse effect on the Company's financial condition.* On July 8, 1999, the Company filed a complaint for copyright infringement to protect its investment and intellectual property from six third party vendors ("the Defendants"), subsequently, complaints against two of the Defendants were withdrawn by the Company. The complaint was filed against the Defendants alleging that the named defendants have infringed upon certain copyrights owned by the Company on its 8X series equipment by duplicating or modifying software in the refurbishment and sale of replacement boards. The complaint further asks for preliminary and permanent injunction against the Defendants' further infringement of the Company's copyrights and sale of infringing systems and boards, and for an award of damages. One of the Defendants has filed a counterclaim against the Company in response to the Company's complaint. In addition to the above, the Company, from time to time, is party to various legal actions arising out of the normal course of business, none of which is expected to have a material effect on the Company's financial position or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of the Company's security holders during the fiscal quarter ended September 30, 1999. 16 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded in the over-the-counter market on the Nasdaq National Market System under the symbol SVGI. The following table sets forth the range of high and low sales prices of the stock during fiscal years 1998 and 1999 as reported by Nasdaq-NMS.
FISCAL 1998 FISCAL 1999 -------------------- ----------------------- HIGH LOW HIGH LOW ------- ------- --------- -------- First Quarter $36-1/4 $18-3/8 $13-5/16 $ 6-5/8 Second Quarter 27-7/8 19 17-5/16 10-3/8 Third Quarter 21-1/2 15-3/4 16-13/16 12-1/16 Fourth Quarter 16-1/2 8 17-11/16 11
To date, the Company has not declared or paid dividends on its common stock. The Board of Directors of the Company presently intends to retain all earnings for use in the Company's business and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. The Company's revolving credit facility prohibits the payment of cash dividends on common stock. As of November 26, 1999, there were 806 holders of record of the common stock. ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data concerning the Company for and as of the end of each of the years in the five year period ended September 30, 1999, are derived from the audited consolidated financial statements of the Company. The selected financial data are qualified in their entirety by the more detailed information and financial statements, including the notes thereto. The financial statements of the Company as of September 30, 1999, and for each of the three years in the period ended September 30, 1999, and the report of Deloitte and Touche LLP thereon, are included elsewhere in this report.
YEARS ENDED SEPTEMBER 30, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- Statement of operations data: Net sales $475,141 $657,337 $614,226 $608,625 $473,690 Income (loss) before income taxes and minority interest 61,696 99,809 4,198 (27,157) (37,436) Net income (loss) 39,263 64,099 2,592 (13,577) (25,456) Preferred stock dividend 537 -- -- -- -- Net income (loss) per share--basic $ 1.66 $ 2.09 $ 0.08 $ (0.42) $ (0.77) Shares used in per share computations--basic 23,627 30,657 31,635 32,438 32,926 Net income (loss) per share--diluted $ 1.61 $ 2.06 $ 0.08 $ (0.42) $ (0.77) Shares used in per share computations--diluted 24,326 31,122 32,414 32,438 32,926 Balance Sheet Data: Working capital $328,128 $466,637 $420,486 $371,960 $382,155 Total assets 513,665 744,257 756,017 730,590 754,773 Long-term debt and capital leases 2,015 1,718 6,515 5,865 26,790 Stockholders' equity 358,614 551,242 573,110 561,530 557,537 Other Data: Backlog $400,324 $404,889 $437,668 $254,129 $357,455 Number of employees 2,757 3,185 3,515 2,660 3,078
17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to certain risks and uncertainties, including those discussed below that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Forward-looking statements are indicated by an asterisk (*) following the sentence in which such statement is made. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS The Company primarily designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. The Company's products are used in photolithography for exposure and photoresist processing, and in deposition for oxidation/diffusion and low pressure chemical vapor deposition ("LPCVD"), and with the acquisition of the Semiconductor Equipment Group of Watkins-Johnson, thermal processing products which address atmospheric pressure chemical vapor deposition ("APCVD"). The Company manufactures and markets photolithography exposure SVGL products, photoresist processing Track products, oxidation/diffusion, chemical vapor deposition and LPCVD, APCVD Thermal products and certain precision optical components. On July 6, 1999, the Company acquired the business of the Semiconductor Equipment Group of Watkins-Johnson Company ("SEG"). The acquisition was accounted under the purchase method of accounting for financial reporting purposes. The results of the Company for fiscal 1999 include the operating results of SEG from the date of acquisition. On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI"). The transaction has been accounted for as a pooling of interests for financial reporting purposes. All amounts discussed below have been retroactively restated to reflect the inclusion of TLI. The semiconductor industry into which the Company sells its products is highly cyclical and has, historically, experienced periodic downturns that have had a severe effect on the semiconductor industry's demand for semiconductor processing equipment. As a result of the Asian economic crisis which began in 1997, an oversupply of certain semiconductor products, the impact of low cost personal computers, and various other factors, semiconductor manufacturers reduced planned expenditures and cancelled or delayed the construction of new fabrication facilities. This slowdown in demand began to impact the Company during the first quarter of fiscal 1998 and continued to impact the Company through out fiscal 1999. The slowdown in demand resulted in the Company experiencing lower new customer orders, customer deferrals of scheduled equipment delivery dates and, to a lesser extent, customer order cancellations. Customer orders with scheduled delivery dates are referred to by the Company as bookings. Last year's lower bookings, order rescheduling and cancellations, have caused sales and net income during fiscal 1999 to decline from prior years amounts. Although the Company has experienced a modest improvement in new bookings as during the second half of fiscal 1999 the Company recorded new bookings of $324,213,000 up from new bookings of $254,444,000 and $237,451,000 during the first half of fiscal 1999 and the second half of fiscal 1998, respectively, there can be no assurance that the dollar amount of new bookings will continue to increase. There can be no assurance that the Company will not in the future experience further customer delivery deferrals, additional order cancellations or a prolonged period of customer orders at reduced levels, any or a combination of which would have a material adverse effect on the Company's business and results of operations.* During fiscal 1998 in an effort to lessen the impact of these lower sales volumes, the Company took several steps to reduce operating expenses including a reduction in workforce, temporary shutdowns and the restructuring of certain portions of the Company's business. During the second half of fiscal 1998, the Company shut down the majority of its operations for 15 days and recorded restructuring and related charges of $33,680,000. The restructuring and related charges include costs of $28,521,000 resulting from the termination of the Company's previously announced 200-APS photoresist processing system and a provision of $5,159,000 for 1998 reductions in the Company's workforce for approximately 1,150 employees. Historically, the Company has relied on a limited number of customers for a substantial percentage of its net sales. In fiscal 1999, the Company's largest customer accounted for 56% of net sales. The Company believes that, for the foreseeable future, it will continue to rely on a limited number of major customers for a substantial percentage of its net sales.* 18 19 FISCAL 1999 COMPARED TO FISCAL 1998 Net sales for fiscal 1999 were $473,690,000, 22% below fiscal 1998 net sales of $608,625,000. The decrease in net sales was due to lower shipments of Track, Thermal and Lithography products during fiscal 1999, offset in part by sales of APCVD products during the fourth quarter of fiscal 1999 resulting from the SEG acquisition. The decrease in net sales occurred across all geographies except Israel where sales increased by $40,298,000 reflecting continued expansion of customer manufacturing operations in Israel. The Company's fiscal 1999 net bookings were $545,709,000, representing a book to bill ratio of 1.15 to 1, significantly above fiscal 1998 net bookings of 427,272,000, representing a book to bill ratio of .70 to 1. At September 30, 1999, the Company had a backlog of $357,455,000, a 41% increase over September 30, 1998 backlog of $254,129,000. The Company includes in backlog only those orders to which a purchase order number has been assigned by the customer, with substantially all of the terms and conditions agreed upon, and for which delivery has been specified within twelve months. During the third quarter of fiscal 1999, the Company reduced its 193-nanometer orders by approximately $53,000,000; of this amount, customer orders for three machines totaling $31,500,000 were cancelled and removed from the Company's backlog due to customer requirements having changed. (See "SVGL- Research and Development Funding"). Backlog at September 30, 1999, included orders for 47 Micrascan photolithography products. During the first quarter of fiscal 1999, the Company recognized net sales of approximately $20,000,000 from one customer who accepted and took title to the related equipment and agreed to normal payment terms, but requested that the Company store the equipment until predetermined shipment dates. During fiscal 1998 approximately $58,000,000 in net sales to two such customers was recognized. At September 30, 1999, the Company was storing approximately $1,500,000 of such equipment with a scheduled shipment date of March 2000. Fiscal 1999 gross margin was 34%, slightly above fiscal 1998 gross margin of 33%. Fiscal 1998 cost of sales includes $19,117,000 in restructuring charges for the write-off of 200-APS inventory. Excluding the impact of the 200-APS inventory charge, the fiscal 1998 adjusted gross margin was 36%. The decrease in fiscal 1999 gross margin when compared to fiscal 1998 adjusted gross margin was primarily the result of the impact associated with the fourth quarter fiscal 1999 inventory provision due to the cancellation of orders (discussed above) under the Low NA 193nm Lithography program, higher per unit costs resulting from lower shipment volumes of Thermal products, partially offset by higher margin shipments of the Company's newly acquired APCVD products. Research, development and related engineering ("R&D") expenses are net of funding received from outside parties under various development agreements. Such funding is typically payable upon the attainment of one or more development milestones that are specified in the agreements. During fiscal years 1997, 1998 and 1999 funding was primarily related to agreements between the Company and certain customers for the development of a 193-nanometer Micrascan system ("193 Development Program"). During June 1999 certain participants in the 193 Development Program decided that their product needs have changed for initial 193-nanometer machines and have withdrawn from the development program and chosen to use or are evaluating other solutions. (See "SVGL-Research and Development Funding.") During fiscal 1999, R&D expenses were $94,698,000 (20% of net sales), compared to $87,272,000 (14% of net sales) during fiscal 1998. Such R&D amounts are net of funding recognized under joint development agreements of $2,902,000 and $11,997,000 during fiscal 1999 and fiscal 1998, respectively. R&D expense increased over fiscal 1998 primarily due to increased spending on the 157-nanometer development program, reduced development funding, offset in part by reduced spending on the 200-APS Track product resulting from its fiscal 1998 cancellation. The increase in R&D as a percentage of net sales reflects the significant year-to-year decrease in net sales. Fiscal 1999, marketing, general and administrative ("MG&A") expenses were $109,819,000 (23% of net sales), lower than fiscal 1998 MG&A of $130,615,000 (21% of net sales). The decrease in MG&A from the preceding year was primarily due to reduced product support costs. The increase in MG&A as a percentage of net sales reflects the significant year-to-year decrease in net sales. As discussed above, during the fourth quarter of fiscal 1998, the Company recorded restructuring and related charges of $33,680,000, of which $14,563,000 was classified as operating expenses. During the fourth quarter of fiscal 1999, the Company revised its estimate primarily relating to severance and benefits and reversed approximately $506,000 of the fiscal 1998 restructuring and related charges accrued against operating expenses. 19 20 For fiscal 1999, the Company had an operating loss of $42,640,000, compared to an operating loss of $32,221,000 during fiscal 1998. In comparison to the preceding year, the increase in the operating loss is primarily from reduced gross margin resulting from reduced net sales, increased R&D expenses offset in part by the absence of restructuring charges in fiscal 1999 and lower MG&A expenses. Interest and other income was $6,509,000 during fiscal 1999 compared to $6,082,000 for fiscal 1998. The year to year increase in interest and other income was primarily the result of foreign currency translation and exchange gains offset in part by lower interest income due to lower average cash balances available for investment. Interest expense in fiscal 1999 was $1,305,000 compared to fiscal 1998 interest expense of $1,018,000. The increase in interest expense between periods is primarily due to the three Japanese bank loans assumed in connection with the acquisition of SEG. (See Note 8 to the Consolidated Financial Statements). The Company recorded a 32% benefit for income taxes for fiscal 1999, compared to a 50% benefit for fiscal 1998. Variations in the Company's effective tax rate relate primarily to changes in the geographic distribution of its pretax income and certain tax-free interest income. (See Note 10 to the Consolidated Financial Statements). For fiscal 1999 the Company had a net loss of $25,456,000 ($0.77 loss per share--diluted), compared to a net loss of $13,577,000 ($0.42 loss per share--diluted) for fiscal 1998. FISCAL 1998 COMPARED TO FISCAL 1997 For fiscal 1998, net sales were $608,625,000, slightly below fiscal 1997 net sales of $614,226,000. The decrease in net sales was due to lower shipments of Thermal and Track products during fiscal 1998, offset in part by increased shipments of the SVGL Micrascan photolithography product. The decrease in net sales occurred across all geographies except Ireland and Israel where sales increased by $83,285,000 and $11,118,000, respectively. These increases reflected expansions of customer manufacturing operations in these countries. The Company's fiscal 1998 net bookings were $427,272,000, which represented a book to bill ratio of 0.70 to 1, significantly below fiscal 1997 net bookings of $648,001,000, which represented a book to bill ratio of 1.05 to 1. At September 30, 1998, the Company had a backlog of $254,129,000, a 42% decrease from the September 30, 1997 backlog of $437,668,000. For fiscal 1998, the Company's gross margin was 33%, significantly below the fiscal 1997 gross margin of 38%. Fiscal 1998 included a restructuring charge of $19,117,000 for the write-off of 200-APS inventory, which has been included in cost of sales. This restructuring charge accounted for 3% of the year to year decrease in gross margin. Without taking into account the 200-APS inventory charge, the fiscal 1998 gross margin was 36%, a decrease of 2% from the fiscal 1997 gross margin. This decrease was primarily the result of lower volumes and higher fixed costs for SVGL products during the second half of fiscal 1998 and the overall effect of lower volumes of Thermal and to a lesser degree, Track products. R&D expenses were $87,272,000 (14% of net sales) during fiscal 1998, compared to $74,311,000 (12% of net sales) during fiscal 1997. Such R&D amounts are net of funding recognized under joint development agreements of $11,997,000 and $7,968,000 during fiscal 1998 and fiscal 1997, respectively. The year to year increase in R&D was primarily due to new product and process development, particularly for SVGL products, the design and development of equipment capable of processing the next generation 300mm wafer and costs associated with Track's subsequently terminated 200-APS program. During late fiscal 1996 and early fiscal 1997, the Company sold approximately $20,000,000 in product to SubMicron Technology PCL ("SMT"), a newly established semiconductor foundry in Thailand. SMT paid the Company approximately $14,000,000 before encountering severe financial difficulties. During the third quarter of fiscal 1997, the Company determined that the remaining receivable from SMT was uncollectible. After reversing costs accrued for the installation and warranty of the products sold to SMT, the Company recorded a net charge against its fiscal 1997 operating results of approximately $4,000,000 (the "SMT Charge"). 20 21 During fiscal 1998, marketing, general and administrative ("MG&A") expenses were $130,615,000 (21% of net sales), lower than fiscal 1997 MG&A of $134,642,000 (22% of net sales). The decrease in MG&A from the preceding year was primarily due to the effect of the SMT Charge on fiscal 1997 MG&A. As discussed above, during the fourth quarter of fiscal 1998, the Company recorded restructuring and related charges of $33,680,000, of which $14,563,000 was classified as operating expenses. Under the terms of a research and development agreement, SVGL owed IBM certain royalties based on future operating results. During the second quarter of fiscal 1997, the Company satisfied its obligation to IBM, recognized an expense of $32,582,000, which represented royalties related to products currently under development, and recorded a prepayment of $5,418,000, which represented royalties related to existing products which are being amortized through fiscal 2000. For fiscal 1998, the Company had an operating loss of $32,221,000, compared to an operating loss of $5,423,000 during fiscal 1997. In comparison to the preceding year, the fiscal 1998 operating loss was the result of the restructuring charges, lower gross margins on lower net sales and increased R&D expenses, offset in part by the non-recurring royalty settlement during fiscal 1997. Interest and other income was $6,082,000 during fiscal 1998 compared to $10,639,000 for fiscal 1997. The year to year decrease in interest and other income was primarily the result of lower interest income due to lower average cash balances available for investment, foreign currency translation and exchange losses, in large part due to the strength of the U.S. dollar during fiscal 1998, and the absence of certain royalty income under an agreement which expired during the fourth quarter of fiscal 1997. Interest expense of $1,018,000 in fiscal 1998 was equivalent to fiscal 1997 interest expense of $1,018,000. Interest expense in fiscal 1998 and 1997 was primarily associated with a $6,500,000 loan received from the Connecticut Development Authority. (See Note 8 to the Consolidated Financial Statements). The Company recorded a 50% benefit for income taxes for fiscal 1998, compared to a 36% provision for fiscal 1997. Variations in the Company's effective tax rate relate primarily to changes in the geographic distribution of its pretax income, settlement of royalty obligations and certain tax-free interest income. (See Note 10 to the Consolidated Financial Statements). The minority interest reflected in the Company's 1997 financial statements represents that share of SVGL's operating results attributable at the time to its minority stockholder, IBM. In March 1997, the Company purchased IBM's interest in SVGL for $3,000,000. The Company now accounts for SVGL as a wholly owned subsidiary and there is no longer a minority interest. In fiscal 1997, minority interest was recorded from the beginning of the fiscal year through the date the Company purchased IBM's interest and represented a reduction from income of $92,000. For fiscal 1998 the Company had a net loss of $13,577,000 ($0.42 loss per share--diluted), compared to net income of $2,592,000 ($0.08 per share--diluted) for fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, cash and cash equivalents and short-term investments totaled $142,246,000, a decrease of $7,754,000 from the September 30, 1998 balance of $150,000,000 and a decrease of $64,415,000 from the September 30, 1997 balance of $206,661,000. During fiscal years 1999 and 1998 the Company generated $2,933,000 and $22,422,000, respectively, in cash from operating activities. Contributors to positive cash from operations during fiscal 1999 include non-cash depreciation and amortization, reduced inventories and refundable income taxes offset in part by increased accounts receivable resulting from increased fourth quarter sales, a net loss of $25,456,000 for the fiscal year and reduced accrued liabilities. Net cash used for investing activities for fiscal years 1999 and 1998 was $45,996,000 and $30,661,000, respectively. During fiscal 1999 purchases of capital equipment were $30,937,000 and net purchases of temporary investments were $15,198,000. Net cash provided by financing activities was $19,056,000 in fiscal 1999 compared to $2,941,000 during fiscal 1998. During fiscal 1999 the Company received $14,976,000 from the sale of preferred stock and $4,940,000 from the exercise of stock options and issuance of stock under the Company's Employee stock purchase plan. 21 22 In connection with the acquisition of SEG (See Note 2 to the Consolidated Financial Statements) the Company assumed three Yen-denominated bank loans totaling approximately $22,700,000 bearing interest at rates of between 2.2% and 3.1%. On June 30, 1998, the Company entered into an unsecured $150,000,000 bank revolving line of credit agreement that expires June 30, 2001. Advances under the line bear interest at the bank's prime rate or 0.65% to 1.50% over LIBOR. The agreement includes covenants regarding liquidity, profitability, leverage, and coverage of certain charges and minimum net worth and prohibits the payment of cash dividends. On October 23, 1998 and May 14, 1999, certain of the covenants were amended, in part to reflect the acquisition of SEG and change quarterly profitability covenants. The Company is in compliance with the covenants as amended. At September 30, 1999, there were no borrowings outstanding under the facility. The Company believes that it has sufficient working capital and available bank credit to sustain operations and research and development activities, to the extent such activities are not funded by third parties, and provide for the expansion of its business for the next twelve months.* YEAR 2000 As the Year 2000 approaches, a universal issue has emerged regarding how existing application software programs and operating systems can accommodate date values. The Company has evaluated and continues to evaluate its Year 2000 risk as it exists in three areas: information technology infrastructure, including reviewing what actions are necessary to bring all software tools used internally to Year 2000 compliance; Year 2000 readiness of critical suppliers; and Year 2000 compliance of the products the Company supplies to its customers. The Company evaluated its information technology infrastructure for Year 2000 compliance, which included reviewing what actions were required to make all internal-use software systems Year 2000 compliant. The Company has completed the modification of its internal-use computer software for the Year 2000. The third party costs associated with such modifications were $124,000 and were expensed in fiscal 1998. Although the Company believes that the solutions, which were extensively tested, have resulted in its internal-use systems being Year 2000 compliant, there can be no assurance that unforeseen problems that could disrupt operations will not arise, or that the Company will not be required to expend further cost and effort to solve such problems.* The Company has contacted its critical suppliers and service providers to ascertain their state of readiness and compliance for Year 2000 issues. Responses have generally indicated substantial remediation, or documented plans to remediate the Year 2000 issue. Some suppliers have given written certification of internal and product compliance. Substantially all critical suppliers have indicated compliance of their products or service. The Company will continue to monitor their progress and compliance for these issues. There can be no assurance, however, that the Company's suppliers and service providers will timely provide the Company with products or services which are Year 2000 compliant. Any failure to do so by such third parties could have a material adverse impact on the Company's results of operations.* The Company has evaluated its products and identified those areas containing date sensitive Year 2000 issues. The Company adheres to Year 2000 test case scenarios established by SEMATECH, an industry group comprised of U.S. semiconductor manufacturers. The Company's compliance efforts and review and identification of corrective measures are substantially complete. Based on this review, the Company believes that all products currently being shipped are Year 2000 compliant. The Company has made available for potential sale the necessary modifications to bring previously shipped products into compliance. As all customer events cannot be anticipated, the Company may see an increase in product warranty and other claims.* In the event that any of the Company's products ultimately are not Year 2000 compliant, or there are customer claims made against the Company, the Company's business, financial condition and results of operations could be adversely affected.* The total cost to address the Year 2000 issue has not been and is not expected to be material to the Company's financial condition.* The Company is using both internal and external resources in its Year 2000 project.* The Company does not segregate internal costs incurred to assess and remedy deficiencies related to the Year 2000 problem or modifications to its products. At this time, the Company does not feel it is necessary to develop a contingency plan.* As risks are identified, plans will be developed and implemented as required. 22 23 Although the Company believes its Year 2000 plans will be successful, there can be no assurance that unforeseen problems will not happen which could have a material adverse effect on the Company.* RISKS INHERENT IN THE COMPANY'S BUSINESS Fluctuations in Quarterly Results. The Company has, at times during its existence, experienced quarterly fluctuations in its operating results. Due to the relatively small number of systems sold during each fiscal quarter and the relatively high revenue per system, customer order rescheduling or cancellations, or production or shipping delays can significantly affect quarterly revenues and profitability. The Company has experienced, and may again experience, quarters during which a substantial portion of the Company's net sales are realized near the end of the quarter.* Accordingly, shipments scheduled near the end of a quarter, which are delayed for any reason, can cause quarterly net sales to fall short of anticipated levels. Since most of the Company's expenses are fixed in the short term, such shortfalls in net sales could have an adverse effect on the Company's business and results of operations.* The Company's operating results may also vary from quarter to quarter based upon numerous factors including the timing of new product introductions, product mix, level of sales, the relative proportion of domestic and international sales, activities of competitors, acquisitions, international events, currency exchange fluctuations, and difficulties obtaining materials or components on a timely basis.* In light of these factors, the Company may again experience variability in its quarterly operating results.* Rapid Technological Change; Dependence on New Product Development. Semiconductor manufacturing equipment and processes are subject to rapid technological change. The Company believes that its future success will depend upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities that enable semiconductor manufacturers to fabricate more advanced semiconductors with increased efficiency.* The Company is developing Track and Lithography products, and has shipped limited quantities of Thermal products, capable of processing 300mm wafers in anticipation of the industry's transition to this larger wafer standard.* Failure to successfully introduce these or any other new products in a timely manner would result in the loss of competitive position and could reduce sales of existing products.* In addition, new product introductions could contribute to quarterly fluctuations in operating results as orders for new products commence and increase the potential for a decline in orders of existing products, particularly if new products are delayed.* From time-to-time, the Company has experienced delays in the introduction of its products and product enhancements due to technical, manufacturing and other difficulties and may experience similar delays in the future.* For example, during fiscal 1996, the Company announced the subsequently terminated 200-APS Track product. Initial shipments of the 200-APS were scheduled to commence during the second quarter of fiscal 1997, and were delayed until the second quarter of fiscal 1998. This delay, as well as industry developments, caused the Company to implement a plan, which was announced on September 30, 1998, to terminate future development and shipments of its 200-APS products, and to concentrate its efforts on completing the ProCell product which had been in development for approximately one year. There can be no assurance that the Company will not experience delays in completing the development or manufacturing problems related to the ProCell product as a result of instability of the design of either the hardware or software elements of the new technology, or be able to efficiently manufacture the new product or other products.* During June of 1999 the Company introduced the ProCell product for shipment in fiscal 2000. The Company believes that protracted delays in delivering initial quantities of this newly introduced product or any new product to multiple customers could result in semiconductor manufacturers electing to install competitive equipment and could preclude industry acceptance of the ProCell product or any of the Company's products.* The inability to produce such products or any failure to achieve market acceptance could have a material effect on the Company's business, results of operations and could result in a subsequent loss of future sales.* In June of 1999, five participants in the 193-nanometer Development Program decided that their product needs have changed for initial 193-nanometer machines and have withdrawn from the development program and declined delivery of initial tools. These participants withdrew in part due to delays in product introduction and changes in participant's technical requirements. As the Lithography demands continue, the Company is responding by accelerating the development of a very high numerical aperture ("VHNA") version of its 193-nanometer product. In order to address a broader market with this tool, the Company is also redesigning its stage technology to optimize cost of ownership. Although the Company believes that the timing of the introduction of the product will be sufficient to meet volume production requirements of .13 micron, there can be no assurance that the product will be introduced on time or that customers will wait for the product to commit for their production needs.* The absence of a successful implementation of the product or obtaining sufficient orders for this product could have a material adverse impact on the future profitability of the Company.* Semiconductor manufacturers tend to select either a single supplier or a primary supplier for a certain type of equipment. The Company believes that prolonged delays in delivering initial quantities of newly developed products to multiple customers, whether 23 24 due to the protracted release of product from engineering into manufacturing or due to manufacturing difficulties, could result in semiconductor manufacturers electing to install competitive equipment in their fabrication facilities and could preclude industry acceptance of the Company's products.* For example, the Company's largest Track customer has decided to secure deliveries from another source, a decision the Company believes is primarily due to the delay and subsequent termination of the 200-APS. Initial shipments into the market of a new technology Track product, the ProCell, is not expected until fiscal 2000.* As a result, competitors will increase their market share, and it will be increasingly more difficult for the Company to regain market position.* The Company's inability to effect the timely production of new products or any failure of these products to achieve market acceptance could have a material adverse effect on the Company's business and results of operations.* Historically, the unit cost of the Company's products has been the highest when they are newly introduced into production and cost reductions have come over time through engineering improvements, economies of scale and improvements in the manufacturing process.* As a result, new products have, at times, had an unfavorable impact on the Company's gross margins and results of operations. There can be no assurance that the initial shipments of new products will not have an adverse effect on the Company's profitability or that the Company will be able to attain design improvements, manufacturing efficiencies or manufacturing process improvements over time.* Further, the potential unfavorable effect of newly introduced products on profitability can be exacerbated when there is intense price competition in the marketplace.* Competition. The semiconductor equipment industry is intensely competitive. The Company faces substantial competition both in the United States and other countries in all of its products. The Company's competitors include Tokyo Electron, Ltd. ("TEL") and DaiNippon Screen Mfg. Co., Ltd. in photoresist processing equipment; TEL and Kokusai Electric Co., Ltd. in oxidation/diffusion, LPCVD equipment; in its newly acquired APCVD products from Watkins-Johnson the Company's competitors include Applied Materials and Quester; and Nikon, Canon, ASM Lithography and other suppliers of photolithography exposure equipment, and projection aligners. The trend toward consolidation in the semiconductor processing equipment industry has made it increasingly important to have the financial resources necessary to compete effectively across a broad range of product offerings, to fund customer service and support on a worldwide basis and to invest in both product and process research and development. Significant competitive factors include technology and cost of ownership, a formula which includes such data as initial price, system throughput and reliability and time to maintain or repair. Other competitive factors include familiarity with particular manufacturers' products, established relationships between suppliers and customers, product availability and technological differentiation. Occasionally, the Company has encountered intense price competition with respect to particular orders and has had difficulty establishing new relationships with certain customers who have long-standing relationships with other suppliers. The Company believes that outside Japan and the Pacific Rim it competes favorably with respect to most of these factors.* (See "Importance of Japanese and Pacific Rim Markets".) Many of the Company's competitors are Japanese corporations. Although the economic conditions in Asia are improving, the Company believes that an oversupply of equipment from certain Japanese competitors may continue to cause more severe price competition in its non-Asian markets.* To compete effectively in these markets, the Company may be forced to reduce prices, which could cause further reduction in net sales and gross margins and, consequently, have a material adverse effect on the Company's financial condition and results of operations.* Customer Concentration. Historically, the Company has relied on a limited number of customers for a substantial percentage of its net sales. In fiscal 1999, the Company's largest customer accounted for 56% of net sales and no other single customer accounted for 10% or more of net sales. In fiscal 1998, the Company's three largest customers accounted for 40%, 17% and 13% of net sales. The Company believes that, for the foreseeable future, it will continue to rely on a limited number of major customers for a substantial percentage of its net sales.* As a result of delays in delivering initial quantities of the subsequently terminated 200-APS Track product, one of the Company's largest Track customers has decided to purchase systems with similar capabilities from another supplier. We expect that the decision by such customer to purchase systems from other suppliers and the cancellation of the 200-APS Track product will continue to have an adverse effect on Track product sales in future periods.* (See "Risks Inherent in the Company's Business - Rapid Technological Change; Dependence on New Product Development"). The loss of any other significant customer or additional reductions in orders by a significant customer, including reductions in orders due to market, economic or competitive conditions in the semiconductor industry, or delays in the introduction of newly developed products and product enhancements will further exacerbate the adverse effect the customer order rescheduling and cancellations discussed above will have on the Company's business and results of operations.* Importance of the Japanese and Pacific Rim Markets. The Company's customers are heavily concentrated in the United States and Europe. The Japanese and Pacific Rim markets (including fabrication plants located in other parts of the world which are operated by Japanese and Pacific Rim semiconductor manufacturers) represent a substantial portion of the overall market for semiconductor manufacturing equipment. To date, neither the Company's shipments into Japan nor the Pacific Rim have been significant. The 24 25 Company believes that the Japanese companies with which it competes have a competitive advantage because their dominance of the Japanese and Pacific Rim semiconductor equipment market provides them with the sales and technology base to compete more effectively throughout the rest of the world. The Company is not engaged in any significant collaborative effort with any Japanese or Pacific Rim semiconductor manufacturers. As a result, the Company may be at a competitive disadvantage to the Japanese equipment suppliers that are engaged in such collaborative efforts with Japanese and Pacific Rim semiconductor manufacturers. The Company believes that it must substantially increase its share of these markets if it is to compete as a global supplier.* Further, in many instances, Japanese and Pacific Rim semiconductor manufacturers fabricate devices such as dynamic random access memory devices ("DRAMs"), with potentially different economic cycles than those affecting the sales of devices manufactured by the majority of the Company's U.S. and European customers. Failure to secure customers in these markets may limit the global market share available to the Company and may increase the Company's vulnerability to industry or geographic downturns.* In the past, several of the Company's larger customers have entered into joint ventures ("JV") with European, Japanese or Pacific Rim semiconductor manufacturers. In such cases, the Company has encountered intense price competition from foreign competitors who are suppliers to the non-U.S. member of the JV. Further, in certain instances the Company has not secured the equipment order when the non-U.S. member has had the responsibility for selecting the equipment to be used by the JV in its U.S. operations. There can be no assurance that as the Company's customers form additional alliances, whether in the U.S. or in other parts of the world, that the Company will be successful in obtaining equipment orders or that it will be able to obtain orders with sufficient gross margin to generate profitable transactions, either of which could have an adverse effect on the Company's results of operations.* Throughout the Pacific Rim, the Company is attempting to compete with major equipment suppliers having significant market share and established service and support infrastructures in place. The Company has invested in the staffing and facilities that it believes are necessary to sell, service and support customers in the Pacific Rim and with the acquisition of SEG, the Company acquired from Watkins-Johnson Company a 36,000 square foot customer demonstration facility in Kawasaki City, Japan. However, the Company anticipates that it will continue to encounter significant price competition as well as competition based on technological ability.* There can be no assurance that the Company's Pacific Rim operations will be profitable, even if it is successful in obtaining significant sales into this region.* Further, due to recent economic issues in certain Asian countries, particularly Korea, the Company's ability to penetrate such markets has been more difficult. Failure to secure customers in these markets would have an adverse effect on the Company's business and results of operations.* Due to the high cost of building, equipping and maintaining fabrication facilities, many customers are outsourcing their manufacturing to foundries, many of which are located in Taiwan. Although the Company is focused on increasing its penetration into Taiwan, it has had limited success in securing volume orders from companies in this area, which have long standing relationships with the Company's competitors. If the Company is not successful in penetrating this market, it could have an adverse effect on the Company's net sales and results of operations.* Risks Associated with Acquisition of Watkins-Johnson Company's Semiconductor Equipment Group. On July 6, 1999, the Company completed the acquisition of the Semiconductor Equipment Group ("SEG") of Watkins-Johnson. The acquisition of the assets of SEG is accompanied by a variety of risks, which could prevent the Company from realizing any significant benefits from the transaction. The Company may experience difficulty with integrating the operations and personnel of the business acquired from Watkins-Johnson, need additional financial resources to fund the operations of the acquired business, be unable to maximize the Company's financial and strategic position by the incorporation or development of the acquired technology and products or lose key employees of the acquired business. In particular, the Company believes it must successfully transition the acquired technology of SEG to incorporate process improvements such as single wafer processing and scalability from 200mm to 300mm wafer processing capability.* There can be no assurance that the Company will not experience difficulties or delays in transitioning this technology which could have a material adverse effect on the Company.* The acquisition of SEG also included the assumption of certain liabilities of SEG, which may prove more costly than the Company anticipates. For example, certain environmental remediation steps have been put in place at the site, there can be no assurance that additional environmental hazards or liabilities will not surface which may have an adverse impact on the Company's business.* In order to successfully integrate SEG, the Company must, among other things, continue to attract and retain key personnel, integrate the acquired products, technology and information systems from engineering, sales, product development and marketing perspectives, and consolidate functions and facilities, which may result in future charges to streamline the combined operations. Difficulties encountered in the integration of SEG may have a material adverse effect on the Company.* Business Interruption. The Company manufactures its Track products in San Jose, California and substantially all of its Thermal products in Orange and Scotts Valley, California. Tinsley's optical components are manufactured in Richmond and North Hollywood, 25 26 California. These California facilities are located in seismically active regions. SVGL's photolithography exposure products are manufactured in Wilton and Ridgefield, Connecticut. If the Company were to lose the use of one of its facilities as a result of an earthquake, flood or other natural disaster, the resultant interruptions in operations would have a material adverse effect on the Company's results of operations and financial condition.* Euro Conversion. On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between each of their existing sovereign currencies and the Single European Currency. The participating countries adopted the Euro as their common legal currency on that date, with a transition period through January 2002 regarding certain elements of the Euro change. In January 1999, the Company implemented changes to its internal systems to make them Euro capable. The cost of system modifications to date has not been material, nor are future system modifications expected to be material.* The Company does not expect the transition to, or use of, the Euro to have a material adverse effect on the Company's results of operations and financial condition.* Environmental Matters. The Company is subject to a number of governmental regulations related to the discharge or disposal of toxic and hazardous chemicals used in the manufacture of certain of the Company's products. The Company believes that it is in general compliance with these regulations and that it has obtained or expects to obtain shortly all necessary environmental permits to conduct its business.* The failure to comply with present or future regulations could result in fines or penalties being assessed against the Company, interruption of production or reduction in the Company's customers accepting its products.* The Scotts Valley, California facility is subject to an environmental remediation plan being monitored by various governmental agencies. Watkins-Johnson Company purchased a guaranteed fixed price remediation contract from a third party environmental consultant to remediate the groundwater contamination at the facility. The remediation agreement (which includes insurance policies covering performance of the environmental consultant and coverage for undiscovered contamination) obligates the third party to perform all of the obligations and responsibilities of Watkins-Johnson Company. There can be no assurance that the third party consultant will have the financial resources or technical expertise to execute under the remediation agreement.* It is not inconceivable that environmental regulatory agencies could ultimately look to the Company to remediate the groundwater contamination at the site.* In August 1996, the Company purchased from Perkin-Elmer, approximately 50 acres of land and a 201,000 square foot building thereon (the "Property") located in Ridgefield, Connecticut. At the time the Company purchased the Property, it was aware that certain groundwater and soil contamination was present and that the Property was subject to a clean-up order being performed by Perkin-Elmer under the jurisdiction of the Connecticut Department of Environmental Protection. Agreements between the Company and Perkin-Elmer provide that Perkin-Elmer has sole responsibility for all obligations or liabilities related to the clean-up order. While the Company believes that it has been adequately indemnified, if for some reason Perkin-Elmer was unable to comply or did not comply with the clean-up order, the Company could be required to do so.* The Company does not anticipate any material capital expenditures for environmental control facilities in 2000.* SVGL - Uncertain Market for Micrascan Products. The Company believes that the photolithography exposure equipment market is one of the largest segments of the semiconductor processing equipment industry.* To address the market for advanced photolithography exposure systems, the Company has invested and expects to continue to invest substantial resources in SVGL's Micrascan technology and its family of Micrascan DUV step-and-scan photolithography systems, eventually capable of producing line widths of .10 micron and below. The development of a market for the Company's Micrascan step-and-scan photolithography products will be highly dependent on the continued trend towards finer line widths in integrated circuits and the ability of other lithography manufacturers to keep pace with this trend through either enhanced technologies or improved processes.* The Company believes DUV lithography is required to fabricate devices with line widths below 0.3 micron.* Semiconductor manufacturers can purchase DUV steppers to produce product at .25 micron line widths. However, the Company believes that as devices increase in complexity and size and require finer line widths, the technical advantages of DUV step-and-scan systems, as compared to DUV steppers, will enable semiconductor manufacturers to achieve finer line widths with improved critical dimension control which will result in higher yields of faster devices.* The Company also believes that the industry transition to DUV step-and-scan systems has accelerated in calendar 1999 and that advanced semiconductor manufacturers are beginning to require volume quantities of production equipment as advanced as the current and pending versions of Micrascan to produce both critical and to some degree sub-critical layers of semiconductor devices.* Currently, competitive DUV step-and-scan equipment capable of producing .25 micron line widths and below is available in limited quantities from three competitors.* Further, if manufacturers of DUV steppers are able to further enhance existing technology to achieve finer line widths sufficiently to erode the competitive and technological advantages of DUV step-and-scan systems, or other manufacturers of step-and-scan systems are successful in supplying sufficient quantities of product in a timely 26 27 manner that are technically equal to or better than the Micrascan, demand for the Micrascan technology may not develop as the Company expects.* The Company believes that advanced logic devices, DRAMs and ASICs will require increasingly finer line widths.* Consequently, SVGL must continue to develop advanced technology equipment capable of meeting its customers' current and future requirements while offering those customers a progressively lower cost of ownership.* In particular, the Company believes that it must continue its development of future systems capable of printing line widths finer than .10 micron and processing 300mm wafers.* Any failure by the Company to develop the advanced technology required by its customers at progressively lower costs of ownership and supply sufficient quantities to a worldwide customer base could have a material adverse impact on the Company's financial condition and results of operations.* The Company believes that for SVGL to succeed in the long term, it must sell its Micrascan products on a global basis. The Japanese and Pacific Rim markets (including fabrication plants located in other parts of the world which are operated by Japanese and Pacific Rim semiconductor manufacturers as well as foundries located primarily in Taiwan) represent a substantial portion of the overall market for photolithography exposure equipment. To date, the Company has not been successful in penetrating either of these markets. (See "Importance of the Japanese and Pacific Rim Markets"). SVGL - Need to Increase Manufacturing Capacity and System Output. The Company believes that its ability to supply systems in volume to multiple customers will be a major factor in customer decisions to commit to the Micrascan technology.* Based upon the expected transition from steppers to step-and-scan equipment for photolithography equipment, and potential future demand for advanced lithography products, the Company has been in the process of increasing SVGL's production capacity. In August 1996, as part of this expansion, the Company purchased from The Perkin-Elmer Corporation a 243,000 square foot facility (subsequently increased by the Company to 276,000 square feet) occupied by SVGL in Wilton, Connecticut and an additional 201,000 square foot building, which SVGL now occupies, in Ridgefield, Connecticut. The Company has invested in significant capital improvements related to the buildings purchased and the equipment required to expand the production capabilities of SVGL. While the Company has essentially completed its facility expansion activities, it has not invested in all of the metrology and other equipment required to maximize manufacturing capacity. However, the Company plans to continue increasing capacity to produce optical components, thus enabling it to quickly respond to customer requirements.* Once demand recovers, the timely equipping of facilities to successfully complete the increase in capacity will require the continued recruitment, training and retention of a high quality workforce, as well as the achievement of satisfactory manufacturing results on a scale greater than SVGL has attempted in the past. There can be no assurance that demand will recover or, that if it does, that the Company can manage these efforts successfully. Any failure to successfully manage such efforts could result in product delivery delays and a subsequent loss of future revenues. In particular, the Company believes that protracted delays in delivery quantities of current and future Micrascan products could result in semiconductor manufacturers electing to install competitive equipment in their advanced fabrication facilities, which could impede acceptance of the Micrascan products on an industry-wide basis.* This could result in the Company's operating results being adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if net sales, for any reason, do not increase commensurately.* The time required to build a Micrascan system is significant. If SVGL is to be successful in supplying increased quantities of Micrascan systems, it will not only need to be able to build more systems, it will need to build them faster.* SVGL will require additional trained personnel, additional raw materials and components and improved manufacturing and testing techniques to both facilitate volume increases and shorten manufacturing cycle time.* To that end, SVGL is continuing to develop its vendor supply infrastructure, and implement manufacturing improvements.* Additionally, the Company believes that as it increases its penetration of the Micrascan product, it must resume increasing its factory, field service and technical support organization staffing and infrastructure to support the anticipated customer requirements.* There can be no assurance that the Company will not experience manufacturing difficulties or encounter problems in its attempt to increase production and upgrade or expand existing operations.* One of the most critical components of the Micrascan systems is the projection optics, which are primarily manufactured by SVGL. As part of its overall investment in capacity, the Company has increased SVGL's optical manufacturing floor space. The Company believes that in order for SVGL to be a viable supplier of advanced lithography systems in the future, it must successfully reduce the cycle times required to build projection optics.* In November 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI") in exchange for approximately 1,091,000 shares of Company common stock. TLI designs, manufactures and sells precision optical components, assemblies and systems to customers in a variety of industries and research endeavors. The primary reasons for the acquisition were TLI's technology and expertise relating to aspherical lenses, a key component of SVGL's photolithography products, the adaptation of certain of TLI's manufacturing 27 28 processes by SVGL and TLI's commencement of the fabrication of non-aspherical lenses which are currently produced by SVGL. However, there can be no assurance that TLI's manufacturing technology is scaleable, or that such expertise can be transferred without substantial time or expense, if at all.* The inability of SVGL to transfer this production technology for use in processes of a substantially larger scale or the inability of TLI to manufacture non-aspherical lenses for SVGL in sufficient quantities to realize efficiencies of scale could adversely affect the Company's ability to realize any significant benefits from the acquisition of TLI.* The Company believes that protracted delays in delivering quantities of both current and future generations of Micrascan products to multiple worldwide customers could result in semiconductor manufacturers electing to install competitive equipment in their advanced fabrication facilities, and could preclude industry acceptance of the Micrascan technology and products.* In addition, the Company's operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity and field service and technical support activities if net sales do not increase commensurately.* SVGL - Sole Source Materials and Components. Most raw materials and components not produced by the Company are available from more than one supplier. However, certain raw materials, components and subassemblies are obtained from single sources or a limited group of suppliers. Although the Company seeks to reduce its dependence on these sole and limited source suppliers, and the Company has not experienced significant production delays due to unavailability or delay in procurement of component parts or raw materials to date, disruption or termination of certain of these sources could occur and such disruptions could have at least a temporary adverse effect on the Company's business and results of operations.* Moreover, a prolonged inability to obtain certain components could have a material adverse effect on the Company's business and results of operations and could result in damage to customer relationships.* The raw material for a proprietary component of the optical system for the Micrascan is available from only one supplier. The supplier has expanded its capacity to meet SVGL's projected long-term requirements and has created and stored agreed upon quantities of safety stock. There can be no assurance that the supplier will be able to provide acceptable quantities of material required by SVGL.* Additionally, a version of the Company's Micrascan III photolithography system utilizes an Excimer laser that is manufactured in volume by only one supplier. In fiscal 1999 SVGL qualified an additional source of lasers for its current and future versions of Micrascan products, allowing the potential for the integration of such lasers into its system configurations.* However, there can be no assurance that its customers will be receptive to procuring products with lasers from this supplier, or the supplier will be able to provide product of sufficient quantity and quality.* If these suppliers were unable to meet their commitments, SVGL would be unable to manufacture the quantity of products required to meet the anticipated future demand, which would have a material adverse effect on the Company's business and results of operations.* It is anticipated that a critical component of the optical system for the 157-nanometer lithography product, which is currently under development, will utilize Calcium Fluoride.* Calcium Fluoride is a raw material that has been known to be in short supply and is integral to the production of optics capable of producing quality line widths of .10 and below. The Company has or will shortly qualify three suppliers who could be sources of this raw material for the Company.* There can be no assurance that these suppliers will be able to supply the quality or quantity of the product necessary for the Company to meet expected future demand, which could have a material adverse effect on the Company's business and results on operations. SVGL - Research and Development Funding. Historically, the Company has depended on external funding to assist in the high cost of development in its photolithography operation. Beginning in fiscal 1996, the Company entered into agreements with certain customers (the "Participants") whereby each agreed to assist in funding the Company's development of an advanced technology 193-nanometer Micrascan system. In exchange for such funding, each Participant received the right to purchase one such system and, in addition, received a right of first refusal (ratable among such Participants) to all such machines manufactured during the first two years following the initial system shipments. For each initial system ordered, each Participant agreed to fund $5,000,000 in such development costs. The agreements call for each Participant to pay $1,000,000 of initial development funding and four subsequent payments of $1,000,000 upon the completion of certain development milestones. The Participants may withdraw from the development program without penalty, but payments made against completed development milestones are not refundable and all rights to future equipment are forfeited. At September 30, 1999, the Company had received and recognized $20,000,000 in funding from program Participants against research and development expenditures. Three competitors of the Company have either announced the development of, or have shipped 193-nanometer products. In June 1999, certain Participants decided that their product needs have changed for initial 193-nanometer machines and have withdrawn from the program and chosen to use or are evaluating other solutions. At September 30, 1999, the Company's obligations under these agreements are complete and no additional funding is expected or required from the Participants.* 28 29 In May 1999, the Company entered into an agreement with Intel Corporation ("Intel") for the development of 157-nanometer lithography technology. This agreement obligates the Company among other things to develop and sell to Intel a predetermined number of initial tools. Intel has agreed to provide advanced payments for the development and manufacture of these machines, based upon predetermined milestones. Separately, Intel has invested approximately $15,000,000 in the Company in the form of a purchase of Series 1 Convertible Preferred Stock (see Note 11 to the Consolidated Financial Statements). The Company is obligated to dedicate a certain amount of its 157-nanometer unit production output to Intel. The Company is required to use the proceeds from the Series 1 Preferred investment and funds received under the agreement for the development of technology for use on 157-nanometer lithography equipment. There can be no assurance that the Company will be successful in developing 157-nanometer technology or will be able to manufacture significant quantities of machines to satisfy its obligations to Intel or other customers.* There is no assurance that the Company will receive all funding which it currently anticipates or that it will be able to obtain future outside funding beyond that which it is currently receiving, and any failure to do so could have a material adverse impact on the Company's results of operations.* If the Company were required to use its own funds, its research and development expenses would increase and its operating income would be reduced correspondingly. SVGL - Market Penetration. The Company believes that for SVGL to succeed in the long term, it must expand its customer base and sell its Micrascan products on a global basis.* The Japanese market (including fabrication plants operated outside Japan by Japanese semiconductor manufacturers), the Taiwanese market and the Korean market represent a substantial portion of the overall market for photolithography exposure equipment. To date, the Company has not been successful penetrating any of these markets. Economic difficulties in certain Asian economies, particularly Korea, may adversely effect the Company's ability to penetrate such markets.* SVGL - Future Profitability. If SVGL is to attain its objective of being a volume supplier of advanced photolithography products to multiple customers, the Company believes that it must expand its customer base to include additional customers from whom it secures and successfully fulfills orders for production-quantities of Micrascan products.* The Company believes that in light of the recent downturn in industry demand, costs associated with the continued development of the Micrascan technology, the expansion of SVGL's manufacturing capacity, the related increase in manpower and customer support, increased competition and the potential difficulties inherent in developing and manufacturing sub-.25 micron Micrascan products, in particular the projection optics required for these products, there can be no assurance that SVGL will be able to operate profitably in the future.* Dependence on Key Personnel. The Company's future success will continue to depend to a large extent on the continued contributions of its executive officers and key management and technical personnel. In particular, SVGL's future growth is very dependent on the Company's ability to attract and retain key skilled employees, particularly those related to the optical segment of its business. The Company is a party to agreements with each of its executive officers to help ensure the officers' continual service to the Company in the event of a change-in-control. Each of the Company's executive officers, and key management and technical personnel would be difficult to replace. The loss of the services of one or more of the Company's executive officers or key personnel, or the inability to continue to attract qualified personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations.* Legal Proceedings. On or about August 12, 1998, Fullman International Inc. and Fullman Company LLC (collectively, "Fullman") initiated a lawsuit in the United States District Court for the District of Oregon alleging claims for fraudulent conveyance, constructive trust and declaratory relief in connection with a settlement the Company had previously entered into resolving its claims against a Thailand purchaser of the Company's equipment. In its complaint against the Company, Fullman, allegedly another creditor of the Thailand purchaser, alleges damages of approximately $11,500,000 plus interest. The Company has successfully moved to transfer the case to the United States District Court for the Northern District of California. The trial is tentatively scheduled for July 2000. While the outcome of such litigation is uncertain, the Company believes it has meritorious defenses to the claims and intends to conduct a vigorous defense. However, an unfavorable outcome in this matter could have a material adverse effect on the Company's financial condition.* On July 8, 1999, the Company filed a complaint for copyright infringement to protect its investment and intellectual property from six third party vendors ("the Defendants") subsequently complaints against two of the Defendants were withdrawn by the Company. The complaint was filed against the Defendants alleging that the named defendants have infringed upon certain copyrights owned by the Company on its 8X series equipment by duplicating or modifying software in the refurbishment and sale of replacement boards. The complaint further asks for preliminary and permanent injunction against the Defendants' further infringement of the Company's copyrights and sale of infringing systems and boards, and for an award of damages. One of the Defendants has filed a counterclaim against the Company in response to the Company's complaint. 29 30 In addition to the above, the Company, from time to time, is party to various legal actions arising out of the normal course of business, none of which is expected to have a material effect on the Company's financial position or operating results.* Recently Issued Accounting Pronouncements. In June 1998 and June 1999, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." These statements require companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company is required to adopt SFAS 133 for the fiscal year ending September 30, 2002. Although the Company has not fully assessed the impact of adoption, management believes that the adoption of these statements will not have a significant impact on its financial results.* In December 1999, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 101 (SAB101). SAB 101 summarizes certain interpretations and practices followed by the Division of Corporation finance and the Office of the Chief Accountant of the SEC in administering the disclosure requirements of the Federal securities laws in applying generally accepted accounting principles to revenue recognition in financial statements. Although the company has not fully assessed the impact of adoption, management believes that applying the guidance in this bulletin will not have a significant impact on its financial statements.* ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. The Company attempts to minimize its currency fluctuation risk by actively managing the balances of current assets and liabilities denominated in foreign currencies. A 10% change in the foreign currency exchange rates would not have a material impact on the Company's results of operations. During fiscal 1999 the Company did not use foreign currency hedging transactions, however it is the Company's intent during fiscal 2000 to sell forward contracts in Japanese Yen in order to hedge foreign currency exposures.* At September 30, 1999 the Company had investments in marketable debt securities that are subject to interest rate risk (See Note 4 to the Consolidated Financial Statements). However, due to the short-term nature of the Company's debt investments and the Company's ability to hold it's fixed income investments to maturity the impact of a 10% interest rate change would not have a material impact on the value of such investments.* At September 30, 1999 fixed rate debt obligations totaled $28,410,000 (See Note 8 to the Consolidated Financial Statements). The fixed rate obligations range between 2.2% to 12% with a weighted average of 3.93% and maturity dates through February 2011. Certain of the Company's manufacturing facilities are leased under operating lease agreements under which the monthly rent payments adjust based on LIBOR. Monthly rent payments are variable at 0.75% to 2.0% over LIBOR. For one of the leases, the Company has entered into an interest rate swap contract to fix the interest rate and therefore, the lease payment. For the other lease, the Company has income and cash flow exposure to the extent that LIBOR changes. The impact of a 10% change in interest rates would not have a material impact on the amount of lease payment. 30 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated Financial Statements Included in Item 8:
Page ---- Independent Auditors' Report................................................................................ 32 Consolidated Balance Sheets at September 30, 1998 and 1999.................................................. 33 Consolidated Statements of Operations for the Years Ended September 30, 1997, 1998 and 1999................. 34 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years Ended September 30, 1997, 1998 and 1999........................................................................... 35 Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1998 and 1999................. 36 Notes to Consolidated Financial Statements.................................................................. 37 Schedule for each of the three years in the period ended September 30, 1999 included in Item 14(a): II--Valuation and Qualifying Accounts and Reserves.......................................................... 53
Schedules other than those listed above have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. 31 32 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders of Silicon Valley Group, Inc.: We have audited the accompanying consolidated balance sheets of Silicon Valley Group, Inc. and its subsidiaries as of September 30, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended September 30, 1999. Our audits also included the consolidated financial statement schedule listed in Item 14.(a)2. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Silicon Valley Group, Inc. and its subsidiaries at September 30, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP - ------------------------------------- Deloitte & Touche LLP San Jose, California October 25, 1999 32 33 SILICON VALLEY GROUP, INC. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1998 1999 -------- -------- ASSETS Current Assets: Cash and equivalents $121,575 $ 98,278 Short-term investments 28,425 43,968 Accounts receivable (net of allowance for doubtful accounts of $8,232 and $5,038, respectively) 121,562 153,981 Refundable income taxes 15,000 2,500 Inventories 212,975 200,769 Prepaid expenses and other assets 7,485 9,826 Deferred income taxes 22,740 35,489 -------- -------- Total current assets 529,762 544,811 Property and equipment, net 191,022 198,403 Deposits and other assets 6,070 8,299 Intangible assets, net 3,736 3,260 -------- -------- Total $730,590 $754,773 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 25,346 $ 34,202 Accrued liabilities 130,532 123,266 Current portion of long-term debt 640 1,620 Income taxes payable 1,284 3,568 -------- -------- Total current liabilities 157,802 162,656 -------- -------- Long-term debt 5,865 26,790 -------- -------- Deferred and other liabilities 5,393 7,790 -------- -------- Commitments (See Notes 9, 13, 14 and 17) -- -- Stockholders' Equity: Convertible preferred stock--$0.01 par value, Shares authorized: 1,000,000; shares outstanding: 1998: none; 1999: 15,000 -- 14,976 Common stock--$0.01 par value, shares authorized: 100,000,000; shares outstanding: 1998: 32,696,394; 1999: 33,333,884 404,462 410,068 Retained earnings 160,384 134,928 Accumulated other comprehensive loss (3,316) (2,435) -------- -------- Total stockholders' equity 561,530 557,537 -------- -------- Total $730,590 $754,773 ======== ========
See Notes to Consolidated Financial Statements. 33 34 SILICON VALLEY GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1998 1999 -------- -------- -------- Net sales $614,226 $608,625 $473,690 Cost of sales: Cost of net sales 378,114 389,279 312,319 Restructuring charges -- 19,117 -- -------- -------- -------- Gross profit 236,112 200,229 161,371 Operating expenses: Research, development and related engineering 74,311 87,272 94,698 Marketing, general and administrative 134,642 130,615 109,819 Settlement of royalty obligation 32,582 -- -- Restructuring and related charges -- 14,563 (506) -------- -------- -------- Operating loss (5,423) (32,221) (42,640) Interest and other income 10,639 6,082 6,509 Interest expense (1,018) (1,018) (1,305) -------- -------- -------- Income (loss) before income taxes and minority interest 4,198 (27,157) (37,436) Provision (benefit) for income taxes 1,514 (13,580) (11,980) Minority interest 92 -- -- -------- -------- -------- Net income (loss) $ 2,592 $(13,577) $(25,456) ======== ======== ======== Net income (loss) per share--basic $ 0.08 $ (0.42) $ (0.77) ======== ======== ======== Shares used in per share computations--basic 31,635 32,438 32,926 ======== ======== ======== Net income (loss) per share--diluted $ 0.08 $ (0.42) $ (0.77) ======== ======== ======== Shares used in per share computations--diluted 32,414 32,438 32,926 ======== ======== ========
See Notes to Consolidated Financial Statements. 34 35 SILICON VALLEY GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
CONVERTIBLE ACCUMULATED PREFERRED STOCK COMMON STOCK OTHER ----------------- ---------------------- RETAINED COMPREHENSIVE (IN THOUSANDS EXCEPT SHARES) SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME(LOSS) TOTAL ------ ------- ---------- -------- -------- ------------- -------- Balances, October 1, 1996 -- -- 31,199,148 $379,553 $171,817 $ (128) $551,242 ------ ------- ---------- -------- -------- ------- -------- Stock issued in settlement of royalty obligation 489,296 9,994 9,994 Stock options exercised 372,464 3,853 3,853 Employee stock purchase plan 216,709 3,753 3,753 Tax benefit of stock option transactions 2,532 2,532 Adjustment to conform TLI fiscal year (5,275) (22) (22) Components of comprehensive income: Net income 2,592 2,592 Cumulative translation adjustment (240) (240) Pension liability (146) (146) Adjustment to conform TLI fiscal year (448) (448) -------- Total comprehensive income 1,758 ------ ------- ---------- -------- -------- ------- -------- Balances, September 30, 1997 -- -- 32,272,342 399,663 173,961 (514) 573,110 ------ ------- ---------- -------- -------- ------- -------- Stock options exercised 158,254 866 866 Employee stock purchase plan 265,798 3,196 3,196 Tax benefit of stock option transactions 737 737 Components of comprehensive loss: Net loss (13,577) (13,577) Cumulative translation adjustment (2,802) (2,802) -------- Total comprehensive loss (16,379) ------ ------- ---------- -------- -------- ------- -------- Balances, September 30, 1998 -- -- 32,696,394 404,462 160,384 (3,316) 561,530 ------ ------- ---------- -------- -------- ------- -------- Stock options exercised 214,659 1,444 1,444 Employee stock purchase plan 422,831 3,496 3,496 Tax benefit of stock option transactions 357 357 Stock compensation 309 309 Sale of convertible preferred stock, net of $24 in issuance costs 15,000 $14,976 14,976 Components of comprehensive loss: Net loss (25,456) (25,456) Cumulative translation adjustment 574 574 Change in unrealized gain on investments 345 345 Pension liability (38) (38) -------- Total comprehensive loss (24,575) ------ ------- ---------- -------- -------- ------- -------- Balances, September 30, 1999 15,000 $14,976 33,333,884 $410,068 $134,928 $(2,435) $557,537 ====== ======= ========== ======== ======== ======== ========
See Notes to Consolidated Financial Statements. 35 36 SILICON VALLEY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30 (IN THOUSANDS) 1997 1998 1999 --------- --------- --------- Cash Flows from Operating Activities: Net income (loss) $ 2,592 $ (13,577) $ (25,456) Reconciliation to net cash provided by operating activities: Depreciation and amortization 27,605 39,171 48,690 Settlement of royalty obligation 27,582 -- -- Amortization of intangibles 751 848 476 Deferred income taxes 948 (17,150) (11,620) Stock compensation -- -- 309 Adjustment to conform TLI fiscal year (470) -- -- Minority interest 92 -- -- Changes in assets and liabilities: Accounts receivable (14,250) 24,232 (32,419) Refundable income taxes -- (15,000) 12,500 Inventories (13,249) 15,478 26,318 Prepaid expenses and other assets (120) 22 (819) Deposits and other assets (1,159) 373 (2,502) Accounts payable 7,481 (18,361) 3,507 Accrued liabilities (9,350) 5,617 (16,366) Income taxes payable (3,416) 769 315 --------- --------- --------- Net cash provided by operating activities 25,037 22,422 2,933 --------- --------- --------- Cash Flows from Investing Activities: Purchases of short-term investments, available for sale (109,872) (10,190) (54,773) Maturities of short-term investments, available for sale 76,120 58,737 39,575 Purchases of property and equipment (89,932) (79,208) (30,937) Net cash received from SEG acquisition (See Note 2) -- -- 139 Purchase of minority interest in subsidiary (3,000) -- -- --------- --------- --------- Net cash used for investing activities (126,684) (30,661) (45,996) --------- --------- --------- Cash Flows from Financing Activities: Sale of preferred stock -- -- 14,976 Sale of common stock 7,332 4,799 4,940 Proceeds from borrowings 6,462 250 -- Repayment of debt (1,406) (2,108) (860) --------- --------- --------- Net cash provided by financing activities 12,388 2,941 19,056 --------- --------- --------- Effect of Exchange Rate Changes on Cash (839) (2,816) 710 --------- --------- --------- Decrease in cash and equivalents (90,098) (8,114) (23,297) Cash and equivalents: Beginning of year 219,787 129,689 121,575 --------- --------- --------- End of year $ 129,689 $ 121,575 $ 98,278 ========= ========= ========= Non-Cash Investing and Financing Activities: Common stock issued in settlement of royalty obligation $ 9,994 $ -- $ -- ========= ========= ========= Tax benefit of stock option transactions $ 2,532 $ 737 $ 357 ========= ========= =========
See Notes to Consolidated Financial Statements. 36 37 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES LINE OF BUSINESS. Silicon Valley Group, Inc. (the Company) primarily designs, manufactures, markets and services semiconductor wafer processing equipment used in the fabrication of integrated circuits. CERTAIN RISKS AND UNCERTAINTIES. The semiconductor industry is highly cyclical and has, historically, experienced periodic downturns that have had a severe effect on the industry's demand for semiconductor wafer processing equipment. Any future such downturns are likely to have an adverse effect on the Company's results of operations. The Company relies on a limited number of major customers for a substantial percentage of its net sales. The loss of or any substantial reduction or rescheduling of orders by any such customer could adversely affect the Company's business and results of operations. CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and trade receivables. The Company places its cash equivalents and short-term investments in high-grade instruments, which it places for safe keeping with high-quality financial institutions. Further, by policy, it limits the amount of credit exposure with any one counterparty and the amount of total investment through any one financial institution or in any one type of investment. The Company sells its systems to both domestic and international semiconductor manufacturers. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable. The combined receivables at September 30, 1999 for the Company's top five revenue-generating customers in fiscal 1999 total approximately $108,000,000. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly assesses those estimates and, while actual results may differ, management believes that the estimates are reasonable. PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, after elimination of significant intercompany transactions and balances. The functional currency for the majority of the Company's subsidiaries is the U.S. dollar, and for such subsidiaries, foreign exchange gains and losses are included in net income (loss) and were not significant in any of the periods presented. For two subsidiaries, the functional currency is the local currency, and for these subsidiaries, remeasurement gains and losses are included in a separate component of stockholders' equity. Certain intercompany receivables from two subsidiaries have been classified as long term and the cumulative translation adjustments related to these receivables are presented as a separate component of stockholders' equity. CASH EQUIVALENTS. Cash and equivalents consist of highly liquid investments with a maturity date at acquisition of three months or less. Cash and equivalents are stated at cost, plus any accrued interest, which approximates fair value. INVENTORIES. Inventories are stated at the lower of cost (which approximates first-in, first-out) or market. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
YEARS Land improvements 15 Buildings and improvements 35 to 40 Machinery and equipment 2 to 10 Furniture and fixtures 2 to 10 Leasehold improvements Shorter of the estimated useful life or the lease term
37 38 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTANGIBLE ASSETS. Intangible assets are amortized on a straight-line basis over their estimated lives as follows: goodwill, twenty-five years; purchased technology, six years. REVENUE RECOGNITION. The Company generally recognizes revenue from the sale of equipment upon shipment and transfer of title. During fiscal 1999, the Company recognized net sales of approximately $20,000,000 from a customer who accepted and took title to the related equipment and agreed to normal payment terms, but requested that the Company store the equipment until predetermined shipment dates. Approximately $58,000,000 in revenue to two such customers was recognized in fiscal 1998. At September 30, 1999 the Company was storing $1,500,000 of such equipment with a scheduled shipment date of March 2000. Product liability and installation costs are accrued in the period that sales are recognized. RESEARCH, DEVELOPMENT AND RELATED ENGINEERING. Research, development and related engineering costs are expensed as incurred. Funds received under development funding arrangements are recorded as a reduction to such expenses as earned (See Note 14). The Company's products include certain software applications that are integral to the operation of the product. The costs to develop such software have not been capitalized as the Company believes its current software development process is essentially completed concurrent with the establishment of technological feasibility of the software and/or development of the related hardware. NET INCOME (LOSS) PER SHARE. Effective October 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (EPS), which requires a dual presentation of basic and diluted EPS. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities to issue common stock (convertible preferred stock and common stock options) were exercised or converted into common stock. Common stock equivalents are excluded from the computation in loss periods, as their effect is antidilutive. The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):
1997 1998 1999 ---- ---- ---- Numerator: Net income (loss) $ 2,592 $(13,577) $(25,456) ------- -------- -------- Denominator: Denominator for basic earnings (loss) per share --weighted average shares outstanding 31,635 32,438 32,926 Employee stock options 779 -- -- ------- -------- -------- Denominator for diluted earnings (loss) per share--adjusted weighted average shares outstanding 32,414 32,438 32,926 ------- -------- -------- Basic earnings (loss) per share $ 0.08 $ (0.42) $ (0.77) ======= ======== ======== Diluted earnings (loss) per share $ 0.08 $ (0.42) $ (0.77) ======= ======== ========
Weighted average options to purchase approximately 3,700,000 shares in 1999 and 2,800,000 shares in 1998 of common stock at weighted average exercise prices of $18.22 and $18.59 per share, respectively, were excluded from the computation of diluted earnings per common share because their effect was antidilutive. Weighted average preferred stock convertible into approximately 461,000 common shares was excluded from the computation of diluted earnings per share in 1999 because its effect was antidilutive. In 1997, 475,000 options with a weighted average price of $20.61 per share were outstanding but excluded from the computation of diluted earnings per share because their exercise price exceeded the average market price and therefore, the effect would be anitdilutive. 38 39 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EMPLOYEE STOCK PLANS. The Company accounts for its stock option and employee stock purchase plans in accordance with the provisions of the Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company continues to apply the provisions of APB No. 25 for purposes of determining net income or loss and has adopted the pro forma disclosure requirements of SFAS No. 123 (see Note 12). COMPREHENSIVE INCOME. In the first quarter of fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income. Components of comprehensive income (loss) include net income (loss), unrealized gains (losses) on investments, foreign currency translation adjustments, and pension liability changes (See Note 9). The adoption of SFAS No. 130 required additional disclosure in the consolidated statement of stockholders' equity and comprehensive income (loss), but did not impact the Company's consolidated financial position, results of operations or cash flows. SEGMENT INFORMATION. The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," for the year ended September 30, 1999. SFAS No. 131 establishes annual and interim reporting standards for a Company's business segments and related disclosures about its products, services, geographic areas and major customers. The Company primarily designs, manufactures, markets and services semiconductor wafer processing equipment used in the fabrication of integrated circuits. All operating units are aggregated into one segment because of their similarities in the nature of products and services, production processes, types of customers, and distribution method. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1998 and June 1999, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." These statements require companies to record all derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 is effective for the Company's fiscal year ending September 30, 2002. Although the Company has not fully assessed the impact of the adoption, management believes that the adoption of these statements will not have a material effect on the Company's financial results. RECLASSIFICATIONS. Certain reclassifications have been made to the prior years' Consolidated Financial Statements to conform to the fiscal 1999 presentation. Such reclassifications had no impact on the Company's financial position or results of operations. FISCAL YEAR. The Company uses a 52-53 week fiscal year ending on the Friday closest to September 30. The accompanying financial statements have been shown as ending on September 30. Fiscal 1997 included 53 weeks, fiscal 1998 and fiscal 1999 each included 52 weeks. NOTE 2. ACQUISITION OF THE SEMICONDUCTOR EQUIPMENT GROUP OF WATKINS-JOHNSON. On July 6, 1999, the Company acquired the business of the Semiconductor Equipment Group of Watkins-Johnson Company ("SEG"), a California corporation, pursuant to a Securities Purchase Agreement dated April 30, 1999 by and between the Company and Watkins-Johnson, as amended by Amendment No. 1 to the Securities Purchase Agreement dated July 2, 1999 by and between the Company and Watkins-Johnson (as so amended, the "Purchase Agreement"). Under the terms of the Purchase Agreement, the Company acquired from Watkins-Johnson all of its limited liability company interests in Semiconductor Equipment Group, LLC and the outstanding capital stock of certain foreign subsidiaries. The acquisition was accounted for as a purchase. The Company made preliminary payments to Watkins-Johnson of approximately $9,000,000 based upon certain values of assets and liabilities at December 31, 1998. The purchase price was adjusted to $2,700,000 based upon the final closing Balance Sheet of July 2, 1999. The $6,300,000 excess payment to Watkins-Johnson appears in prepaid expenses and other assets at September 30, 1999 and was refunded in October 1999. The total purchase price of $3,750,000 included approximately $1,050,000 in costs directly attributable to the acquisition and was allocated to the assets acquired and liabilities assumed based on 39 40 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS their respective fair values. The excess of the net SEG assets over the total purchase price was used to proportionately reduce the value of material noncurrent assets acquired. Also, in connection with the acquisition, $3,450,000 was placed in escrow by Watkins-Johnson to cover potential claims by the Company. The Company has up to twelve months from the closing date to file claims for indemnification against this escrow fund. At the end of this period, the remaining funds, interest and earnings accrued revert to Watkins-Johnson. The operating results of SEG have been included in the consolidated statements of operations since the date of acquisition. Had the acquisition taken place at the beginning of the periods presented, unaudited pro forma results of operations would have been as follows (in thousands, except per share data):
1998 1999 ---- ---- Net sales $705,606 $ 570,636 Net loss (64,728) (22,170) Diluted loss per share (2.00) (0.67)
Pro forma financial information is presented for illustrative purposes only and does not purport to be indicative of the operating results that would have occurred had the acquisition been effected as of the periods indicated, nor is it indicative of the future operating results of the Company. NOTE 3. RESTRUCTURING AND RELATED CHARGES During the fourth quarter of fiscal 1998, the Company recorded restructuring and related charges of $33,680,000. The charge includes costs of $28,521,000 resulting from the termination of the Company's previously announced 200-APS photoresist processing system (the 200-APS charge) and a provision of $5,159,000 for reductions in the Company's workforce that includes severance compensation and benefit costs for workforce reductions announced in July 1998 ($2,696,000) and September 1998 ($2,463,000). These workforce reductions were implemented in response to global weakness in the demand for semiconductor capital equipment as well as the decision to terminate the 200-APS product. The 200-APS charge consisted of: the write-off of 200-APS inventory and purchase commitments, which has been classified as cost of sales; the write-off of fixed assets that were employed in the 200-APS effort; costs to fulfill obligations to customers utilizing 200-APS systems, including the cancellation of certain receivables and the support of such systems through fiscal 2000; and certain other costs related to exiting the 200-APS program. Changes to the restructuring accrual in fiscal 1999 are as follows (in thousands):
200-APS INVENTORY SEVERANCE AND PURCHASE CUSTOMER OTHER EXIT AND BENEFITS COMMITMENTS OBLIGATIONS COSTS TOTAL ------------ ----------- ----------- ---------- ----- Balance at September 30, 1998 $ 3,006 $ 1,832 $ 2,293 $ 201 $ 7,332 Incurred to date (1,761) (1,832) (2,037) (201) (5,831) Adjustments (506) -- -- -- (506) ------- ------- ------- ----- ------- Balance at September 30, 1999 $ 739 $ -- $ 256 $ -- $ 995 ======= ======= ======= ===== =======
The Company revised its estimate related to severance and benefits in fiscal 1999. Substantially all employee terminations have been effected as of September 30, 1999, although benefits will continue to be paid during fiscal 2000. Customer obligations will be concluded in fiscal 2000. 40 41 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. INVESTMENTS Investments in debt and equity securities are classified as available for sale and measured at fair value. Material unrealized gains and losses, net of tax, are recorded as a separate component of stockholders' equity until realized. At September 30, 1999 net unrealized gains on investments totaled $435,000. Investments at September 30 are comprised of the following:
1998 1999 ---- ---- MARKET MARKET (IN THOUSANDS) COST VALUE COST VALUE ---- ----- ---- ----- Available for sale: Institutional money market funds included in cash and cash equivalents $101,123 $101,123 $ 64,652 $ 64,652 -------- -------- -------- -------- Municipal bonds 25,425 25,425 256 251 Municipal notes -- -- 13,833 13,806 Auction rate preferreds 3,000 3,000 -- -- Market auction preferreds -- -- 4,000 4,000 Certificates of deposit -- -- 5,030 4,985 Foreign debt securities -- -- 2,036 2,000 Corporate bonds -- -- 1,003 1,003 U.S. government agencies -- -- 17,995 17,923 -------- -------- -------- -------- Total included in short-term investments 28,425 28,425 44,153 43,968 -------- -------- -------- -------- Institutional mutual funds included in deposits and other assets 2,487 2,487 4,610 5,230 -------- -------- -------- -------- Total available for sale $132,035 $132,035 $113,415 $113,850 ======== ======== ======== ========
All of the Company's investments at September 30, 1999 mature within one year. NOTE 5. BALANCE SHEET COMPONENTS
SEPTEMBER 30 (IN THOUSANDS) 1998 1999 --------- --------- Inventories: Raw materials $ 103,738 $ 83,080 Work-in-process 103,362 115,172 Finished goods 5,875 2,517 --------- --------- Total $ 212,975 $ 200,769 ========= ========= Property and equipment: Land and improvements $ 11,494 $ 19,351 Buildings and improvements 74,822 87,645 Machinery and equipment 172,584 195,944 Furniture and fixtures 36,114 41,554 Leasehold improvements 24,220 26,611 --------- --------- Total 319,234 371,105 --------- --------- Accumulated depreciation and amortization (128,212) (172,702) --------- --------- Property and equipment, net $ 191,022 $ 198,403 ========= =========
41 42 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible assets: Goodwill $ 6,019 $ 5,705 Purchased technology 1,000 -- 7,019 5,705 -------- -------- Accumulated amortization (3,283) (2,445) -------- -------- Total $ 3,736 $ 3,260 ======== ======== Accrued liabilities: Compensation $ 28,792 $ 23,853 Product warranty 48,943 53,746 Customer deposits and advances 31,452 23,131 Restructuring and related charges 7,332 995 Other 14,013 21,541 -------- -------- Total $130,532 $123,266 ======== ========
NOTE 6. SVG LITHOGRAPHY SYSTEMS, INC. Through March 17, 1997, the Company owned 94% of SVG Lithography Systems, Inc. (SVGL) and International Business Machines, Inc. (IBM) owned the remaining 6%. The minority interest reflected in the Consolidated Statement of Operations represented that share of SVGL's operating results which were attributable to IBM. On March 18, 1997, the Company purchased IBM's 6% interest in SVGL for $3,000,000. As a result, the Company now accounts for SVGL as a wholly-owned subsidiary. NOTE 7. SETTLEMENT OF ROYALTY OBLIGATION Under the terms of a research and development agreement, SVGL owed IBM certain royalties based on future operating results. On March 18, 1997, the Company satisfied this royalty obligation to IBM in exchange for $5,000,000 in cash, 489,296 shares of common stock valued at $10,000,000 and $23,000,000 in SVGL product. Of the $38,000,000 total, $32,582,000 related to products currently under development and was recognized as an expense in the second quarter of fiscal 1997, and $5,418,000 related to existing products and was recorded as a prepayment which is being amortized to expense through fiscal year 2000. NOTE 8. DEBT ARRANGEMENTS On June 30, 1998, the Company entered into an unsecured $150,000,000 bank revolving line of credit agreement, which expires June 30, 2001. Advances under the line bear interest at the bank's prime rate (8.25% at September 30, 1999) or 0.65% to 1.50% over LIBOR (6.13% at September 30, 1999). The agreement includes covenants regarding liquidity, profitability, leverage, coverage of certain charges and minimum net worth and prohibits the payment of cash dividends. On October 23, 1998 and May 14, 1999, certain of the covenants were amended to reflect the effects of the acquisition of SEG (See Note 2) and change quarterly profitability covenants. The Company is in compliance with the covenants as amended and there were no outstanding borrowings under this facility at September 30, 1999. In February 1997, the Company received a $6,500,000 loan from the Connecticut Development Authority. The loan has a ten year term, bears interest at 8.25%, and is secured by the Company's Wilton, Connecticut facility which houses certain operations of SVGL. Tinsley Laboratories, Inc. (TLI) has two loans and one special assessment bond outstanding, which bear interest at rates between 8.5% and 12% with maturity dates through April 2007. In 1999, the Company assumed three Yen-denominated loans in connection with the acquisition of SEG (See Note 2). Approximately $7,700,000 (Y804.6 million), which is secured by land and buildings in Japan, is payable in monthly installments through the year 2011, bearing interest at 2.5%. Approximately $13,000,000 (Y1,350.0 million) and $2,000,000 (Y200.0 million) are unsecured and require a payment in 2006 and 2007, respectively, bearing interest at 3.1% and 2.2%, respectively, payable semiannually. 42 43 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest rates on substantially all of the Company's debt reflect current market rates, therefore the carrying value of the Company's debt approximates fair value. Long-term debt balances at September 30, consist of the following (in thousands):
1998 1999 ---- ---- Connecticut Development Authority loan $ 5,791 $ 5,294 TLI loans and special assessment bonds 714 512 Japanese Yen-denominated bank loans -- 22,604 -------- -------- 6,505 28,410 Less current portion (640) (1,620) -------- -------- $ 5,865 $ 26,790 ======== ========
Interest payments were $488,000 in 1997, $655,000 in 1998 and $662,000 in 1999. At September 30, 1999, aggregate debt maturities were approximately: $1,620,000 in fiscal 2000; $1,309,000 in fiscal 2001; $1,354,000 fiscal 2002; $1,384,000 in fiscal 2003; $1,443,000 in 2004; and $21,300,000 thereafter. NOTE 9. EMPLOYEE BENEFIT PLANS The Company's profit-sharing plan provides quarterly distributions to eligible employees as determined by the Board of Directors. Profit-sharing distributions were $1,172,000 in 1997, and $1,623,000 in 1998. No profit-sharing distributions were made in fiscal 1999. Under the Company's Cash or Deferred Profit Sharing Plan (401(k) Plan), the Company may make contributions, depending on the amount of the employee's contribution, up to a maximum of 3% of compensation. The Company's contributions were $3,135,000 in 1997, $3,407,000 in 1998 and $3,432,000 in 1999. In February 1997, the Company adopted a non-qualified deferred compensation plan that allows a select group of management or highly compensated Employees and Directors to defer a portion of their salary, bonus and other benefits. The plan is unfunded and amounts due participants represent general obligations of the Company. The Company may credit additional amounts to participants' account balances, depending on the amount of the employee's contribution, up to a maximum of 5% of an employee's annual salary and bonus. In addition, interest is credited to the participants' account balances at 120% of the average Moody's corporate bond rate. For 1999, participants' accounts will be credited at 7.18%. Company contributions and related interest become 100% vested five years after the plan year in which the contribution was made. During fiscal 1997, 1998 and 1999, the Company's expense was $609,000, $878,000 and $774,000, respectively, and at September 30, 1999, the Company's liability under the deferred compensation plan was $5,227,000. Additionally, the Company assumed unfunded salary continuation agreements with certain key executives and employees of TLI. Under the terms of the agreement, the Company has agreed to pay certain fixed amounts over a ten year period after the employees reach the age of 65. Payments began vesting December 1990 and become fully vested only if the participants remain employed by the Company through the age of 65. The present value of these payments, calculated using a discount rate of 6% is being charged ratably to expense over the vesting period. During fiscal 1997, 1998, and 1999 the Company had related expenses of $32,000, $14,000, and $21,000, respectively, and at September 30, 1999, the Company's liability under these agreements was $532,000. At September 30, 1999, four officers of the Company had employment agreements that provide, in the event of disability, death, or termination meeting certain criteria, for severance payments based on a multiple of their then-current compensation. At September 30, 1999, the aggregate potential payments under these agreements would have been approximately $5,500,000. The Company also assumed the defined benefit pension plan of TLI. The plan had previously been terminated during 1995 and the Company is currently in the process of finalizing the termination process. At September 30, 1998 and 1999, the Company had recorded a minimum pension liability of $274,000 and $312,000, respectively, within stockholders' equity, net of income taxes, which is based upon the excess of the estimated accumulated benefit obligation of $1,705,000 and $2,174,000, respectively, over the fair 43 44 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS market value of plan assets (primarily corporate bond mutual funds) of $1,510,000 and $1,513,000, respectively. Upon finalization of the plan termination, the minimum pension liability will be charged to the statement of operations. NOTE 10. INCOME TAXES The provision (benefit) for income taxes consists of (in thousands):
YEARS ENDED SEPTEMBER 30, 1997 1998 1999 ------- -------- -------- Current: Federal $(1,218) $ 478 $ (2,500) State 1,433 1,252 -- Foreign 351 1,840 2,140 ------- -------- -------- Total current 566 3,570 (360) ------- -------- -------- Deferred: Federal (293) (14,720) (9,921) State 1,241 (2,430) (1,699) ------- -------- -------- Total Deferred 948 (17,150) (11,620) ------- -------- -------- $ 1,514 $(13,580) $(11,980) ======= ======== ========
Domestic and foreign income (loss) before income taxes and minority interest is as follows (in thousands):
YEARS ENDED SEPTEMBER 30, 1997 1998 1999 -------- -------- -------- Domestic $ 3,898 $(30,925) $(43,762) Foreign 300 3,768 6,326 -------- -------- -------- $ 4,198 $(27,157) $(37,436) ======== ======== ========
The effective tax rate differs from the Federal statutory rate as follows (in thousands):
YEARS ENDED SEPTEMBER 30, 1997 1998 1999 ------- -------- -------- Statutory rate $ 1,469 $ (9,505) $(13,103) State taxes, net of Federal effect 200 (1,178) (486) Foreign taxes at differing rates 268 (51) 395 FSC commission (464) (1,437) -- Tax exempt interest (2,284) (1,799) (360) Settlement of royalty obligation 1,500 -- -- Other 825 390 1,574 ------- -------- -------- Total $ 1,514 $(13,580) $(11,980) ======= ======== ========
The items giving rise to deferred taxes were as follows (in thousands):
SEPTEMBER 30, 1998 1999 -------- -------- Deferred tax assets: Reserves not recognized for tax purposes $ 28,907 $ 37,256 Net operating loss carryforwards 3,130 7,530 Accelerated depreciation 273 (497) -------- -------- Total deferred tax assets 32,310 44,289 Valuation allowance (9,297) (9,297) -------- -------- Total $ 23,013 $ 34,992 ======== ========
44 45 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components giving rise to the net deferred tax asset described above have been included in the accompanying consolidated balance sheet as follows:
SEPTEMBER 30, 1998 1999 ------- ------- Current assets $22,740 $35,489 Deposits and other assets 273 -- Deferred and other liabilities -- (497)
At September 30, 1999, the Company had approximately $11,300,000 and $4,200,000 of federal and state loss carryforwards available to offset future income. These losses begin to expire in year 2004. Additionally, approximately $7,900,000 of federal loss carryforwards were available to offset future federal taxable income generated by SVGL, through the year 2007, subject to certain limitations. The valuation allowance relates to the net deferred tax assets of SVGL. In 1997 and 1998, the Company made income tax payments of $2,882,000, and $16,878,000 respectively. In 1999, income tax refunds were $13,207,000. NOTE 11. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK. On May 5, 1999 Intel Corporation (Intel) made a $15,000,000 equity investment in the Company in the form of a purchase of 15,000 shares of newly issued non-voting Series 1 Convertible Preferred Stock (Series 1 Preferred). The Series 1 Preferred investment is convertible into 1,111,111 shares of the Company's common stock subject to adjustments for events of dilution in certain circumstances such as stock splits or dividends. Intel has the option to convert, at any time, it's Series 1 Preferred into shares of the Company's common stock. In connection with the Series 1 Preferred investment, Intel and the Company entered into an agreement for the development of 157-nanometer lithography technology. This agreement obligates the Company, among other things, to develop and sell to Intel a predetermined number of initial development tools. Intel has agreed to provide advance payments for the development and manufacture of these machines based on predetermined milestones. Under certain conditions, the Company is obligated to dedicate a certain amount of 157-nanometer unit production output to Intel. The Company is required to use the proceeds from the Series 1 Preferred investment and funds received under this development agreement for the development of technology for use on 157-nanometer lithography equipment. PREFERRED SHARES PURCHASE RIGHTS. In September 1996, the Company's Board of Directors adopted a plan for the distribution of one Preferred Shares Purchase Right (the Rights) to the holder of each outstanding share of the Company's common stock. The rights expire in September 2006 and are not exercisable until a person or group announces the acquisition of 15% or more of the Company's outstanding common stock, or the commencement of a tender or exchange offer for 15% or more of the Company's common stock. Each Right entitles its holder to purchase 1/1000 of one new share of the Company's Series A Participating Preferred Stock at an exercise price of $125, subject to certain antidilution adjustments. Additionally, a holder would be entitled, under certain circumstances, to purchase shares of common stock of the Company or, in other cases, of the acquiring company, having a market value of twice the exercise price of the Right. Under certain conditions, the Company may redeem the Rights for a price of $0.01 per Right or exchange each Right not held by the acquirer for one share of the Company's common stock. NOTE 12. STOCK OPTION AND PURCHASE PLANS Under the Company's stock option plans, the Board of Directors may, at its discretion, grant incentive or nonqualified stock options to employees and directors, and options are automatically granted annually to directors who are not employees of the Company. Options may be granted with a period not to exceed ten years from the date of grant, at prices at least equal to the fair market value of common stock at the grant date, and vest and become exercisable generally over a period of up to five years. 45 46 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Activity under the plans is as follows (shares in thousands):
WEIGHTED SHARES AVERAGE UNDER OPTION EXERCISE PRICE ------------ -------------- Balances, October 1, 1996 2,127 $13.02 Granted 823 25.03 Exercised (372) 10.34 Canceled (117) 17.94 ----- ------ Balances, September 30, 1997 2,461 16.97 Granted 1,121 21.64 Exercised (158) 5.47 Canceled (218) 20.24 ----- ------ Balances, September 30, 1998 3,206 18.93 Granted 1,502 13.35 Exercised (215) 6.73 Canceled (173) 19.34 ----- ------ Balances, September 30, 1999 4,320 $17.60 ===== ======
The following table summarizes information concerning options outstanding and exercisable as of September 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------- ----------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ---------------- -------------- ----------- -------------- $ 4.66 - $15.00 1,965,754 6.53 $12.88 644,823 $11.61 16.13 717,212 3.79 16.13 524,515 16.13 16.63 - 20.63 653,527 7.97 20.25 215,825 19.90 $21.25 - $32.69 983,051 6.30 26.36 418,665 26.26 --------- ---- ------ --------- ------ Total 4,319,544 6.24 $17.60 1,803,828 $17.31 ========= ==== ====== ========= ======
At September 30, 1999, approximately 5,567,120 options to purchase common stock were authorized, with 1,247,576 options available for future grant. Under the Company's Employee Stock Purchase Plan, 2,950,000 shares of common stock were reserved for issuance of which 1,915,354 had been issued at September 30, 1999. The plan permits eligible employees to purchase, through payroll deductions, common stock at 85% of the lower of the fair market value of the common stock on the first or last day of the offering period. The plan has offering periods of twelve months, with a new twelve-month period beginning each April 1 and October 1. PRO FORMA NET INCOME AND EARNINGS PER SHARE. The Company has elected to continue following APB No. 25, in accounting for its employee stock options. Under APB No. 25, because the exercise price of the Company's employee options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Company's financial statements. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares under the Employee Stock Purchase Plan) granted subsequent to September 30, 1995 under the fair value method of that statement. The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and which are 46 47 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock option and stock purchase plans have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock-based awards to employees. The fair value of the stock option plan and the stock purchase plan was estimated assuming no expected dividends and the following weighted average assumptions
1997 1998 1999 -------- ---------- ---------- Stock option plan: Expected stock price volatility 56% 64% 69% Risk free interest rate 6.4% 6.0% 4.9% Expected life of options after vesting: Officers and directors 2 years 7.2 months 1 month All others 9 months 7.3 months 1.7 months Stock purchase plan: Expected stock price volatility 56% 60% 67% Risk free interest rate 5.8% 6.0% 5.3% Expected life of options 1 year 1 year 1 year
The Company's calculations are based on a multiple option valuation approach and recognition of forfeitures as they occur. The weighted average fair value of options granted during the fiscal 1997, 1998 and 1999 was approximately $12.57, $9.85 and $4.18 per share, respectively. The weighted average fair value of purchase rights granted in fiscal 1997, 1998 and 1999 was approximately $8.76, $7.68 and $5.94 per share, respectively. For purposes of pro forma disclosures required by SFAS No. 123, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1997 1998 1999 ------- -------- -------- Proforma net loss $(3,738) $(21,116) $(34,006) Proforma loss per share--basic (0.12) (0.65) (1.03) Proforma loss per share--diluted (0.12) (0.65) (1.03)
For pro forma purposes in accordance with SFAS No. 123, the repricing of employee stock options during 1996 is treated as a modification of the stock-based award, with the original options being repurchased and new options granted. Any additional compensation arising from the modification is recognized over the remaining vesting period of the new grant. SFAS 123 is effective for stock-based awards granted by the Company commencing October 1, 1995. All stock-based awards granted before October 1, 1995, have not been valued and no pro forma compensation expense has been recognized. However, any option granted before October 1, 1995 that was repriced in 1996 is treated as a new grant within 1996 and valued accordingly. In addition, because compensation expense is recognized over the vesting period of the option, the initial impact on pro forma income may not be representative of pro forma compensation expense in future years. 47 48 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. COMMITMENTS Future minimum lease payments for operating leases for the years ended September 30 (primarily facilities) are as follows (in thousands): 2000 $ 7,149 2001 5,948 2002 5,604 2003 5,201 2004 24,250 Thereafter through 2010 1,196 ------- Total $49,348 =======
Rent expense was $7,009,000, $7,006,000 and $7,360,000 in 1997, 1998 and 1999, respectively. During 1999, the Company entered into two synthetic lease agreements for facilities in San Jose and for the Scotts Valley facility (See Note 2). Both leases are for a five-year term. Monthly rent payments are variable at 0.61% to 2.0% over LIBOR. For the Scotts Valley facility, the Company entered into an interest rate swap contract to fix the interest rate and, therefore, the lease payment. Under the terms of the leases, the Company, at its option, can acquire the properties at their original cost or arrange for properties to be acquired. If the Company does not purchase the properties by the end of the lease terms, the Company will be contingently liable to the lessors for residual value guarantees of approximately $8,400,000 and $12,125,000 respectively (included in future minimum lease payments above). In addition, under the terms of the leases, the Company must maintain compliance with certain financial covenants. As of September 30, 1999, the Company was in compliance with all of its covenants. Management believes that the contingent liability related to the residual value guarantees does not currently have a material adverse effect on the Company's financial position or results of operations. NOTE 14. RESEARCH AND DEVELOPMENT AGREEMENTS The Company, primarily through SVGL, has obtained research and development funding from outside parties. Under the research and development agreements, the Company receives payments based on meeting specified product development milestones and retains ownership of the developed technology and products. The Company does not anticipate that such funding will cover the entire cost of the development efforts to which it pertains. Therefore, it is recorded as a reduction of research, development, and related engineering, in amounts approximating the percentage of costs incurred to date to the total estimated costs of such development efforts. The Company incurred costs of $40,227,000 in 1997, $12,842,000 in 1998 and $9,231,000 in 1999 relating to such product development and recognized $7,968,000, $11,997,000 and $2,902,000, respectively, in related funding. During fiscal 1996, the Company entered into agreements with certain customers (the Participants) whereby each agreed to assist in funding the Company's development of an advanced technology 193-nanometer Micrascan system. In exchange for such funding the Participants receive the right to purchase one such system and in addition, receive a right of first refusal (ratable among such participants) to all such machines manufactured during the first two years following the initial system shipments. For each initial system ordered, each Participant agreed to fund $5,000,000 in such development costs. The agreements call for each Participant to pay $1,000,000 of initial development funding and four subsequent payments of $1,000,000 upon the completion of certain development milestones. The participants may withdraw from the development program without penalty but payments made against completed development milestones are not refundable and all preferential rights to future equipment are forfeited. As of September 30, 1999, the Company had received $20,000,000 in funding from six Participants, all of which had been recognized and offset against research and development expenditures. During fiscal 1999 all but one of the Participants withdrew from the development program and the Company shipped a 193-nanometer Micrascan system to the remaining Participant. The Company's obligations under these agreements are complete, and no additional funding is expected from the Participants. 48 49 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. GEOGRAPHIC SEGMENTS The Company's products are manufactured in the United States and are sold worldwide. The Company designs, manufactures, markets and services semiconductor wafer processing equipment used in the fabrication of integrated circuits. All operating units are aggregated into one segment because of their similarities in the nature of products and services, production processes, types of customers, and distribution method. The Company markets internationally through both its foreign-based sales and service operations and through outside distributors and sales representatives. One customer accounted for 36% of sales in 1997, 40% of sales in 1998, and 56% of sales in 1999; a second customer accounted for 22% of sales in 1997, 17% of sales in 1998 and 7% of sales in 1999; and a third customer accounted for 6% of sales in 1997, 13% of sales in 1998 and 6% of sales in 1999. The following table summarizes total net sales and long-lived assets attributed to significant countries as of and for the years ended September 30 (in thousands):
1997 1998 1999 -------- -------- -------- Net sales: United States $442,314 $393,375 $322,095 France 53,600 44,240 13,059 Ireland 3,180 86,465 20,641 Israel 65 11,183 51,481 Other 115,067 73,362 66,414 -------- -------- -------- Total net sales $614,226 $608,625 $473,690 ======== ========= ======== Long-lived assets: United States $157,289 $195,272 $185,187 Japan 536 489 18,341 Other 2,548 2,307 1,477 -------- -------- -------- Total long-lived assets $160,373 $198,068 $205,005 ======== ======== ========
Net sales are attributed to countries based upon the shipment destinations and service locations of systems. Long-lived assets consist of net property and equipment, deposits and other assets, and net intangible assets, excluding long-term investments and long-term deferred tax assets. Export sales were 23% of net sales in 1997, 29% of net sales in 1998, and 20% of net sales in 1999. NOTE 16. ACQUISITION OF TINSLEY LABORATORIES, INC. On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. (TLI) in a stock for stock transaction whereby approximately 1,091,000 shares of the Company's common stock were exchanged for all outstanding shares of TLI common stock. TLI designs, manufacturers and sells precision optical components, assemblies and systems to customers in a variety of industries and research endeavors. The transaction was accounted for as a pooling of interests for financial reporting purposes. All prior periods have been restated to include TLI financial results. 49 50 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. LEGAL MATTERS On or about August 12, 1998, Fullman International Inc. and Fullman Company LLC (collectively, Fullman) initiated a lawsuit in the United States District Court for the District of Oregon alleging claims for fraudulent conveyance, constructive trust and declaratory relief in connection with a settlement the Company had previously entered into resolving its claims against a Thailand purchaser of the Company's equipment. In its complaint against the Company, Fullman, allegedly another creditor of the Thailand purchaser, alleges damages of approximately $11,500,000 plus interest. The Company has successfully moved to transfer the case to the United States District Court for the Northern District of California. The trial is tentatively scheduled for July 2000. While the outcome of such litigation is uncertain, the Company believes it has meritorious defenses to the claims and intends to conduct a vigorous defense. However, an unfavorable outcome in this matter could have a material adverse effect on the Company's financial condition. In addition to the above, the Company, from time to time, is party to various legal actions arising out of the normal course of business. The resolution of such matters, and the Fullman litigation, are not expected to have a material adverse effect on the Company's financial position or operating results. NOTE 18. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 1999 Net sales $ 85,487 $ 61,496 $136,894 $189,813 Gross profit 24,030 14,170 47,860 75,311 Income (loss) before income taxes (10,353) (26,450) (3,037) 2,404 Net income (loss) (7,032) (17,994) (2,065) 1,635 Net income (loss) per share--basic (0.21) (0.55) (0.06) .05 Net income (loss) per share--diluted (0.21) (0.55) (0.06) .05 1998 Net sales $188,707 $195,872 $116,385 $107,661 Gross profit 74,388 77,514 38,088 10,239 Income (loss) before income taxes 17,860 14,059 (11,357) (47,719) Net income (loss) 12,145 9,560 (6,817) (28,465) Net income (loss) per share--basic 0.38 0.30 (0.21) (0.87) Net income (loss) per share--diluted 0.37 0.29 (0.21) (0.87)
50 51 ITEM 8A. THE COMPANY'S FISCAL YEAR The Company observes a 52-53 week fiscal year ending on the Friday closest to September 30. Under this practice, the Company's last three fiscal years ended October 3, 1997, October 2, 1998 and October 1, 1999. For convenience, this Report and the Company's Consolidated Financial Statements refer to all such fiscal years as ending at September 30. Fiscal 1998 and fiscal 1999 each included 52 weeks. Fiscal 1997 included 53 weeks. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. Not applicable. PART III Certain information required by Part III is omitted from this Report in that the Registrant will file its definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 23, 2000, pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy Statement"), not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the Proxy Statement is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Executive Officers. See the section entitled "Executive Officers of the Registrant" in Part I, Item 1 of this Report. (b) Directors. The information required by this Item is incorporated by reference to the section entitled "Election of Directors" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the section entitled "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the section entitled "Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to the section entitled "Certain Transactions" in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. The financial statements (including the notes thereto) listed in the Index to Consolidated Financial Statements and Financial Statements Schedule (set forth in Item 8 of Part II of this Form 10-K) are filed within this Annual Report on Form 10-K. 2. SUPPLEMENTAL SCHEDULE. The financial statement schedule listed in the Index to Consolidated Financial Statements and Financial Statements Schedule (set forth in Item 8 of Part II of this Form 10-K) is filed within this Annual Report on Form 10-K. 51 52 3. EXHIBITS.
EXHIBIT NO. EXHIBIT - ----------- ------- 10.50 Amendment to Employment Agreement between the Registrant and Papken S. Der Torossian dated June 7, 1999.* 10.51 Amendment to Employment Agreement between the Registrant and William A. Hightower dated June 7, 1999.* 10.52 Amendment to Employment Agreement between the Registrant and Russell G. Weinstock dated June 7, 1999.* 10.53 Amendment to Employment Agreement between the Registrant and Boris Lipkin dated June 7, 1999.* 10.54 Participation Agreement by and among SELCO Service Corporation, the Registrant and KeyBank National Association, as agent for the participants named therein, dated June 30, 1999. 10.55 Purchase Agreement between SELCO Service Corporation and the Registrant, dated June 30, 1999. 10.56 Lease Agreement, Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing between SELCO Service Corporation and the Registrant, dated June 30, 1999. 10.57 Loan Agreement dated as of February 9, 1996 (English Translation) between Watkins-Johnson International Japan K.K. and The Bank of Yokoyama Ltd., including Loan Guaranty Agreement by the Registrant effective July 6, 1999. 10.58 Loan Agreement dated as of June 12, 1996 (English Translation) between Watkins-Johnson International Japan K.K. and The Japan Development Bank, including Loan Guaranty Agreement by the Registrant effective July 6, 1999. 10.59 Loan and Relocation Agreement between the Registrant and Jeffrey Kowalski dated August 31, 1999.* 21.1 Registrant's wholly-owned subsidiaries. 23.1 Consent of Deloitte & Touche LLP, independent auditors. 24.1 Power of Attorney (see page 54) 27 Financial Data Schedule.
- ---------------- * Management contract or compensatory plans or arrangements (b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K on July 16, 1999 and an amended Form 8-KA on September 17, 1999 in connection with the acquisition of the Semiconductor Equipment Group of Watkins-Johnson Company. Included in the Form 8-K are financial statements for the Company and for the Semiconductor Equipment Group of Watkins-Johnson Company. (c) EXHIBITS. See (a) above. (d) FINANCIAL STATEMENT SCHEDULES. See (a) above. 52 53 SILICON VALLEY GROUP SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED BALANCE AT BEGINNING TO COSTS AND END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD --------- -------- ------------- --------- YEAR ENDED 9/30/97: Allowance for Doubtful Accounts.................. $ 6,078 $ 7,725 $ (7,009) $ 6,794 Product Warranty Reserves........................ 42,899 42,320 (41,685) 43,534 YEAR ENDED 9/30/98: Allowance for Doubtful Accounts.................. 6,794 3,273 (1,835) 8,232 Product Warranty Reserves........................ 43,534 64,138 (58,729) 48,943 YEAR ENDED 9/30/99: Allowance for Doubtful Accounts.................. 8,232 (2,579)(3) (615) 5,038 Product Warranty Reserves........................ 48,943 46,371 (2) (41,568) 53,746
- ---------- (1) Write-offs of uncollectible accounts and costs incurred for warranty repairs. (2) Includes $7,076,000 in product warranty reserves acquired from Watkins-Johnson Company's Semiconductor Equipment Group (See Note 2 of the Consolidated Financial Statements included in Item 8). (3) Includes approximately $2,800,000 of recoveries of previously reserved amounts. 53 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. December 22, 1999 SILICON VALLEY GROUP, INC. By: /s/ PAPKEN S. DER TOROSSIAN ------------------------------------- Papken S. Der Torossian Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Papken S. Der Torossian and Russell G. Weinstock, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ PAPKEN S. DER TOROSSIAN Chairman of the Board, December 22, 1999 - ----------------------------------- Chief Executive Officer Papken S. Der Torossian And Director (Principal Executive Officer) /s/ WILLIAM A. HIGHTOWER President Chief December 22, 1999 - ----------------------------------- Operating Officer and Director William A. Hightower /s/ RUSSELL G. WEINSTOCK Vice President, Finance December 22, 1999 - ----------------------------------- And Chief Financial Russell G. Weinstock Officer (Principal Financial And Accounting Officer) /s/ MICHAEL J. ATTARDO Director December 22, 1999 - ----------------------------------- Michael J. Attardo /s/ WILLIAM L. MARTIN Director December 22, 1999 - ----------------------------------- William L. Martin /s/ NAM P. SUH Director December 22, 1999 - ------------------------------------- Nam P. Suh Director - ------------------------------------- Kenneth M. Thompson /s/ LAWRENCE TOMLINSON Director December 22, 1999 - ------------------------------------- Lawrence Tomlinson
54 55 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT - ----------- ------- 10.50 Amendment to Employment Agreement between the Registrant and Papken S. Der Torossian dated June 7, 1999.* 10.51 Amendment to Employment Agreement between the Registrant and William A. Hightower dated June 7, 1999.* 10.52 Amendment to Employment Agreement between the Registrant and Russell G. Weinstock dated June 7, 1999.* 10.53 Amendment to Employment Agreement between the Registrant and Boris Lipkin dated June 7, 1999.* 10.54 Participation Agreement by and among SELCO Service Corporation, the Registrant and KeyBank National Association, as agent for the participants named therein, dated June 30, 1999. 10.55 Purchase Agreement between SELCO Service Corporation and the Registrant, dated June 30, 1999. 10.56 Lease Agreement, Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing between SELCO Service Corporation and the Registrant, dated June 30, 1999. 10.57 Loan Agreement dated as of February 9, 1996 (English Translation) between Watkins-Johnson International Japan K.K. and The Bank of Yokoyama Ltd., including Loan Guaranty Agreement by the Registrant effective July 6, 1999. 10.58 Loan Agreement dated as of June 12, 1996 (English Translation) between Watkins-Johnson International Japan K.K. and The Japan Development Bank, including Loan Guaranty Agreement by the Registrant effective July 6, 1999. 10.59 Loan and Relocation Agreement between the Registrant and Jeffrey Kowalski dated August 31, 1999.* 21.1 Registrant's wholly-owned subsidiaries. 23.1 Consent of Deloitte & Touche LLP, independent auditors. 24.1 Power of Attorney (see page 54) 27 Financial Data Schedule.
- ---------------- * Management contract or compensatory plans or arrangements EX-10.50 2 EX-10.50 1 EXHIBIT 10.50 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AGREEMENT, is effective as of this __ day of June, 1999, by and between Papken S. Der Torossian (the "Employee") and Silicon Valley Group, Inc., a Delaware corporation (the "Corporation"). It is the intent of the parties that this Agreement shall supersede and replace that certain Employment Agreement by and between the parties dated as of August 1, 1994. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Employee by the Corporation, the parties agree as follows: 1. Duties and Scope of Employment. (a) Position. The Corporation agrees to employ the Employee for the term of his employment under this Agreement in the position of Chief Executive Officer, as such position was defined in terms of responsibilities and compensation as of the effective date of this Agreement. (b) Obligations. During the term of his employment under this Agreement, the Employee shall devote his full business efforts and time to the Corporation and its subsidiaries. The foregoing, however, shall not preclude the Employee from engaging in appropriate civic, charitable or religious activities or from devoting a reasonable amount of time to private investments or from serving on the boards of directors of other entities, as long as such activities and service do not interfere or conflict with his responsibilities to the Corporation. 2. Base Compensation. During the term of his employment under this Agreement, the Corporation agrees to pay the Employee as compensation for his services a base salary at the annual rate of $600,000, or at such higher rate as the Corporation's Board of Directors may determine from time to time, along with such performance bonus amounts and car allowances, if any, as the Board shall authorize, in its discretion, from time to time. Such salary shall be payable in approximately equal bi-weekly installments. (The annual compensation specified in this Section 2, together with any increases in such compensation that the Board of Directors may grant from time to time, is referred to in this Agreement as "Base Compensation.") 2 3. Employee Benefits. (a) General. During the term of his employment under this Agreement, the Employee shall be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Corporation, including (without limitation) pension plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, incentive or other bonus plans, life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of any committee administering such plan or program. (b) Stock Options. The Corporation has granted to the Employee options to purchase certain shares of the Common Stock of the Corporation. The terms of the options shall be governed by the Corporation's Stock Option Agreement attached hereto as Exhibit A. 4. Business Expenses and Travel. During the term of his employment under this Agreement, the Employee shall be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties hereunder. The Corporation shall reimburse the Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Corporation's generally applicable policies. 5. Term of Employment. (a) Basic Rule. The Corporation agrees to continue the Employee's employment, and the Employee agrees to remain in employment with the Corporation, from the effective date of this Agreement until the date when the Employee's employment terminates pursuant to the provisions of this Agreement. (b) Termination by the Corporation. The Corporation may terminate Employee's employment at any time, for any reason whatsoever, by giving the Employee thirty (30) days' advance notice in writing. -2- 3 (i) Termination Without Cause. If the Corporation terminates Employee's employment without Cause, the provisions of Section 6(a) shall apply. (ii) Termination Upon Disability. If the Corporation terminates the Employee's employment for Disability, the provisions of Section 6(a) shall apply. For all purposes under this Agreement, "Disability" shall mean that the Employee, at the time notice is given, has been unable to perform his duties under this Agreement for a period of not less than six consecutive months as the result of his incapacity due to physical or mental illness. In the event that the Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment under this subsection (ii) becomes effective, the notice of termination shall automatically be deemed to have been revoked. (iii) Termination Within Twelve (12) Months of a Change in Control. If the Corporation terminates Employee's employment within twelve (12) months after a Change in Control, whether such termination is with or without Cause, is due to Employee's death or Disability, or constitutes a Constructive Termination (as defined in Section 5(c) below), the provisions of Sections 6(a) and 6(b) shall apply. For all purposes under this Agreement, "Change in Control" shall mean the occurrence of any of the following events: (x) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Corporation representing fifty percent (50%) or more of the total voting power represented by the Corporation's then outstanding voting securities except pursuant to a negotiated agreement with the Corporation and pursuant to which such securities are purchased from the Corporation; or (y) A change in the composition of the Board of Directors of the Corporation, as a result of which fewer than a majority of the incumbent directors are directors who either (A) had been directors of the Corporation thirty-six (36) months prior to such change or (B) were elected, or nominated for election, to the Board of Directors of the Corporation with the affirmative votes of at least a majority of the directors who had been directors of the Corporation -3- 4 thirty-six (36) months prior to such change and who were still in office at the time of the election or nomination; or (z) The shareholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation, other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all the Corporation's assets. Any other provision of this Section notwithstanding, the term "Change in Control" shall not include either of the following events undertaken at the election of the Corporation: (1) Any transaction, the sole purpose of which is to change the state of the Corporation's incorporation; (2) A transaction, the result of which is to sell all or substantially all of the assets of the Corporation to another corporation (the "surviving corporation"); provided that the surviving corporation is owned directly or indirectly by the shareholders of the Corporation immediately following such transaction in substantially the same proportions as their ownership of the Corporation's common stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement. (iv) Death. Upon the event of the Employee's death, Employee's employment with the Corporation shall be considered automatically terminated and the provisions of Section 6(a) shall apply. (v) Termination for Cause. Except as set forth in Section 5(b)(iii), if the Corporation terminates Employee's employment for Cause, the provisions of Section 6(c) shall apply. For all purposes under this Agreement, "Cause" shall mean (i) a willful failure by the -4- 5 Employee to substantially perform his duties hereunder (other than a failure resulting from the Employee's complete or partial incapacity due to physical or mental illness or impairment) after there has been delivered to Employee a written demand for performance from the Company which describes the basis for the Company's belief that Employee has not substantially performed his duties and sets forth specific performance goals to cure such defaults; provided that upon any determination by the Company that Employee has willfully failed to perform his duties, Employee shall have 120 days in which to cure such willful failure to perform his duties, (ii) a willful act by the Employee which constitutes gross misconduct and which is injurious to the Corporation, (iii) a willful breach by the Employee of a material provision of this Agreement, or (iv) a material and willful violation of a federal or state law or regulation applicable to the business of the Corporation. No act, or failure to act, by the Employee shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in the Corporation's best interest. (c) Voluntary Termination by the Employee. The Employee may terminate his employment by giving the Corporation thirty (30) days' advance notice in writing. If the Employee terminates his employment under the preceding sentence other than as a result of a Constructive Termination, the provisions of Section 6(d) shall apply. If the Employee terminates his employment pursuant to this Section 5(c) as a result of a Constructive Termination, the provisions of Section 6(a) shall apply. For all purposes under this Agreement, "Constructive Termination" shall mean any of the following: a material reduction in salary or benefits, a material change in responsibilities, or a requirement to relocate, except for office relocations that would not increase the Employee's one-way commute distance by more than forty (40) miles. (d) Waiver of Notice. Any waiver of notice shall be valid only if it is made in writing and expressly refers to the applicable notice requirement in this Section 5. 6. Payments Upon Termination of Employment. (a) Payments Upon Termination Pursuant to Section 5(b)(i)-(iv) and Constructive Termination. If, during the term of this Agreement, the Employee's employment is terminated pursuant to any of the reasons set forth in Section 5(b)(i)-(iv) or voluntarily by Employee under -5- 6 Section 5(c) as a result of a Constructive Termination, the Employee shall be entitled, upon the execution of the Agreement and Release attached hereto as Exhibit A, to receive a severance payment from the Corporation (the "Severance Payment") in an amount equal to the following: (i) an amount equal to three hundred percent (300%) of the Employee's Base Compensation in effect on the date of employment termination; plus (ii) the greater of (x) an amount equal to three hundred percent (300%) of the aggregate bonus and car allowance, if any, payable to the employee for the immediately preceding 12-month period, and (y) an amount equal to three hundred percent (300%) of the target aggregate bonus and car allowance, if any, paid to the employee for the immediately preceding fiscal year. The Severance Payment shall be made in a lump sum within thirty (30) days following the date of the employment termination. The Severance Payment shall be in lieu of any further payments to the Employee under Section 2 and any further accrual of benefits under Section 3 with respect to periods subsequent to the date of the employment termination. Notwithstanding the preceding sentence, the Severance Payment shall not reduce or offset any benefits the Employee may be entitled to under the specific terms of the benefit plans of the Corporation, including but not limited to payments of premiums on a life insurance policy for which the Employee or any designee of the Employee is the beneficiary. The Employee shall not be required to mitigate the amount of any payment contemplated by this Section 6(a) (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. (iii) Employee shall also be entitled to thirty-six (36) months from the date of the employment termination to exercise any vested stock options he may have at the time of his employment termination notwithstanding anything to the contrary in the applicable Stock Option Agreement between Employee and the Company. (b) Option Acceleration Upon Termination on Change in Control. If, during the term of this Agreement, the Employee's employment is terminated pursuant to the reasons set forth -6- 7 in Section 5(b)(iii), then the unvested portion of any stock option held by the Employee under the Company's stock option plans shall automatically be fully vested and exercisable as of the date of employment termination and the Employee or the Employee's representative, as the case may be, shall have the right to exercise all or any portion of such stock option, in addition to any portion of the option vested and exercisable prior to such termination. If a termination of Employee's employment results in acceleration of vesting of any option, the Employee shall have thirty-six (36) months following the date of employment termination to exercise such option, notwithstanding any contrary provision of the option agreement. (c) Termination For Cause. If the Employee's employment is terminated for Cause pursuant to Section 5(b)(v), except as otherwise set forth in Section 5(b)(iii), no compensation or payments will be paid or provided to the Employee for the periods following the date when such a termination of employment is effective. Notwithstanding the preceding sentence, nothing herein shall be interpreted to reduce or offset any benefits the Employee may be entitled to under the terms of the benefit plans of the Corporation. (d) Payments Upon Voluntary Termination. In the event that, during the term of this Agreement, the Employee's employment is terminated pursuant to Section 5(c) other than as a result of a Constructive Termination, no compensation or payments will be paid or provided to the Employee for the periods following the date when such a termination of employment is effective. Notwithstanding the preceding sentence, nothing herein shall be interpreted to reduce or offset any benefits the Employee may be entitled to under the terms of the benefit plans of the Corporation. (e) Limitation on Payments. (i) In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section would be subject to the excise tax imposed by Section 4999 of the Code, then the Executive's severance benefits under Section 6 shall be payable either (i) in full, or (ii) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the -7- 8 applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Executive on an after-tax basis, of the greatest amount of severance benefits under this Agreement, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. (ii) If a reduction in the payments and benefits that would otherwise be paid or provided to the Executive under the terms of this Agreement is necessary to comply with the provisions of Section 6(e)(i), the Executive shall be entitled to select which payments or benefits will be reduced and the manner and method of any such reduction of such payments or benefits (including but not limited to the number of options that would vest under Section 6(b) subject to reasonable limitations (including, for example, express provisions under the Company's benefit plans) (so long as the requirements of Section 6(e)(i) are met). Within thirty (30) days after the amount of any required reduction in payments and benefits is finally determined in accordance with the provisions of Section 6(e)(iii), the Executive shall notify the Company in writing regarding which payments or benefits are to be reduced. If no notification is given by the Executive, the Company will determine which amounts to reduce. If, as a result of any reduction required by Section 6(e)(i), amounts previously paid to the Executive exceed the amount to which the Executive is entitled, the Executive will promptly return the excess amount to the Company. (iii) Unless the Company and the Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. -8- 9 7. Successors. (a) Corporation's Successors. Any successor to the Corporation (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Corporation's business and/or assets shall assume this Agreement and agree expressly to perform this Agreement in the same manner and to the same extent as the Corporation would be required to perform it in the absence of a succession. For all purposes under this Agreement, the term "Corporation" shall include any successor to the Corporation's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by this Agreement by operation of law. (b) Employee's Successors. This Agreement and all rights of the Employee hereunder shall continue to benefit, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Corporation in writing. In the case of the Corporation, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. 9. Termination of Agreement. This Agreement shall terminate upon the earlier of (i) the date that all obligations of the parties hereunder have been satisfied or (ii) August 1, 2004. A termination of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of this Agreement. 10. Miscellaneous Provisions. (a) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the -9- 10 Employee and by an authorized officer of the Corporation (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (b) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to employment matters. (c) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (d) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (e) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in San Jose, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Punitive damages shall not be awarded. (f) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (f) shall be void. (g) Employment At Will; Limitation of Remedies. The Corporation and the Employee acknowledge that the Employee's employment is at will, as defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. -10- 11 (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. (i) Assignment of Agreement by Corporation. The Corporation may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Corporation or to the Corporation. In the case of any such assignment, the term "Corporation" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Corporation by its duly authorized officer, as of the day and year first above written. SILICON VALLEY GROUP, INC. By: ----------------------------------- Title: -------------------------------- -------------------------------------- PAPKEN S. DER TOROSSIAN -11- EX-10.51 3 EX-10.51 1 EXHIBIT 10.51 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AGREEMENT, is effective as of this __day of June 1999, by and between William A. Hightower (the "Employee") and Silicon Valley Group, Inc., a Delaware corporation (the "Corporation"). In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Employee by the Corporation, the parties agree as follows: 1. Duties and Scope of Employment. (a) Position. The Corporation agrees to employ the Employee for the term of his employment under this Agreement in the position of President and Chief Operating Officer, as such position was defined in terms of responsibilities and compensation as of the effective date of this Agreement. (b) Obligations. During the term of his employment under this Agreement, the Employee shall devote his full business efforts and time to the Corporation and its subsidiaries. The foregoing, however, shall not preclude the Employee from engaging in appropriate civic, charitable or religious activities or from devoting a reasonable amount of time to private investments or from serving on the boards of directors of other entities, as long as such activities and service do not interfere or conflict with his responsibilities to the Corporation. 2. Base Compensation. During the term of his employment under this Agreement, the Corporation agrees to pay the Employee as compensation for his services a base salary at the annual rate of $375,000, or at such higher rate as the Corporation's Board of Directors may determine from time to time, along with such performance bonus amounts and car allowances, if any, as the Board shall authorize, in its discretion, from time to time. Such salary shall be payable in approximately equal bi-weekly installments. (The annual compensation specified in this Section 2, together with any increases in such compensation that the Board of Directors may grant from time to time, is referred to in this Agreement as "Base Compensation.") 2 3. Employee Benefits. (a) General. During the term of his employment under this Agreement, the Employee shall be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Corporation, including (without limitation) pension plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, incentive or other bonus plans, life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of any committee administering such plan or program. (b) Stock Options. The Corporation has granted to the Employee options to purchase 200,000 shares of the Common Stock of the Corporation at the closing price on the date hereof. The terms of the options shall be governed by the Corporation's Stock Option Agreement attached hereto as Exhibit A. (c) The Employee shall be entitled to receive a target bonus in the amount of $243,750 for the fiscal year ended September 31, 1998. Such bonus may be adjusted by the Board of Directors from time to time. 4. Business Expenses and Travel. During the term of his employment under this Agreement, the Employee shall be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties hereunder. The Corporation shall reimburse the Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Corporation's generally applicable policies. 5. Term of Employment. (a) Basic Rule. The Corporation agrees to continue the Employee's employment, and the Employee agrees to remain in employment with the Corporation, from the effective date of this Agreement until the date when the Employee's employment terminates pursuant to the provisions of this Agreement. -2- 3 (b) Termination by the Corporation. The Corporation may terminate Employee's employment at any time, for any reason whatsoever, by giving the Employee thirty (30) days' advance notice in writing. (i) Termination Without Cause. If the Corporation terminates Employee's employment without Cause, the provisions of Section 6(a) shall apply. (ii) Termination Upon Disability. If the Corporation terminates the Employee's employment for Disability, the provisions of Section 6(a) shall apply. For all purposes under this Agreement, "Disability" shall mean that the Employee, at the time notice is given, has been unable to perform his duties under this Agreement for a period of not less than six consecutive months as the result of his incapacity due to physical or mental illness. In the event that the Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment under this subsection (ii) becomes effective, the notice of termination shall automatically be deemed to have been revoked. (iii) Termination Within Twelve (12) Months of a Change in Control. If the Corporation terminates Employee's employment within twelve (12) months after a Change in Control, whether such termination is with or without Cause, is due to Employee's death or Disability, or constitutes a Constructive Termination (as defined in Section 5(c) below), the provisions of Sections 6(a) and 6(b) shall apply. For all purposes under this Agreement, "Change in Control" shall mean the occurrence of any of the following events: (1) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Corporation representing fifty percent (50%) or more of the total voting power represented by the Corporation's then outstanding voting securities except pursuant to a negotiated agreement with the Corporation and pursuant to which such securities are purchased from the Corporation; or (2) A change in the composition of the Board of Directors of the Corporation, as a result of which fewer than a majority of the incumbent directors are directors who either (A) had been directors of the Corporation thirty-six (36) months prior to such change or (B) were elected, or nominated for election, to the Board of Directors of the Corporation with the affirmative votes of at least a majority of the directors who had been directors of the Corporation thirty-six (36) months prior to such change and who were still in office at the time of the election or nomination; or -3- 4 (3) The shareholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation, other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all the Corporation's assets. Any other provision of this Section notwithstanding, the term "Change in Control" shall not include either of the following events undertaken at the election of the Corporation: (1) Any transaction, the sole purpose of which is to change the state of the Corporation's incorporation; (2) A transaction, the result of which is to sell all or substantially all of the assets of the Corporation to another corporation (the "surviving corporation"); provided that the surviving corporation is owned directly or indirectly by the shareholders of the Corporation immediately following such transaction in substantially the same proportions as their ownership of the Corporation's common stock immediately preceding such transaction; and provided, further, that the surviving corporation expressly assumes this Agreement. (iv) Death. Upon the event of the Employee's death, Employee's employment with the Corporation shall be considered automatically terminated and the provisions of Section 6(a) shall apply. (v) Termination for Cause. Except as set forth in Section 5(b)(iii), if the Corporation terminates Employee's employment for Cause, the provisions of Section 6(c) shall apply. For all purposes under this Agreement, "Cause" shall mean (i) a willful failure by the Employee to substantially perform his duties hereunder (other than a failure resulting from the Employee's complete or partial incapacity due to physical or mental illness or impairment) after there has been delivered to Employee a written demand for performance from the Company which describes the basis for the Company's belief that Employee has not substantially performed his duties and sets forth specific performance goals to cure such defaults; provided that upon any determination by the Company that Employee has willfully failed to perform his duties, Employee -4- 5 shall have 120 days in which to cure such willful failure to perform his duties, (ii) a willful act by the Employee which constitutes gross misconduct and which is injurious to the Corporation, (iii) a willful breach by the Employee of a material provision of this Agreement, or (iv) a material and willful violation of a federal or state law or regulation applicable to the business of the Corporation. No act, or failure to act, by the Employee shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in the Corporation's best interest. (c) Voluntary Termination by the Employee. The Employee may terminate his employment by giving the Corporation thirty (30) days' advance notice in writing. If the Employee terminates his employment under the preceding sentence other than as a result of a Constructive Termination, the provisions of Section 6(d) shall apply. If the Employee terminates his employment pursuant to this Section 5(c) as a result of a Constructive Termination, the provisions of Section 6(a) shall apply. For all purposes under this Agreement, "Constructive Termination" shall mean any of the following: a material reduction in salary or benefits, a material change in responsibilities, or a requirement to relocate, except for office relocations that would not increase the Employee's one-way commute distance by more than forty (40) miles. (d) Waiver of Notice. Any waiver of notice shall be valid only if it is made in writing and expressly refers to the applicable notice requirement in this Section 5. 6. Payments Upon Termination of Employment. (a) Payments Upon Termination Pursuant to Section 5(b)(i)-(iv) and Constructive Termination. If, during the term of this Agreement, the Employee's employment is terminated pursuant to any of the reasons set forth in Section 5(b)(i)-(iv) or voluntarily by Employee under Section 5(c) as a result of a Constructive Termination, the Employee shall be entitled, upon the execution of the Agreement and Release attached hereto as Exhibit A, to receive a severance payment from the Corporation (the "Severance Payment") in an amount equal to the following: (i) an amount equal to three hundred percent (300%) of the Employee's Base Compensation in effect on the date of employment termination; plus -5- 6 (ii) the greater of (x) an amount equal to three hundred percent (300%) of the aggregate bonus and car allowance, if any, payable to the employee for the immediately preceding 12-month period, and (y) an amount equal to three hundred percent (300%) of the target aggregate bonus and car allowance, if any, paid to the employee for the immediately preceding fiscal year. The Severance Payment shall be made in a lump sum within thirty (30) days following the date of the employment termination. The Severance Payment shall be in lieu of any further payments to the Employee under Section 2 and any further accrual of benefits under Section 3 with respect to periods subsequent to the date of the employment termination. Notwithstanding the preceding sentence, the Severance Payment shall not reduce or offset any benefits the Employee may be entitled to under the specific terms of the benefit plans of the Corporation, including but not limited to payments of premiums on a life insurance policy for which the Employee or any designee of the Employee is the beneficiary. The Employee shall not be required to mitigate the amount of any payment contemplated by this Section 6(a) (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. (iii) Employee shall also be entitled to thirty-six (36) months from the date of the employment termination to exercise any vested stock options he may have at the time of his employment termination notwithstanding anything to the contrary in the applicable Stock Option Agreement between employee and the Company. (b) Option Acceleration Upon Termination on Change in Control. If, during the term of this Agreement, the Employee's employment is terminated pursuant to the reasons set forth in Section 5(b)(iii), then the unvested portion of any stock option held by the Employee under the Company's stock option plans shall automatically be fully vested and exercisable as of the date of employment termination and the Employee or the Employee's representative, as the case may be, shall have the right to exercise all or any portion of such stock option, in addition to any portion of the option vested and exercisable prior to such termination. If a termination of Employee's employment results in acceleration of vesting of any option, the Employee shall have thirty-six (36) -6- 7 months following the date of employment termination to exercise such option, notwithstanding any contrary provision of the option agreement. (c) Termination For Cause. If the Employee's employment is terminated for Cause pursuant to Section 5(b)(v), except as otherwise set forth in Section 5(b)(iii), no compensation or payments will be paid or provided to the Employee for the periods following the date when such a termination of employment is effective. Notwithstanding the preceding sentence, nothing herein shall be interpreted to reduce or offset any benefits the Employee may be entitled to under the terms of the benefit plans of the Corporation. (d) Payments Upon Voluntary Termination. In the event that, during the term of this Agreement, the Employee's employment is terminated pursuant to Section 5(c) other than as a result of a Constructive Termination, no compensation or payments will be paid or provided to the Employee for the periods following the date when such a termination of employment is effective. Notwithstanding the preceding sentence, nothing herein shall be interpreted to reduce or offset any benefits the Employee may be entitled to under the terms of the benefit plans of the Corporation. (e) Limitation on Payments. (i) In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section would be subject to the excise tax imposed by Section 4999 of the Code, then the Executive's severance benefits under Section 6 shall be payable either (i) in full, or (ii) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Executive on an after-tax basis, of the greatest amount of severance benefits under this Agreement, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. (ii) If a reduction in the payments and benefits that would otherwise be paid or provided to the Executive under the terms of this Agreement is necessary to comply with the -7- 8 provisions of Section 6(e)(i), the Executive shall be entitled to select which payments or benefits will be reduced and the manner and method of any such reduction of such payments or benefits (including but not limited to the number of options that would vest under Section 6(b) subject to reasonable limitations (including, for example, express provisions under the Company's benefit plans) (so long as the requirements of Section 6(e)(i) are met). Within thirty (30) days after the amount of any required reduction in payments and benefits is finally determined in accordance with the provisions of Section 6(e)(iii), the Executive shall notify the Company in writing regarding which payments or benefits are to be reduced. If no notification is given by the Executive, the Company will determine which amounts to reduce. If, as a result of any reduction required by Section 6(e)(i), amounts previously paid to the Executive exceed the amount to which the Executive is entitled, the Executive will promptly return the excess amount to the Company. (iii) Unless the Company and the Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. 7. Successors. (a) Corporation's Successors. Any successor to the Corporation (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Corporation's business and/or assets shall assume this Agreement and agree expressly to perform this Agreement in the same manner and to the same extent as the Corporation would be required to perform it in the absence of a succession. For all purposes under this Agreement, the term "Corporation" shall include any successor to the Corporation's business and/or -8- 9 assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by this Agreement by operation of law. (b) Employee's Successors. This Agreement and all rights of the Employee hereunder shall continue to benefit, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Corporation in writing. In the case of the Corporation, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. 9. Termination of Agreement. This Agreement shall terminate upon the earlier of (i) the date that all obligations of the parties hereunder have been satisfied or (ii) August 1, 2004. A termination of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of this Agreement. 10. Miscellaneous Provisions. (a) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Corporation (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (b) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to employment matters. -9- 10 (c) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (d) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (e) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in San Jose, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Punitive damages shall not be awarded. (f) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (f) shall be void. (g) Employment At Will; Limitation of Remedies. The Corporation and the Employee acknowledge that the Employee's employment is at will, as defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. (i) Assignment of Agreement by Corporation. The Corporation may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Corporation or to the Corporation. In the case of any such assignment, the term "Corporation" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. -10- 11 (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Corporation by its duly authorized officer, as of the day and year first above written. SILICON VALLEY GROUP, INC. By: ------------------------------- Title: ---------------------------- ---------------------------------- WILLIAM A. HIGHTOWER -11- EX-10.52 4 EX-10.52 1 EXHIBIT 10.52 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT This First Amended and Restated Employment Agreement (the "Agreement") is effective as of June __, 1999, by and between Russell G. Weinstock (the "Employee") and Silicon Valley Group, Inc., a Delaware corporation (the "Company"). R E C I T A L S A. The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and commitment of the Employee. B. In order to accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by the Employee, to agree to the terms provided herein. C. Certain capitalized terms used in the Agreement are defined in Section 6 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Employee by the Company, the parties agree as follows: 1. Duties and Scope of Employment. (a) Position. The Company shall employ the Employee in the position of Vice President of Finance and Chief Financial Officer, as such position was defined in terms of responsibilities and compensation as of the effective date of this Agreement; provided, however, that the Board shall have the right, prior to the occurrence of a Change of Control (as defined in Section 6 below), to revise such responsibilities and compensation from time to time as the Board may deem necessary or appropriate, subject to the Involuntary Termination provisions under Section 6(b). (b) Obligations. The Employee shall devote his full business efforts and time to the Company and its subsidiaries. The foregoing, however, shall not preclude the Employee from engaging in such activities and services as do not interfere or conflict with his responsibilities to the Company. 2. Base Compensation. The Company shall pay the Employee as compensation for his services a base salary at the annualized rate of $300,000, along with such performance bonus amounts and car allowances, if any, as the Board shall authorize, in its discretion, from time to time. Such salary shall be reviewed at least annually and shall be increased from time to time subject to accomplishment of such performance and contribution goals and objectives as may be established from time to time by the Board. Such salary shall be paid periodically in accordance with normal Company payroll. The annual compensation (including bonus amounts) specified in this Section 2, together with any increases in such compensation that the Board may grant from time to time, is referred to in this Agreement as "Base Compensation." 2 3. Employee Benefits. The Employee shall be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Company applicable to other key executives of the Company, including (without limitation) retirement plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, incentive or other bonus plans, life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of any committee administering such plan or program. 4. At-Will Employment. The Company and the Employee acknowledge that the Employee's employment is at will, as defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. The terms of this Agreement shall terminate upon the earlier of (i) the date that all obligations of the parties hereunder have been satisfied, (ii) twelve (12) months after a Change of Control or (iii) so long as there has been no Change in Control, August 1, 2004. A termination of the terms of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 5. Severance Benefits. Subject to Section 7 below, if the Employee's employment terminates at any time, then the Employee's right, if any, to receive severance benefits shall be as set forth in this Section 5 in lieu of any other severance or severance-type benefits to which Employee may otherwise be entitled under the Company's existing plans, policies or programs. (a) Voluntary Resignation; Termination For Cause. If the Employee's employment terminates by reason of the Employee's voluntary resignation (and is not an Involuntary Termination), or if the Employee is terminated for Cause, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such termination applicable to a voluntary termination or termination for cause. (b) Involuntary Termination. If the Employee's employment is terminated as a result of Involuntary Termination other than for Cause, then the Employee shall be entitled, upon the execution of the Agreement and Release attached hereto as Exhibit A, to receive severance pay in an aggregate amount equal to two times the Employee's Base Compensation for the twelve-calendar month period immediately preceding the Termination Date. Any severance payments to which the Employee is entitled pursuant to this section shall be paid, at the option of the Employee, either in twenty-four (24) equal monthly installments following the Termination Date, or in a single, lump-sum payment within thirty days following the Termination Date. Employee shall also be entitled to twenty-four (24) months from the Termination Date to exercise any vested stock options he may have at the time his employment terminates under this section notwithstanding anything to the contrary in the Company's Stock Option Plan or the applicable Stock Option Agreement between Employee and the Company. -2- 3 (c) Disability; Death. If the Company terminates the Employee's employment as a result of the Employee's Disability, or the Employee's employment is terminated due to the death of the Employee, then the Employee (or the Employee's estate, if such termination results from Employee's death) shall be entitled, at the Employee's option, to (i) continue receiving the Employee's Base Compensation for 24 months following such termination, at the same annualized rate as was in effect at the Termination Date, offset, in the case of Disability, by any payments Employee receives from any governmental agency or private disability insurance plan as a result of such Disability, or (ii) receive the full amount set forth in Section 5(c)(i) in a single, lump-sum payment. (d) Options. (i) If the Employee's employment is terminated following a Change of Control as a result of an Involuntary Termination other than for Cause, then the unvested portion of any stock option held by the Employee under the Company's stock option plans shall automatically become fully vested and exercisable as of the Termination Date and the Employee or the Employee's representative, as the case may be, shall have the right to exercise all or any portion of such stock option, in addition to any portion of the option vested or exercisable prior to such termination. If a termination of Employee's employment results in acceleration of vesting of any option, the Employee shall have 24 months following the Termination Date to exercise such option, notwithstanding any contrary provision of the option agreement. (ii) If a Change of Control occurs within 90 days following the termination of Employee's employment as a result of an Involuntary Termination other than for Cause, then Employee or the Employee's representative, as the case may be, shall be fully vested in and have the right to exercise all options which were not vested or exercisable as of the Termination Date, at the same exercise price as would have applied if Employee had still been employed at the time of the Change in Control. Promptly following the occurrence of any such Change of Control within such 90 days, the Company will provide to the Employee written notice of such Change of Control and a written statement as to the number of shares vested and exercisable by Employee as a result of this Section 5(d)(ii) and the exercise price or prices thereof. The right to exercise such option shall continue for 24 months following the Company's delivery of the written notice contemplated by the preceding sentence. In the event that the securities issuable upon exercise of such options have been converted into different securities as a result of the Change of Control, or have been converted into a right to receive consideration as a result of the Change of Control, Employee shall, upon exercise of such option, be entitled to receive the same securities or consideration as Employee would have received had the option been exercised immediately prior to the Change of Control. (e) Set-off. In the event that, upon any termination of Employee's employment (whether voluntary or involuntary) prior to a Change of Control, the Employee owes any amounts to the Company, (i) the amount of each monthly severance payment to be paid to Employee shall be reduced by the amount of all accrued interest on, and a portion of the outstanding principal amount of, any such debt owing from Employee to the Company at the Termination Date if the Employee has elected to receive severance payments over twenty-four months, or (ii) the payment will be reduced by the outstanding principal amount and accrued interest if the Employee has elected to -3- 4 receive a single, lump-sum payment. The portion of the principal amount of such debt by which each monthly severance payment will be reduced shall be 1/24 in the case of a termination covered under Section 5(b) or Section 5(c) or in full if the Employee has elected to receive a single, lump-sum payment. 6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or the consummation of the sale or disposition by the Company of all or substantially all the Company's assets. (b) Involuntary Termination. "Involuntary Termination" shall mean any of the following (i) without the Employee's express written consent, the assignment to the Employee of any duties or the reduction of the Employee's duties, either of which results in a significant diminution in the Employee's position or responsibilities with the Company in effect immediately prior to such assignment, or the removal of the Employee from such position and responsibilities, including but not limited to the removal of the title of Vice President of Finance and Chief Financial Officer; (ii) a substantial reduction, without good business reasons and without the Employee's written consent, of the facilities and perquisites (including office space and location) available to the Employee immediately prior to such reduction; (iii) a reduction by the Company in the Base Compensation of the Employee as in effect immediately prior to such reduction, other than (A) a bonus reduction resulting from application of a bonus formula or plan on a basis that is consistent with prior practice -4- 5 or (B) a reduction which is comparable (on a percentage basis) to a reduction applicable to all executive officers of the Company; (iv) a material reduction by the Company in the kind or level of employee benefits to which the Employee is entitled immediately prior to such reduction with the result that the Employee's overall benefits package is significantly reduced other than, so long as there is no Change of Control, a reduction which is comparable to a reduction applicable to all executive officers of the Company; (v) the relocation of the Employee to a facility or a location more than 25 miles from the Employee's then present location, without the Employee's express written consent; (vi) any purported termination of the Employee by the Company which is not effected for Disability or for Cause, or any purported termination for which the grounds relied upon are not valid; (vii) the failure of the Company to obtain the assumption of this agreement by any successors contemplated in Section 9 below; or (viii) any purported termination of the Employee's employment by the Company which is not effected pursuant to a notice of termination satisfying the requirements of Section 10(b) below, and for purposes of this Agreement, no such purported termination shall be effective. (c) Cause. "Cause" shall mean (i) any act of personal dishonesty taken by the Employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee which constitutes gross misconduct and which is injurious to the Company, and (iv) continued violations by the Employee of the Employee's obligations under Section 1 of this Agreement which are demonstrably willful and deliberate on the Employee's part after (a) there has been delivered to the Employee a written demand for performance from the Company which describes the basis for the Company's belief that the Employee has not substantially performed his duties and sets forth specific performance goals to cure such defaults, and (b) the Employee has been given 120 days during which the Employee has been unable to cure such failure to perform hereunder. (d) Disability. "Disability" shall mean that the Employee has been unable to perform his duties under this Agreement as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and agreed to the Employee or the Employee's legal representative (such agreement not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Employee's employment. In the event that the Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) Termination Date. "Termination Date" shall mean (i) if this Agreement is terminated by the Company for Disability, thirty (30) days after notice of termination is given to the Employee (provided that the Employee shall not have returned to the performance of the Employee's duties on a full-time basis during such thirty (30) day period), (ii) if the Employee's employment is terminated by the Company for any other reason, the date on which a notice of termination is given, provided that if within thirty (30) days after the Company gives the Employee notice of termination, the Employee notifies the Company that a dispute exists concerning the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement -5- 6 of the parties, by final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), or (iii) if the Agreement is terminated by the Employee, the date on which the Employee delivers the notice of termination to the Company. 7. Limitation on Payments. (a) In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section would be subject to the excise tax imposed by Section 4999 of the Code, then the Executive's severance benefits under Section 5 shall be payable either (i) in full, or (ii) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Executive on an after-tax basis, of the greatest amount of severance benefits under this Agreement, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. (b) If a reduction in the payments and benefits that would otherwise be paid or provided to the Executive under the terms of this Agreement is necessary to comply with the provisions of Section 7(a), the Executive shall be entitled to select which payments or benefits will be reduced and the manner and method of any such reduction of such payments or benefits (including but not limited to the number of options that would vest under Section 5(d) subject to reasonable limitations (including, for example, express provisions under the Company's benefit plans) (so long as the requirements of Section 7(a) are met). Within thirty (30) days after the amount of any required reduction in payments and benefits is finally determined in accordance with the provisions of Section 7(c), the Executive shall notify the Company in writing regarding which payments or benefits are to be reduced. If no notification is given by the Executive, the Company will determine which amounts to reduce. If, as a result of any reduction required by Section 7(a), amounts previously paid to the Executive exceed the amount to which the Executive is entitled, the Executive will promptly return the excess amount to the Company. (c) Unless the Company and the Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. -6- 7 8. Covenants of the Employee. (a) Covenants. As additional consideration for the Company's agreements set forth herein, Employee agrees that Employee will not: (i) directly or indirectly, in any manner or capacity, as advisor, principal, agent, partner, officer, director, stockholder, employee, member of any association or otherwise, engage in any business or activity conducted by the Company as of the Termination Date or have an interest in any firm, corporation, partnership or association engaged in any such business or activity or similar business or activity; provided, however, that ownership by Employee, as a passive investment, of less than 1% of the outstanding shares of capital stock of any corporation with one or more classes of its capital stock listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this paragraph; (ii) so long as there has been no Change of Control, engage in any conduct detrimental to the Company or the conduct of its business. (b) Consequences of Breach. In the event Employee breaches his obligations under Section 8(a), (i) the Company's obligation to make payments to Employee pursuant to this Agreement shall immediately terminate upon the occurrence of the actions which constitute such breach, (ii) all loans from the Company to Employee shall become immediately due and payable and (iii) if the Company has paid any amounts to Employee since the occurrence of the actions which constitute such breach, Employee shall repay such amounts upon demand by the Company. 9. Successors. (a) Company's Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Employee's Successors. The terms of this Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 10. Notice. (a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, -7- 8 mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Notice of Termination. Any termination by the Company for Disability or Cause, or by the Employee as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with this Section 10(b). Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than thirty (30) days after the giving of such notice). The failure by the Employee to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Employee hereunder or preclude the Employee from asserting such fact or circumstance in enforcing his rights hereunder. 11. Miscellaneous Provisions. (a) No Duty to Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source, except as specifically provided for herein. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth or explicitly referenced in this Agreement have been made or entered into by either party with respect to employment matters. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Santa Clara County, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Punitive damages shall not be awarded. -8- 9 (g) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (g) shall be void. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. (i) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (ii) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY SILICON VALLEY GROUP, INC. By: ------------------------------ Papken S. Der Torossian, Chief Executive Officer EMPLOYEE --------------------------------- Russell G. Weinstock -9- EX-10.53 5 EX-10.53 1 EXHIBIT 10.53 FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT This First Amended and Restated Employment Agreement (the "Agreement") is effective as of June __, 1999, by and between Boris Lipkin (the "Employee") and Silicon Valley Group, Inc., a Delaware corporation (the "Company"). R E C I T A L S A. The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and commitment of the Employee. B. In order to accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by the Employee, to agree to the terms provided herein. C. Certain capitalized terms used in the Agreement are defined in Section 6 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Employee by the Company, the parties agree as follows: 1. Duties and Scope of Employment. (a) Position. The Company shall employ the Employee in the position of Vice President, Corporate, as such position was defined in terms of responsibilities and compensation as of the effective date of this Agreement; provided, however, that the Board shall have the right, prior to the occurrence of a Change of Control (as defined in Section 6 below), to revise such responsibilities and compensation from time to time as the Board may deem necessary or appropriate subject to the Involuntary Termination provisions under Section 6(b). (b) Obligations. The Employee shall devote his full business efforts and time to the Company and its subsidiaries. The foregoing, however, shall not preclude the Employee from engaging in such activities and services as do not interfere or conflict with his responsibilities to the Company. 2. Base Compensation. The Company shall pay the Employee as compensation for his services a base salary at the annualized rate of $275,000, along with such performance bonus amounts and car allowances, if any, as the Board shall authorize, in its discretion, from time to time. Such salary shall be reviewed at least annually and shall be increased from time to time subject to accomplishment of such performance and contribution goals and objectives as may be established from time to time by the Board. Such salary shall be paid periodically in accordance with normal Company payroll. The annual compensation (including bonus amounts) specified in this Section 2, together with any increases in such compensation that the Board may grant from time to time, is referred to in this Agreement as "Base Compensation." 2 3. Employee Benefits. The Employee shall be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Company applicable to other key executives of the Company, including (without limitation) retirement plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, incentive or other bonus plans, life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of any committee administering such plan or program. 4. At-Will Employment. The Company and the Employee acknowledge that the Employee's employment is at will, as defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement. The terms of this Agreement shall terminate upon the earlier of (i) the date that all obligations of the parties hereunder have been satisfied, (ii) twelve (12) months after a Change of Control or (iii) so long as there has been no Change in Control, August 1, 2004. A termination of the terms of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 5. Severance Benefits. Subject to Section 7 below, if the Employee's employment terminates at any time, then the Employee's right, if any, to receive severance benefits shall be as set forth in this Section 5 in lieu of any other severance or severance-type benefits to which Employee may otherwise be entitled under the Company's existing plans, policies or programs. (a) Voluntary Resignation; Termination For Cause. If the Employee's employment terminates by reason of the Employee's voluntary resignation (and is not an Involuntary Termination), or if the Employee is terminated for Cause, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such termination applicable to a voluntary termination or termination for cause. (b) Involuntary Termination. If the Employee's employment is terminated as a result of Involuntary Termination other than for Cause, then the Employee shall be entitled, upon the execution of the Agreement and Release attached hereto as Exhibit A, to receive severance pay in an aggregate amount equal to two times the Employee's Base Compensation for the twelve-calendar month period immediately preceding the Termination Date. Any severance payments to which the Employee is entitled pursuant to this section shall be paid, at the option of the Employee, either in twenty-four (24) equal monthly installments following the Termination Date, or in a single, lump-sum payment within thirty days following the Termination Date. Employee shall also be entitled to twenty-four (24) months from the Termination Date to exercise any vested stock options he may have at the time his employment terminates under this section notwithstanding anything to the contrary in Company's Stock Option Plan or the applicable Stock Option Agreement between Employee and the Company. -2- 3 (c) Disability; Death. If the Company terminates the Employee's employment as a result of the Employee's Disability, or the Employee's employment is terminated due to the death of the Employee, then the Employee (or the Employee's estate, if such termination results from Employee's death) shall be entitled, at the Employee's option, to (i) continue receiving the Employee's Base Compensation for 24 months following such termination, at the same annualized rate as was in effect at the Termination Date, offset, in the case of Disability, by any payments Employee receives from any governmental agency or private disability insurance plan as a result of such Disability, or (ii) receive the full amount set forth in Section 5(c)(i) in a single, lump-sum payment. (d) Options. (i) If the Employee's employment is terminated following a Change of Control as a result of an Involuntary Termination other than for Cause, then the unvested portion of any stock option held by the Employee under the Company's stock option plans shall automatically become fully vested and exercisable as of the Termination Date and the Employee or the Employee's representative, as the case may be, shall have the right to exercise all or any portion of such stock option, in addition to any portion of the option vested or exercisable prior to such termination. If a termination of Employee's employment results in acceleration of vesting of any option, the Employee shall have 24 months following the Termination Date to exercise such option, notwithstanding any contrary provision of the option agreement. (ii) If a Change of Control occurs within 90 days following the termination of Employee's employment as a result of an Involuntary Termination other than for Cause, then Employee or the Employee's representative, as the case may be, shall be fully vested in and have the right to exercise all options which were not vested or exercisable as of the Termination Date, at the same exercise price as would have applied if Employee had still been employed at the time of the Change in Control. Promptly following the occurrence of any such Change of Control within such 90 days, the Company will provide to the Employee written notice of such Change of Control and a written statement as to the number of shares vested and exercisable by Employee as a result of this Section 5(d)(ii) and the exercise price or prices thereof. The right to exercise such option shall continue for 24 months following the Company's delivery of the written notice contemplated by the preceding sentence. In the event that the securities issuable upon exercise of such options have been converted into different securities as a result of the Change of Control, or have been converted into a right to receive consideration as a result of the Change of Control, Employee shall, upon exercise of such option, be entitled to receive the same securities or consideration as Employee would have received had the option been exercised immediately prior to the Change of Control. (e) Set-off. In the event that, upon any termination of Employee's employment (whether voluntary or involuntary) prior to a Change of Control, the Employee owes any amounts to the Company, (i) the amount of each monthly severance payment to be paid to Employee shall be reduced by the amount of all accrued interest on, and a portion of the outstanding principal amount of, any such debt owing from Employee to the Company at the Termination Date if the Employee has elected to receive severance payments over twenty-four months, or (ii) the payment will be -3- 4 reduced by the outstanding principal amount and accrued interest if the Employee has elected to receive a single, lump-sum payment. The portion of the principal amount of such debt by which each monthly severance payment will be reduced shall be 1/24 in the case of a termination covered under Section 5(b) or Section 5(c) or in full if the Employee has elected to receive a single, lump-sum payment. 6. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or the consummation of the sale or disposition by the Company of all or substantially all the Company's assets. (b) Involuntary Termination. "Involuntary Termination" shall mean any of the following: (i) without the Employee's express written consent, the assignment to the Employee of any duties or the reduction of the Employee's duties, either of which results in a significant diminution in the Employee's position or responsibilities with the Company in effect immediately prior to such assignment, or the removal of the Employee from such position and responsibilities; (ii) a substantial reduction, without good business reasons and without the Employee's written consent, of the facilities and perquisites (including office space and location) available to the Employee immediately prior to such reduction; (iii) a reduction by the Company in the Base Compensation of the Employee as in effect immediately prior to such reduction, other than (A) a bonus reduction -4- 5 resulting from application of a bonus formula or plan on a basis that is consistent with prior practice or (B) a reduction which is comparable (on a percentage basis) to a reduction applicable to all executive officers of the Company; (iv) a material reduction by the Company in the kind or level of employee benefits to which the Employee is entitled immediately prior to such reduction with the result that the Employee's overall benefits package is significantly reduced other than, so long as there is no Change of Control, a reduction which is comparable to a reduction applicable to all executive officers of the Company; (v) the relocation of the Employee to a facility or a location more than 25 miles from the Employee's then present location, without the Employee's express written consent; (vi) any purported termination of the Employee by the Company which is not effected for Disability or for Cause, or any purported termination for which the grounds relied upon are not valid; (vii) the failure of the Company to obtain the assumption of this agreement by any successors contemplated in Section 9 below; or (viii) any purported termination of the Employee's employment by the Company which is not effected pursuant to a notice of termination satisfying the requirements of Section 10(b) below, and for purposes of this Agreement, no such purported termination shall be effective. (c) Cause. "Cause" shall mean (i) any act of personal dishonesty taken by the Employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee which constitutes gross misconduct and which is injurious to the Company, and (iv) continued violations by the Employee of the Employee's obligations under Section 1 of this Agreement which are demonstrably willful and deliberate on the Employee's part after (a) there has been delivered to the Employee a written demand for performance from the Company which describes the basis for the Company's belief that the Employee has not substantially performed his duties and sets forth specific performance goals to cure such defaults, and (b) the Employee has been given 120 days during which the Employee has been unable to cure such failure to perform hereunder. (d) Disability. "Disability" shall mean that the Employee has been unable to perform his duties under this Agreement as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and agreed to the Employee or the Employee's legal representative (such agreement not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Employee's employment. In the event that the Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) Termination Date. "Termination Date" shall mean (i) if this Agreement is terminated by the Company for Disability, thirty (30) days after notice of termination is given to the Employee (provided that the Employee shall not have returned to the performance of the Employee's duties on a full-time basis during such thirty (30) day period), (ii) if the Employee's employment is terminated by the Company for any other reason, the date on which a notice of termination is given, -5- 6 provided that if within thirty (30) days after the Company gives the Employee notice of termination, the Employee notifies the Company that a dispute exists concerning the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), or (iii) if the Agreement is terminated by the Employee, the date on which the Employee delivers the notice of termination to the Company. 7. Limitation on Payments. (a) In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section would be subject to the excise tax imposed by Section 4999 of the Code, then the Executive's severance benefits under Section 5 shall be payable either (i) in full, or (ii) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Executive on an after-tax basis, of the greatest amount of severance benefits under this Agreement, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. (b) If a reduction in the payments and benefits that would otherwise be paid or provided to the Executive under the terms of this Agreement is necessary to comply with the provisions of Section 7(a), the Executive shall be entitled to select which payments or benefits will be reduced and the manner and method of any such reduction of such payments or benefits (including but not limited to the number of options that would vest under Section 5(d) subject to reasonable limitations (including, for example, express provisions under the Company's benefit plans) (so long as the requirements of Section 7(a) are met). Within thirty (30) days after the amount of any required reduction in payments and benefits is finally determined in accordance with the provisions of Section 7(c), the Executive shall notify the Company in writing regarding which payments or benefits are to be reduced. If no notification is given by the Executive, the Company will determine which amounts to reduce. If, as a result of any reduction required by Section 7(a), amounts previously paid to the Executive exceed the amount to which the Executive is entitled, the Executive will promptly return the excess amount to the Company. (c) Unless the Company and the Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to -6- 7 make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. 8. Covenants of the Employee. (a) Covenants. As additional consideration for the Company's agreements set forth herein, Employee agrees that Employee will not: (i) directly or indirectly, in any manner or capacity, as advisor, principal, agent, partner, officer, director, stockholder, employee, member of any association or otherwise, engage in any business or activity conducted by the Company as of the Termination Date or have an interest in any firm, corporation, partnership or association engaged in any such business or activity or similar business or activity; provided, however, that ownership by Employee, as a passive investment, of less than 1% of the outstanding shares of capital stock of any corporation with one or more classes of its capital stock listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of this paragraph; (ii) so long as there has been no Change of Control, engage in any conduct detrimental to the Company or the conduct of its business. (b) Consequences of Breach. In the event Employee breaches his obligations under Section 8(a), (i) the Company's obligation to make payments to Employee pursuant to this Agreement shall immediately terminate upon the occurrence of the actions which constitute such breach, (ii) all loans from the Company to Employee shall become immediately due and payable and (iii) if the Company has paid any amounts to Employee since the occurrence of the actions which constitute such breach, Employee shall repay such amounts upon demand by the Company. 9. Successors. (a) Company's Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) Employee's Successors. The terms of this Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. -7- 8 10. Notice. (a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Notice of Termination. Any termination by the Company for Disability or Cause, or by the Employee as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with this Section 10(b). Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than thirty (30) days after the giving of such notice). The failure by the Employee to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Employee hereunder or preclude the Employee from asserting such fact or circumstance in enforcing his rights hereunder. 11. Miscellaneous Provisions. (a) No Duty to Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source, except as specifically provided for herein. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth or explicitly referenced in this Agreement have been made or entered into by either party with respect to employment matters. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. -8- 9 (e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Santa Clara County, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Punitive damages shall not be awarded. (g) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (g) shall be void. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes. (i) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY SILICON VALLEY GROUP, INC. By: --------------------------------- Papken S. Der Torossian, Chief Executive Officer EMPLOYEE ------------------------------------ Boris Lipkin -9- EX-10.54 6 EX-10.54 1 EXHIBIT 10.54 PARTICIPATION AGREEMENT THIS PARTICIPATION AGREEMENT (this "Agreement" herein), dated as of June 30, 1999, is entered into by and among: (1) SILICON VALLEY GROUP, INC., a Delaware corporation ("Lessee"); (2) SELCO SERVICE CORPORATION, an Ohio corporation doing business in California as Ohio SELCO Service Corporation ("Lessor"); (3) Each of the financial institutions from time to time listed in Schedule I hereto, as amended from time to time (such financial institutions to be referred to collectively as the "Participants"); and (4) KEYBANK NATIONAL ASSOCIATION, as agent for the Participants (in such capacity, "Agent"). RECITALS A. Lessee has requested Lessor and the Participants to provide to Lessee a lease facility pursuant to which: (1) Lessor would (a) purchase the land described in Exhibit A (as more fully defined in Schedule 1.01, the "Land"), together with the improvements thereto, (b) lease such property to Lessee and (c) grant to Lessee the right to purchase such property; and (2) The Participants would participate in such lease facility by (a) funding the advance to be made by Lessor to purchase such property and (b) acquiring participation interests in the rental and certain other payments to be made by Lessee. B. Lessor and the Participants are willing to provide such lease facility upon the terms and subject to the conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. INTERPRETATION. 1.01. Definitions. Unless otherwise indicated in this Agreement or any other Operative Document, each term set forth in Schedule 1.01, when used in this Agreement or any other Operative Document, shall have the respective meaning given to that term in Schedule 1.01 or in 1 2 the provision of this Agreement or other document, instrument or agreement referenced in Schedule 1.01. 1.02. Rules of Interpretation. Unless otherwise indicated in this Agreement or any other Operative Document, the rules of interpretation set forth in Schedule 1.02 shall apply to this Agreement and the other Operative Documents. SECTION 2. LEASE FACILITY. 2.01. Acquisition, Lease, Amount Limitations, Etc. (a) Acquisition, Lease, Etc. Subject to the terms and conditions of this Agreement (including the limitations set forth in Subparagraph 2.01(b)), on the date specified by Lessee pursuant to Subparagraph 2.03(b) (the "Closing Date"): (i) Lessor shall purchase (with funds provided by the Participants) the Land, certain of the Improvements and certain other property (as more fully defined in Schedule 1.01, the "Property") and shall pay (with funds provided by the Participants) related expenses specified by Lessee to the extent such expenses are Permitted Transaction Expenses; and (ii) Immediately upon the purchase by Lessor of the Property, Lessor and Lessee shall execute (A) a Lease Agreement in the form of Exhibit B (the "Lease Agreement"), pursuant to which Lessor leases to Lessee the Property and (2) a Purchase Agreement in the form of Exhibit C (the "Purchase Agreement"), pursuant to which Lessor grants to Lessee the right to purchase the Property. (b) Amount Limitations. The advance made by Lessor on the Closing Date to purchase the Property and pay Permitted Transaction Expenses (the "Acquisition Advance") shall not exceed the following limitations: (i) The portion of the Acquisition Advance used to pay the Acquisition Price for the Property shall not exceed the Closing Date Appraisal for the Property; and (ii) The aggregate amount of the Acquisition Advance shall not exceed the lesser of (A) Fourteen Million Eight Hundred Seventy Nine Thousand Five Hundred Dollars ($14,879,500) (the "Total Commitment") and (B) the Expiration Date Appraisal for the Property. (c) Tranches. The Acquisition Advance shall consist of a Tranche A Portion and a Tranche B Portion. For accounting purposes, the Tranche A Portion shall constitute debt and the Tranche B Portion shall constitute equity. 2 3 2.02. Participation Agreement. (a) Acquisition Advance. Each Participant severally, unconditionally and irrevocably agrees with Lessor to participate in the Acquisition Advance made by Lessor in an amount equal to such Participant's Proportionate Share of the Acquisition Advance; provided, however, that the aggregate amount of each Participant's Proportionate Share of the Acquisition Advance shall not exceed such Participant's Commitment. Each Participant shall fund its Proportionate Share of the Acquisition Advance as provided in Subparagraph 2.05(a). Each Participant's Proportionate Share of the Acquisition Advance shall consist of such Participant's Tranche A Portion and Tranche B Portion. (b) Payments. In consideration of each Participant's participation in the Acquisition Advance made by Lessor, such Participant shall participate in the payments made by Lessee under this Agreement and the other Operative Documents as provided in Paragraph 2.06. (c) Other Rights of Participants and Agent. (i) Until all amounts payable to Agent and Participants under this Agreement and the other Operative Documents are paid in full, Lessee shall deliver all notices for Lessor under this Agreement and the other Operative Documents to Agent at the office or facsimile number and during the hours specified in Paragraph 7.01. Agent shall promptly furnish to Lessor and each Participant copies of each such notice and, in the case of the Acquisition Request, shall notify each Participant of the amount of such Participant's Proportionate Share of the Acquisition Advance requested thereby. (ii) Lessor is not an agent for Participants or Agent and may exercise or refrain from exercising its rights under this Agreement and the other Operative Documents in its discretion; provided, however that: (A) Until all amounts payable to Agent and Participants under this Agreement and the other Operative Documents are paid in full, (1) Lessor shall, subject to the limitations set forth in Section VI, be required to act or to refrain from acting upon instructions of the Required Participants as provided in Paragraph 6.03 and (2) Agent may exercise any or all of the rights and remedies of Lessor, and shall be entitled to the other benefits afforded Lessor, under this Agreement and the other Operative Documents; and (B) This clause (ii) shall not relieve the Lessor Parties of any of their obligations to Lessee under the Operative Documents. (iii) Neither Agent nor any Participant shall have any right, title or interest in the Property except for the Lien therein granted to Agent, for the 3 4 benefit of the Participants, under the Lessor Deed of Trust, the Assignment of Lease and the Lessor Security Agreement. 2.03. Acquisition Request. Lessee shall request Lessor to make the Acquisition Advance by delivering to Lessor an irrevocable written request in the form of Exhibit D, appropriately completed (the "Acquisition Request"), which specifies, among other things: (a) The amount of the Acquisition Advance; (b) The date of the Acquisition Advance, which shall be a Business Day on or prior to July 15, 1999 (the "Commitment Termination Date"); (c) The portion of the Acquisition Advance to be used to pay the Acquisition Price of the Property; and (d) The portion of the Acquisition Advance to be used to pay Permitted Transaction Expenses and the Permitted Transaction Expenses so to be paid. Lessee shall deliver the Acquisition Request to Lessor by 11:00 a.m. on the Closing Date by first-class mail or facsimile as required by Subparagraph 2.02(c) and Paragraph 7.01; provided, however, that Lessee shall promptly deliver to Lessor the original of the Acquisition Request if initially delivered by facsimile. The amount set forth in the Acquisition Request shall constitute the Outstanding Lease Amount as of the Closing Date. 2.04. Agent Fees. Lessee shall pay to Agent, for its own account, an agent structuring fee in the amount and at the time set forth in the Agent's Structuring Fee Letter (the "Agent's Structuring Fee"). 2.05. Funding of Acquisition Advance. (a) Participant Funding and Disbursement. Each Participant shall, before 11:00 a.m. on the Closing Date, make available to Agent at its office specified in Paragraph 7.01, in same day or immediately available funds, such Participant's Proportionate Share of the Acquisition Advance. After Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Section 3, Agent will promptly disburse such funds on behalf of Lessor, in same day or immediately available funds, to an escrow or other account established for the payment of the Acquisition Price and any related Permitted Transaction Expenses pursuant to the Acquisition Agreement or otherwise as directed by Lessee in the Acquisition Request. (b) Participants' Obligations Several. The failure of any Participant to fund its Proportionate Share of the Acquisition Advance shall not relieve any other Participant of its obligation hereunder to fund its Proportionate Share of the Acquisition Advance, and no Participant shall be responsible for the failure of any other Participant to fund its Proportionate Share of the Acquisition Advance on the Closing Date. 4 5 2.06. Sharing of Payments. (a) Outstanding Lease Amount. Lessor shall share payments applied to reduce the Outstanding Lease Amount as follows: (i) Each payment of the Outstanding Lease Amount derived from the purchase price paid by Lessee (or an Assignee Purchaser) to purchase the Property pursuant to the Purchase Agreement shall be shared first by the Participants pro rata according to their respective Outstanding Participation Amounts at the time of such payment, up to the Outstanding Participation Amount for each Participant. (ii) Each payment of the Outstanding Lease Amount derived from the Residual Value Guaranty Amount paid by Lessee pursuant to the Purchase Agreement shall be shared first by the Tranche A Participants pro rata according to their respective Outstanding Tranche A Participation Amounts at the time of such payment up to the Outstanding Tranche A Participation Amount for each Participant; and second, if any amounts remain after all Outstanding Tranche A Participation Amounts are paid in full, by the Tranche B Participants pro rata according to their respective Outstanding Tranche B Participation Amounts at the time of such payment up to the Outstanding Tranche B Participation Amount for each Participant. (iii) Each payment of the Outstanding Lease Amount derived from: (A) The purchase price paid by a Designated Purchaser to purchase the Property pursuant to the Purchase Agreement; (B) The Indemnity Amount paid by Lessee pursuant to the Purchase Agreement; (C) Casualty Proceeds or Condemnation Proceeds related to any of the Property; or (D) The purchase price paid by any other Person to purchase the Property (whether after the retention of such Property by Lessor following the Expiration Date, upon foreclosure or otherwise); Shall be shared first by the Tranche A Participants pro rata according to their respective Outstanding Tranche A Participation Amounts at the time of such payment up to the Outstanding Tranche A Participation Amount for each Participant; and second, if any amounts remain after all Outstanding Tranche A Participation Amounts are paid in full, by the Tranche B Participants pro rata according to their respective Outstanding Tranche B Participation Amounts at the time of such payment up to the Outstanding Tranche B Participation Amount for each Participant. 5 6 (b) Base Rent. Lessor shall share each payment applied to Base Rent among the Participants which funded the Outstanding Lease Amount pro rata according to (i) the respective Outstanding Participation Amounts so funded by such Participants and (ii) the dates on which such Participants so funded such amounts. (c) Supplemental Rent. Lessor shall share each payment applied to Supplemental Rent among the Lessor Parties as follows: (i) Each payment applied to Agent's Structuring Fee shall be solely for the account of Agent. (ii) Each payment applied to reimburse any Lessor Party for any fees, costs and expenses incurred by such Lessor Party shall be solely for the account of such Lessor Party. (iii) Each payment of interest (other than Base Rent) shall be shared among the Lessor Parties owed the amount upon which such interest accrues pro rata according to (A) the respective amounts so owed such Lessor Parties and (B) the dates on which such amounts became owing to such Lessor Parties. (iv) All other payments under this Agreement and the other Operative Documents shall be for the benefit of the Person or Persons specified. (d) Disproportionate Payments, Etc. If any Participant shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) on account of amounts owed to it in excess of its ratable share of payments on account of such amounts obtained by all Participants entitled to such payments, such Participant shall forthwith purchase from the other Participants such participations in the payments to be made under the Operative Documents as shall be necessary to cause such purchasing Participant to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Participant, such purchase shall be rescinded and each other Participant shall repay to the purchasing Participant the purchase price to the extent of such recovery together with an amount equal to such other Participant's ratable share (according to the proportion of (i) the amount of such other Participant's required repayment to (ii) the total amount so recovered from the purchasing Participant) of any interest or other amount paid or payable by the purchasing Participant in respect of the total amount so recovered. Lessee agrees that any Participant so purchasing a participation from another Participant pursuant to this Subparagraph 2.06(d) may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of setoff) with respect to such participation as fully as if such Participant were the direct creditor of Lessee in the amount of such participation. 6 7 2.07. Other Payment Terms. (a) Place and Manner of Payments by Lessee. Lessee shall make all payments due to any Lessor Party under this Agreement and the other Operative Documents by payments to Agent, for the account of such Person, at Agent's office, located at the address specified in Paragraph 7.01, with each payment due to a Participant to be for the account of such Participant's Applicable Participating Office. Lessee shall make all payments in lawful money of the United States and in same day or immediately available funds not later than 11:00 a.m. on the date due. Agent shall promptly disburse to the appropriate Person each such payment received by Agent for such Person. (b) Date. Whenever any payment due under this Agreement or any other Operative Document shall fall due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of Rent, interest or fees, as the case may be. (c) Late Payments. If any amounts required to be paid by Lessee under this Agreement or any other Operative Document (including Rent, interest, fees or other amounts) remain unpaid after such amounts are due, Lessee shall pay interest on the aggregate, outstanding balance of such amounts from the date due until those amounts are paid in full at a per annum rate equal to the Base Rate plus two percent (2.0%), such rate to change from time to time as the Base Rate shall change. (d) Application of Payments. Except as otherwise expressly provided herein or in the other Operative Documents, all payments and all other sums received by Lessor Parties under this Agreement and the other Operative Documents shall be applied first to unpaid fees, costs and expenses and other Supplemental Rent then due and payable under this Agreement or any other Operative Document, second to the accrued Base Rent then due and payable under this Agreement or any other Operative Document and finally to reduce the Outstanding Lease Amount. If, at any time, after Lessor Parties have so applied, or should have so applied, all payments received by Lessor Parties to Lessee Obligations then due and payable by Lessee any excess remains, Lessor Parties promptly shall return such excess to Lessee unless an Event of Default has occurred and is continuing. (e) Failure to Pay Agent. Unless Agent shall have received notice from Lessee at least one (1) Business Day prior to the date on which any payment is due to Lessor or the Participants under this Agreement or the other Operative Documents that Lessee will not make such payment in full, Agent may assume that Lessee has made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to the appropriate Persons on such due date an amount equal to the amount then due such Persons. If and to the extent Lessee shall not have so made such payment in full to Agent, each such Person shall repay to Agent forthwith on demand such amount distributed to such Person together with interest thereon, for each day from the date such amount is distributed to such Person until the date such Person repays such 7 8 amount to Agent, at (i) the Federal Funds Rate for the first three (3) days and (ii) the Base Rate plus two percent (2.0%) thereafter, such rate to change from time to time as the Base Rate shall change. A certificate of Agent submitted to any Person with respect to any amounts owing by such Person under this Subparagraph 2.07(e) shall be conclusive absent manifest error. 2.08. Commitment Termination. Any undrawn portion of the Commitments shall terminate on the earlier of (a) the Closing Date, after the funding by the Participants of the Acquisition Advance, and (b) July 15, 1999. 2.09. Lease Extensions. Lessee may, as provided herein but not more than three (3) times, request Lessor to extend the Scheduled Expiration Date of the Lease Agreement for an additional period of one (1) year by appropriately completing, executing and delivering to Agent a written request in the form of Exhibit E, together with an attachment thereto setting forth the terms upon which Lessee would propose for the requested extension (a "Lease Extension Request"). Lessee shall deliver each Lease Extension Request to Agent not more than eighteen (18) months and not less than fifteen (15) months before the then current Scheduled Expiration Date. Agent shall promptly deliver to Lessor and each Participant three (3) copies of each Lease Extension Request received by Agent. If Lessor or a Participant, in its sole and absolute discretion, consents to a Lease Extension Request, such Person shall evidence such consent by executing and returning two (2) copies of such Lease Extension Request to Agent not later than the last Business Day which is not less than thirteen (13) months prior to the then current Scheduled Expiration Date. Any failure by Lessor or any Participant so to execute and return a Lease Extension Request shall be deemed a denial thereof. If Lessee shall deliver a Lease Extension Request to Lessor pursuant to the first sentence of this Subparagraph 2.09(b), then not later than the last Business Day which is not less than 364 days prior to the then current Scheduled Expiration Date, Agent shall notify Lessee, Lessor and the Participants in writing whether (i) Agent has received a copy of the Lease Extension Request executed by Lessor and each Participant, in which case the definition of "Scheduled Expiration Date" set forth in Subparagraph 2.02(a) of the Lease Agreement shall be deemed extended to the date which is one (1) year after the then current Scheduled Expiration Date (subject to the receipt by Agent of any amounts payable by Lessee in connection with such extension), or (ii) Agent has not received a copy of the Lease Extension Request executed by Lessor and each Participant, in which case such Lease Extension Request shall be deemed denied. Lessee acknowledges that neither Lessor nor any Participant has promised (either expressly or implicitly), or has any obligation or commitment, to extend or consent to the extension of the Scheduled Expiration Date at any time. 2.10. Nature of the Transaction. Lessee and the Lessor Parties intend that the transaction evidenced by this Agreement and the other Operative Documents constitute an operating lease for purposes of Lessee's financial and SEC reporting and a loan secured by the Property for purposes of federal, state and local income tax and commercial, real estate and bankruptcy law. To the extent that this Agreement and the other Operative Documents reflect the lease form alone, they do so for convenience only, and such form should not be construed to alter the intent expressed in the preceding sentence. Lessee and the Lessor Parties intend that the 8 9 Operative Documents have the dual form referred to in the first sentence of this paragraph, notwithstanding the use of the lease form alone. However, the parties hereto reserve the right to report this transaction in their legal documents as required by law, and such reporting will not affect the characterization of this transaction, inter se, as described in this Paragraph 2.10. (a) Tax Treatment. For purposes of all income, franchise and other taxes imposed upon or measured by income, Lessee and Lessor Parties intend that the transaction evidenced by the Operative Documents shall be treated as a loan by the Participants (through Lessor) to Lessee secured by the Property, with Lessee as owner of the Property. Lessee and the Lessor Parties may only take deductions, credits, allowances and other reporting positions on their respective returns, reports and statements which are consistent with such treatment, unless required to do otherwise by an appropriate taxing authority after the completion of judicial proceedings at which Lessee has had a full and complete opportunity to present its position or after a clearly applicable change in applicable Governmental Rules; provided, however, that if an appropriate taxing authority or a clearly applicable change in applicable Governmental Rules requires any Lessor Party to take such an inconsistent position, such Lessor Party shall promptly notify Lessee. (b) Other Legal Treatment. For purposes of commercial, real estate and bankruptcy law, Lessee and Lessor Parties also intend that the transaction evidenced by the Operative Documents shall be treated as a loan by the Participants (through Lessor) to Lessee secured by the Property, with Lessee as owner of the Property. Consistent with such treatment, Lessee and the Lessor Parties intend that, among other things for such purposes, (i) the Acquisition Advance be treated as a loan to Lessee by the Participants (through Lessor); (ii) the Acquisition Advance be secured by the Property and the Lessor Parties have the rights and remedies of secured lenders; (iii) Base Rent be treated as interest on the Acquisition Advance; (iv) Lessee be required to pay on the Expiration Date only the Residual Value Guaranty Amount, the Indemnity Amount and the other amounts required by Subparagraph 3.03(b) of the Purchase Agreement if Lessee exercises the Return Option in accordance with the Purchase Agreement; and (v) Lessee be required to pay on the Expiration Date the Outstanding Lease Amount and all other amounts outstanding under this Agreement and the other Operative Documents if the Lease Agreement is terminated or all Lessee Obligations are declared due prior to the Scheduled Expiration Date after an Event of Default occurs under the Lease Agreement or if Lessee fails to or is otherwise not entitled to exercise the Return Option in accordance with the Purchase Agreement. (c) No Reliance by Lessee. Lessee acknowledges and agrees that no Lessor Party has made any representations or warranties to Lessee concerning the tax, accounting or legal characteristics of the Operative Documents and that Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as it deems appropriate. 9 10 (d) Loss of Lease Treatment. If the transaction evidenced by this Agreement and the other Operative Documents can no longer be treated as an operating lease pursuant to GAAP for accounting purposes, all provisions in the Operative Documents limiting Lessee's obligation to pay less than the Outstanding Lease Amount (including the Return Option) on the Expiration Date shall no longer apply. If any such change in accounting treatment shall occur, and the provisions of the Operative Documents cannot be modified in a manner which will preserve such accounting treatment without resulting in a Material Adverse Effect, then Lessee and Lessor shall enter into such amendments to the Operative Documents as Lessor or Required Participants may reasonably request to reflect the foregoing. 2.11. Security. (a) Lessee Obligations. (i) To the extent that the transaction evidenced by the Lease Agreement, Purchase Agreement and other Operative Documents is treated as a loan by the Participants (through Lessor) to Lessee secured by the Property, with Lessee as owner of the Property pursuant to Paragraph 2.10, the Lessee Obligations shall be secured by the Real Property Collateral and the Personal Property Collateral (collectively, the "Property Collateral") as provided in Subparagraphs 2.07(a) and 2.07(b) of the Lease Agreement and in an Assignment of Remediation Agreements in the form of Exhibit M, executed by Lessee (the "Assignment of Remediation Agreements"). (ii) In addition to the Property Collateral, the Lessee Obligations shall be secured by a Cash Collateral Agreement in the form of Exhibit F, duly executed by Lessee (the "Cash Collateral Agreement") and Cash Collateral delivered to Agent or Participants pursuant to the Cash Collateral Agreement. Lessee shall deliver to Depository Banks pursuant to the Cash Collateral Agreement Cash Collateral in an amount not less than 105% of the total Tranche A Proportionate Shares of the Outstanding Lease Amounts at any time Lessee elects, pursuant to Subparagraph 3.01(a) of the Purchase Agreement, to exercise the Return Option after Lessor notifies Lessee that Lessor is terminating the Lease Agreement pursuant to Subparagraph 5.03(a) of the Lease Agreement or declaring all Lessee Obligations due pursuant to Subparagraph 5.04(a) of the Lease Agreement on a Termination Date that is prior to the Scheduled Expiration Date. At the time Lessee delivers any Cash Collateral to Agent or Participants pursuant to this clause (ii), Lessee also shall deliver to Lessor a favorable written opinion of its counsel, in form and substance reasonably satisfactory to Lessor and Agent but subject to customary qualifications and assumptions, to the effect that the Cash Collateral Agreement is a legal, valid and binding agreement of Lessee, enforceable in accordance with its terms, and that Lessor has a perfected security interest in the Cash Collateral. Lessee may not withdraw any Cash Collateral 10 11 required to be delivered pursuant to this clause (ii) until the Expiration Date and the satisfaction in full of all Lessee Obligations. (iii) Lessee shall deliver to Lessor and Agent such additional mortgages, deeds of trust, security agreements, pledge agreements, lessor consents and estoppels (containing appropriate mortgagee and lender protection language) and other instruments, agreements, certificates, opinions and documents (including Uniform Commercial Code financing statements and fixture filings and landlord waivers) as Lessor or Agent may reasonably request to (A) grant, perfect, maintain, protect and evidence security interests in favor of Lessor or Agent in the Property Collateral prior to the Liens or other interests of any Person, except for Permitted Property Liens; and (B) otherwise establish, maintain, protect and evidence the rights provided to Lessor and Agent in the Property Collateral. Lessee shall fully cooperate with Lessor and Agent and perform all additional acts reasonably requested by Lessor or Agent to effect the purposes of this Subparagraph 2.11(a). (b) Lessor Obligations to Lessor Parties. (i) The Lessor Obligations to the Lessor Parties shall be secured by the following: (A) An Assignment of Lease Agreement and Purchase Agreement in the form of Exhibit G, duly executed by Lessor (the "Assignment of Lease"); (B) A Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing in the form of Exhibit H, duly executed by Lessor (the "Lessor Deed of Trust"); and (C) A Security Agreement in the form of Exhibit I, duly executed by Lessor (the "Lessor Security Agreement"). (ii) Lessor shall deliver to Agent such additional mortgages, deeds of trust, security agreements, pledge agreements, lessor consents and estoppels (containing appropriate mortgagee and lender protection language) and other instruments, agreements, certificates, opinions and documents (including Uniform Commercial Code financing statements and fixture filings and landlord waivers) as Agent may reasonably request to (A) grant, perfect, maintain, protect and evidence security interests in favor of Agent in Lessor's rights in the Property Collateral and the Cash Collateral; and (B) otherwise establish, maintain, protect and evidence the rights provided to Agent in the Property Collateral and the Cash Collateral. Lessor shall fully cooperate with Agent and perform all additional acts reasonably requested by Agent to effect the purposes of this Subparagraph 2.11(b). 11 12 (iii) Lessee hereby consents to the Assignment of Lease, the Lessor Deed of Trust and the Lessor Security Agreement; the Liens granted to Agent therein; and all other Liens granted to Agent in any of the Operative Documents and the Property to secure the Lessor Obligations. (c) Lessor Obligations to Lessee. The Lessor Obligations to Lessee shall be secured by a Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing in the form of Exhibit J, duly executed by Lessor (the "Lessor/Lessee Deed of Trust"). 2.12. Change of Circumstances. (a) Inability to Determine Rates. If, on or before the first day of any Rental Period for any Portion, (i) any Participant shall advise Agent that the LIBOR Rental Rate for such Rental Period and Portion cannot be adequately and reasonably determined due to the unavailability of funds in or other circumstances affecting the London interbank market or (ii) Required Participants shall advise Agent that the LIBOR Rental Rate for such Rental Period and Portion does not adequately and fairly reflect the cost to such Participants of funding their shares of such Portion, Agent shall immediately give notice of such condition to Lessee, Lessor and the other Participants. After the giving of any such notice (and until Agent shall otherwise notify Lessee and Lessor that the circumstances giving rise to such condition no longer exist), the LIBOR Rental Rate shall be unavailable and the Rental Rate for each new Rental Period shall be the Alternate Rental Rate. (b) Illegality. If, after the date of this Agreement, the adoption of any Governmental Rule, any change in any Governmental Rule or the application or requirements thereof (whether such change occurs in accordance with the terms of such Governmental Rule as enacted, as a result of amendment or otherwise), any change in the interpretation or administration of any Governmental Rule by any Governmental Authority, or compliance by Lessor or any Participant with any request or directive (whether or not having the force of law) of any Governmental Authority (a "Change of Law") shall make it unlawful or impossible for any Participant to fund or maintain its portion of the Outstanding Lease Amount at the LIBOR Rental Rate, such Participant shall immediately notify Agent and Agent shall immediately notify Lessee, Lessor and the other Participants of such Change of Law. Upon the termination of the Rental Period during which such notice was given, and until Agent shall otherwise notify Lessee and Lessor that such Change of Law is no longer in effect, the LIBOR Rental Rate shall be unavailable for the Outstanding Participation Amount of the Participant affected by such Change of Law and the Rental Rate for the Outstanding Participation Amount of such Participant after the end of the Rental Period during which such notice was given shall be the Alternate Rental Rate. 12 13 (c) Increased Costs. Subject to Paragraph 2.16, if, after the date of this Agreement, any Change of Law: (i) Shall subject Lessor or any Participant to any tax, duty or other charge with respect to the Outstanding Lease Amount, or shall change the basis of taxation of Base Rent payments by Lessee to Lessor or any Participant under this Agreement or any other Operative Document (except for changes in the rate of taxation on the overall net income of Lessor or any Participant imposed by its jurisdiction of incorporation or, in the case of any Participant, the jurisdiction in which its Applicable Participating Office is located); or (ii) Shall impose, modify or hold applicable any reserve (excluding any Reserve Requirement or other reserve to the extent included in the calculation of the LIBOR Rental Rate), special deposit or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by Lessor or any Participant or its portion of the Outstanding Lease Amount; or (iii) Shall impose on Lessor or any Participant any other condition related to the Outstanding Lease Amount, Base Rent or Lessor's or such Participant's commitments hereunder; And the effect of any of the foregoing is to increase the cost to Lessor or such Participant of funding or maintaining its portion of the Outstanding Lease Amount or commitments or to reduce any amount receivable by Lessor or such Participant hereunder; then Lessee shall from time to time within thirty (30) days after demand by such Person, pay to such Person additional amounts sufficient to reimburse such Person for such increased costs or to compensate such Person for such reduced amounts; provided, however, that Lessee shall have no obligation to make any payment to any demanding party under this Subparagraph 2.12(c) on account of any such increased costs or reduced amounts relating to any Rental Period that ended more than six (6) months prior to such demanding party's first demand for payment (or, if any increased costs or reduced amounts do not relate to a particular Rental Period, on account of any such increased costs or reduced amounts realized by the demanding party more than six (6) months prior to its first demand for payment). A certificate of Lessor or any Participant setting forth in reasonable detail the computation of any such increased costs or reduced amounts, delivered by such Person to Lessee shall constitute prima facie evidence of such costs or amounts. The obligations of Lessee under this Subparagraph 2.12(c) shall survive the payment and performance of the Lessee Obligations and the termination of this Agreement. (d) Capital Requirements. Subject to Paragraph 2.16, if, after the date of this Agreement, Lessor or any Participant determines that (i) any Change of Law affects the amount of capital required to be maintained by such Person or any other Person controlling such Person (a "Capital Adequacy Requirement") and (ii) the amount of capital maintained by such Person or such other Person which is attributable to or based 13 14 upon the Acquisition Advance, the Commitments or this Agreement must be increased as a result of such Capital Adequacy Requirement (taking into account such Person's or such other Person's policies with respect to capital adequacy), Lessee shall pay to such Person or such other Person, within thirty (30) days after demand of such Person, such amounts as such Person or such other Person reasonably shall determine are necessary to compensate such Person or such other Person for the increased costs to such Person or such other Person of such increased capital; provided, however, that Lessee shall have no obligation to make any payment to any demanding party under this Subparagraph 2.12(d) on account of any such increased costs relating to any Rental Period that ended more than six (6) months prior to such demanding party's first demand for payment (or, if any increased costs or reduced amounts do not relate to a particular Rental Period, on account of any such increased costs or reduced amounts realized by the demanding party more than six (6) months prior to its first demand for payment). A certificate of Lessor or any Participant setting forth in reasonable detail the computation of any such increased costs, delivered by such Person to Lessee shall constitute prima facie evidence of such costs. The obligations of Lessee under this Subparagraph 2.12(d) shall survive the payment and performance of the Lessee Obligations and the termination of this Agreement. (e) Mitigation. If Lessor or any Participant becomes aware of (i) any Change of Law which will make it unlawful or impossible for such Person to fund or maintain its portion of the Outstanding Lease Amount at the LIBOR Rental Rate or (ii) any Change of Law or other event or condition which will obligate Lessee to pay any amount pursuant to Subparagraph 2.12(c) or Subparagraph 2.12(d), such Person shall notify Lessee and Agent thereof as promptly as practical. If any Person has given notice of any such Change of Law or other event or condition and thereafter becomes aware that such Change of Law or other event or condition has ceased to exist, such Person shall notify Lessee and Agent thereof as promptly as practical. Each Person affected by any Change of Law which makes it unlawful or impossible for such Person to fund or maintain its portion of the Outstanding Lease Amount at the LIBOR Rental Rate or to which Lessee is obligated to pay any amount pursuant to Subparagraph 2.12(c) or Subparagraph 2.12(d) shall use reasonable commercial efforts (including changing the jurisdiction of its Applicable Participating Office) to avoid the effect of such Change of Law or to avoid or materially reduce any amounts which Lessee is obligated to pay pursuant to Subparagraph 2.12(c) or Subparagraph 2.12(d) if, in the reasonable opinion of such Person, such efforts would not be disadvantageous to such Person or contrary to such Person's normal business practices for transactions of this type. 2.13. Taxes on Payments. (a) Payments Free of Taxes. Subject to Paragraph 2.16, all payments made by Lessee under this Agreement and the other Operative Documents shall be made free and clear of, and without deduction or withholding for or on account of, any present or future Indemnified Taxes, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority. If any Indemnified Taxes are required to be withheld from any amounts payable to any Lessor Party hereunder or under the other Operative 14 15 Documents, the amounts so payable to such Lessor Party shall be increased to the extent necessary to yield to such Lessor Party (after payment of all Indemnified Taxes) the Base Rent or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Operative Documents. Whenever any Indemnified Taxes are payable by Lessee, as promptly as possible thereafter, Lessee shall send to Agent for its own account or for the account of Lessor or such Participant, as the case may be, a certified copy of an original official receipt received by Lessee showing payment thereof. If Lessee fails to pay any Indemnified Taxes when due to the appropriate taxing authority or fails to remit to Agent the required receipts or other required documentary evidence, Lessee shall indemnify the Lessor Parties for any incremental taxes, interest or penalties that may become payable by the Lessor Parties as a result of any such failure. The obligations of Lessee under this Subparagraph 2.13(a) shall survive the payment and performance of the Lessee Obligations and the termination of this Agreement. (b) Withholding Exemption Certificates. On or prior to the Closing Date or, if such date does not occur within thirty (30) days after the date of this Agreement, by the end of such 30-day period, Lessor, if it is not organized under the laws of the United States of America or a state thereof, and each Participant which is not organized under the laws of the United States of America or a state thereof shall deliver to Lessee and Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 (or successor applicable form), as the case may be, certifying in each case that Lessor or such Participant, as the case may be, is entitled to receive payments under this Agreement and the other Operative Documents without deduction or withholding of any United States federal income taxes. Lessor and each Participant further agree (i) promptly to notify Lessee and Agent of any change of circumstances (including any change in any treaty, law or regulation) which would prevent such Person from receiving payments hereunder without deduction or withholding of such taxes and (ii) if Lessor or such Participant has not so notified Lessee and Agent of any change of circumstances which would prevent such Person from receiving payments hereunder without deduction or withholding of taxes, then on or before the date that any certificate or other form delivered by such Person under this Subparagraph 2.13(b) expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by such Person, to deliver to Lessee and Agent a new certificate or form certifying that such Person is entitled to receive payments under this Agreement and the other Operative Documents without deduction or withholding of such taxes. If Lessor or any Participant fails to provide to Lessee or Agent pursuant to this Subparagraph 2.13(b) (or, in the case of an Assignee Participant, Subparagraph 7.05(b)) any certificates or other evidence required by such provision to establish that such Person is, at the time it becomes a Lessor or a Participant hereunder, entitled to receive payments under this Agreement and the other Operative Documents without deduction or withholding of any United States federal income taxes, Lessor or such Participant, as the case may be, shall not be entitled to any indemnification under Subparagraph 2.13(a) for any Indemnified Taxes imposed on such Lender primarily as a result of such failure. 15 16 (c) Mitigation. If any Lessor Party claims any additional amounts to be payable to it pursuant to this Paragraph 2.13, such Lessor Party shall use reasonable commercial efforts to file any certificate or document requested in writing by Lessee (including copies of Internal Revenue Service Form 1001 (or successor forms) reflecting a reduced rate of withholding) or to change the jurisdiction of its Applicable Participating Office if the making of such a filing or such change in the jurisdiction of its Applicable Participating Office would avoid the need for or materially reduce the amount of any such additional amounts which may thereafter accrue and if, in the reasonable opinion of a Participant, in the case of a change in the jurisdiction of its Applicable Participating Office, such change would not be disadvantageous to such Person. (d) Tax Returns. Nothing contained in this Paragraph 2.13 shall require any Lessor Party to make available any of its tax returns (or any other information relating to its taxes which it deems to be confidential). (e) Tax Savings. In the event an Indemnitee receives a refund (or similar tax savings) in respect of any Indemnified Tax paid or reimbursed by Lessee, such Indemnitee shall, within thirty (30) days thereafter, remit the amount of such refund (or tax savings) to Lessee, provided that the amount so remitted shall not exceed the lesser of: (i) the amount received by such Indemnitee as a refund (or tax savings) net of all reasonable costs and expenses incurred by such Indemnitee in connection with obtaining and paying such amount; and (ii) the remainder of (A) the amount of all prior payments by Lessee to such Indemnitee with respect to Indemnified Taxes, plus any refunded interest, less (B) the amount of all prior payments by such Indemnitee to Lessee under this Subparagraph 2.13(e); provided that (1) any disallowance or other loss of such refund (or tax savings) shall be treated as an "Indemnified Tax" without regard to all exclusions and (2) no such remittance shall be made if any Default or Event of Default has occurred and is continuing. 2.14. Funding Loss Indemnification. Subject to Paragraph 2.16, if Lessee shall (a) pay all or any portion of the Outstanding Lease Amount on any day other than the last day of a Rental Period therefor (whether an optional payment, a mandatory payment or otherwise) or (b) cancel or otherwise fail to consummate the Acquisition Request which has been delivered to Agent (whether as a result of the failure to satisfy any applicable conditions or otherwise), then Lessee shall, within five (5) Business Days after demand by Lessor or any Participant, reimburse such Person for and hold such Person harmless from all costs and losses incurred by such Person as a result of such payment, cancellation or failure. Lessee understands that such costs and losses may include, without limitation, losses incurred by Lessor or a Participant as a result of funding and other contracts entered into by such Person to fund its portion of the Outstanding Lease Amount. Each Person demanding payment under this Paragraph 2.14 shall deliver to Lessee, with a copy to Agent, a certificate setting forth the amount of costs and losses for which demand is made, which certificate shall set forth in reasonable detail the calculation of the amount demanded. Such a certificate so delivered to Lessee shall constitute prima facie evidence of such costs and losses. The obligations of Lessee under this Paragraph 2.14 shall survive the payment and performance of the Lessee Obligations and the termination of this Agreement. 16 17 2.15. Replacement of Participants. If any Participant shall (a) become a Defaulting Participant more than one (1) time in a period of twelve (12) consecutive months, (b) continue as a Defaulting Participant for more than five (5) Business Days at any time, (c) deliver, pursuant to Subparagraph 2.12(b), a notice of a Change of Law which does not affect any other Participant, or (d) demand any payment under Subparagraph 2.12(c), 2.12(d) or 2.13(a) for a reason which is not applicable to any other Participant, then Agent may (or upon the written request of Lessee, shall) replace such Participant (the "affected Participant"), or cause such affected Participant to be replaced, with another financial institution (the "replacement Participant") satisfying the requirements of an Assignee Participant under Subparagraph 7.05(b), by having the affected Participant sell and assign all of its rights and obligations under this Agreement and the other Operative Documents to the replacement Participant pursuant to Subparagraph 7.05(b); provided, however, that if Lessee seeks to exercise such right, it must do so within sixty (60) days after it first knows or should have known of the occurrence of the event or events giving rise to such right, and no Lessor Party shall have any obligation to identify or locate a replacement Participant for Lessee. Upon receipt by any affected Participant of a written notice from Agent stating that Agent is exercising the replacement right set forth in this Paragraph 2.15, such affected Participant shall sell and assign all of its rights and obligations under this Agreement and the other Operative Documents to the replacement Participant pursuant to an Assignment Agreement and Subparagraph 7.05(b) for a purchase price equal to the sum of its portion of the Outstanding Lease Amount, the accrued and unpaid portion of the Base Rent relating to such portion and its ratable share of all fees to which it is entitled. 2.16. Limitation on Collection of Costs. Lessee shall not be obligated to reimburse any Lessor Party for any cost or expense incurred by such Lessor Party pursuant to Paragraph 2.12, Paragraph 2.13 or Paragraph 2.14 unless demand for such payment is made by such Lessor Party to Lessee within one (1) year after the date such cost or expense was incurred. SECTION 3. CONDITIONS PRECEDENT. 3.01. Acquisition Advance. The obligation of Lessor to make the Acquisition Advance hereunder (and the obligations of the Participants to fund their respective Proportionate Shares of the Acquisition Advance) is (are) subject to receipt by Agent, on or prior to the Closing Date, of each item listed in Schedule 3.01). 3.02. Other Conditions Precedent. The occurrence of each Credit Event (including the making of the Acquisition Advance by Lessor and the funding of the Acquisition Advance by the Participants) is subject to the further conditions that, on the date such Credit Event is to occur and after giving effect to such Credit Event, the following shall be true and correct: (a) The representations and warranties of Lessee set forth in Paragraph 4.01 and in the other Operative Documents are true and correct in all material respects as if made on such date (except for representations and warranties expressly made as of a specified date, which shall be true as of such date); 17 18 (b) No Default has occurred and is continuing or will result from such Credit Event; and (c) All of the Operative Documents are in full force and effect. The submission by Lessee to Lessor and Agent of the Acquisition Request and a Notice of Return Option Exercise shall be deemed to be a representation and warranty by Lessee that each of the statements set forth above in this Paragraph 3.02 is true and correct as of the date of such request and notice. 3.03. Covenant to Deliver. Lessee agrees (not as a condition but as a covenant) to deliver to Lessor and Agent each item required to be delivered to Lessor and Agent as a condition to the Acquisition Advance if the Acquisition Advance is made. Lessee expressly agrees that the making of the Acquisition Advance prior to the receipt by Lessor and Agent of any such item shall not constitute a waiver by Lessor, Agent or any Participant of Lessee's obligation to deliver such item, unless expressly waived in writing. SECTION 4. REPRESENTATIONS AND WARRANTIES. 4.01. Lessee's Representations and Warranties. In order to induce the Lessor Parties to enter into this Agreement and the other Operative Documents to which they are parties, Lessee hereby represents and warrants to the Lessor Parties, except as has been previously disclosed to the Lessor Parties in the Disclosure Letter, the Environmental Reports or the Financial Statements delivered on or before the date of this Agreement, as follows: (a) Due Incorporation, Qualification, etc. (i) Lessee (A) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation; (B) has the power and authority to own, lease and operate its properties and carry on its business as now conducted; and (C) is duly qualified, licensed to do business and in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified or licensed is reasonably likely to have a Material Adverse Effect. (ii) Each Material Subsidiary and, to the knowledge of Lessee, each other Subsidiary, (A) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation; (B) has the power and authority to own, lease and operate its properties and carry on its business as now conducted; and (C) is duly qualified, licensed to do business and in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified or licensed is reasonably likely to have a Material Adverse Effect. (b) Authority. The execution, delivery and performance by Lessee of each Operative Document executed, or to be executed, by Lessee and the consummation of the 18 19 transactions contemplated thereby (i) are within the power of Lessee and (ii) have been duly authorized by all necessary actions on the part of Lessee. (c) Enforceability. Each Operative Document executed, or to be executed, by Lessee has been, or will be, duly executed and delivered by Lessee and constitutes, or will constitute, a legal, valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally and general principles of equity. (d) Non-Contravention. The execution and delivery by Lessee of the Operative Documents executed by Lessee and the performance and consummation of the transactions contemplated thereby do not (i) violate any Requirement of Law applicable to Lessee; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other Person to accelerate (whether after the giving of notice or lapse of time or both), any Contractual Obligation of Lessee; or (iii) result in the creation or imposition of any Lien (or the obligation to create or impose any Lien) upon any property, asset or revenue of Lessee (except such Liens as may be created in favor of Lessor or Agent pursuant to this Agreement or the other Operative Documents). (e) Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority or other Person (including, without limitation, the shareholders of any Person) is required in connection with the execution and delivery of the Operative Documents executed by Lessee and the performance and consummation by Lessee of the transactions contemplated thereby, except such as have been made or obtained and are in full force and effect. (f) No Violation or Default. Neither Lessee, nor any of its Material Subsidiaries, nor to the best knowledge of Lessee any other Subsidiary, is in violation of or in default with respect to (i) any Requirement of Law applicable to such Person; (ii) any Contractual Obligation of such Person (nor is there any waiver in effect which, if not in effect, would result in such a violation or default), where, in each case, such violation or default is reasonably likely to have a Material Adverse Effect. Without limiting the generality of the foregoing, neither Lessee, nor any of its Material Subsidiaries, nor to the best knowledge of Lessee any other Subsidiary, (A) has violated any Environmental Laws, (B) has any liability under any Environmental Laws or (C) has received notice or other communication of an investigation or is under investigation by any Governmental Authority having authority to enforce Environmental Laws, where such violation, liability or investigation is reasonably likely to have a Material Adverse Effect. No Default has occurred and is continuing. (g) Litigation. No actions (including, without limitation, derivative actions), suits, proceedings or investigations are pending or, to the knowledge of Lessee, threatened against Lessee or any of its Subsidiaries at law or in equity in any court or before any other Governmental Authority which (i) is reasonably likely (alone or in the 19 20 aggregate) to have a Material Adverse Effect or (ii) seeks to enjoin, either directly or indirectly, the execution, delivery or performance by Lessee of the Operative Documents or the transactions contemplated thereby. (h) Title; Possession Under Leases. Lessee and its Subsidiaries own and have good and marketable title, or a valid leasehold interest in, all their respective properties and assets as reflected in the most recent Financial Statements delivered to Agent (except those assets and properties disposed of in the ordinary course of business or otherwise in compliance with this Agreement since the date of such Financial Statements) and all respective assets and properties acquired by Lessee and its Subsidiaries since such date (except those disposed of in the ordinary course of business or otherwise in compliance with this Agreement). Such assets and properties are subject to no Lien, except for Permitted Liens. Each of Lessee and its Subsidiaries has complied with all material obligations under all material leases to which it is a party and all such leases are in full force and effect (except such leases that have expired in accordance with their terms or have been replaced by similar leases or where such failure to comply is not reasonably likely to have a Material Adverse Effect). Each of Lessee and its Subsidiaries enjoys peaceful and undisturbed possession under such leases. (i) Financial Statements. The Financial Statements of Lessee and its Subsidiaries which have been delivered to Agent, (i) are in accordance with the books and records of Lessee and its Subsidiaries, which have been maintained in accordance with good business practice; (ii) have been prepared in conformity with GAAP; and (iii) fairly present the financial conditions and results of operations of Lessee and its Subsidiaries as of the date thereof and for the period covered thereby. Neither Lessee nor any of its Subsidiaries has any Contingent Obligations, liability for taxes or other outstanding obligations which are material in the aggregate, except as disclosed in the audited Financial Statements dated September 30, 1998, furnished by Lessee to Agent prior to the date hereof, or in the Financial Statements delivered to Agent pursuant to clause (i) or (ii) of Subparagraph 5.01. (j) Equity Securities. To the knowledge of Lessee, all outstanding Equity Securities of Lessee are duly authorized, validly issued, fully paid and non-assessable. (k) No Agreements to Sell Assets; Etc. Except as otherwise permitted by Subparagraph 5.02(c) or Subparagraph 5.02(d), neither Lessee nor any of its Subsidiaries has any legal obligation, absolute or contingent, to any Person to sell the assets of Lessee or any of its Subsidiaries (other than sales in the ordinary course of business), or to effect any merger, consolidation or other reorganization of Lessee or any of its Subsidiaries or to enter into any agreement with respect thereto. (l) Employee Benefit Plans. (i) Based on the latest valuation of each Employee Benefit Plan that either Lessee or any ERISA Affiliate maintains or contributes to, or has any obligation under (which occurred within twelve months of the date of this 20 21 representation), the aggregate benefit liabilities of such plan within the meaning of Section 4001 of ERISA did not exceed the aggregate value of the assets of such plan. Neither Lessee nor any ERISA Affiliate has any liability with respect to any post-retirement benefit under any Employee Benefit Plan which is a welfare plan (as defined in section 3(1) of ERISA), other than liability for health plan continuation coverage described in Part 6 of Title I(B) of ERISA, which liability for health plan contribution coverage is not reasonably likely to have a Material Adverse Effect. (ii) Each Employee Benefit Plan complies, in both form and operation, in all material respects, with its terms, ERISA and the IRC, and no condition exists or event has occurred with respect to any such plan which would result in the incurrence by either Lessee or any ERISA Affiliate of any material liability, fine or penalty. Each Employee Benefit Plan, related trust agreement, arrangement and commitment of Lessee or any ERISA Affiliate is legally valid and binding and in full force and effect. No Employee Benefit Plan is being audited or investigated by any government agency or is subject to any pending or threatened claim or suit. Neither Lessee nor any ERISA Affiliate nor any fiduciary of any Employee Benefit Plan has engaged in a prohibited transaction under section 406 of ERISA or section 4975 of the IRC. (iii) Neither Lessee nor any ERISA Affiliate contributes to or has any material contingent obligations to any Multiemployer Plan. Neither Lessee nor any ERISA Affiliate has incurred any material liability (including secondary liability) to any Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan under Section 4201 of ERISA or as a result of a sale of assets described in Section 4204 of ERISA. Neither Lessee nor any ERISA Affiliate has been notified that any Multiemployer Plan is in reorganization or insolvent under and within the meaning of Section 4241 or Section 4245 of ERISA or that any Multiemployer Plan intends to terminate or has been terminated under Section 4041A of ERISA. (m) Other Regulations. Lessee is not subject to regulation under the Investment Company Act of 1940, the Public Utility Holding Company Act of 1935, the Federal Power Act, any state public utilities code or to any other Governmental Rule limiting its ability to incur indebtedness. (n) Patent and Other Rights. Lessee and its Subsidiaries own or license under validly existing agreements, all patents, licenses, trademarks, trade names, trade secrets, service marks, copyrights and all rights with respect thereto, which are required to conduct their businesses as now conducted, except to the extent that failure to own or license the same could not reasonably be expected to have a Material Adverse Effect. (o) Governmental Charges and Other Indebtedness. Lessee and its Material Subsidiaries have filed or caused to be filed all tax returns which are required to be filed 21 22 by them. Lessee and its Subsidiaries have paid, or made provision for the payment of, all taxes and other Governmental Charges which have or may have become due pursuant to said returns or otherwise and all other indebtedness, except such Governmental Charges or indebtedness, if any, which are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided or which are not reasonably likely to have a Material Adverse Effect if unpaid. (p) Margin Stock. Lessee owns no Margin Stock which, in the aggregate, would constitute a substantial part of the assets of Lessee, and no proceeds of any Loan will be used to purchase or carry, directly or indirectly, any Margin Stock or to extend credit, directly or indirectly, to any Person for the purpose of purchasing or carrying any Margin Stock. (q) Subsidiaries, etc. Set forth in Schedule 4.01(q) (as supplemented by Lessee from time to time in a written notice to Agent) is a complete list of all of Lessee's Subsidiaries, the jurisdiction of incorporation of each, the classes of Equity Securities of each and the number of shares and percentages of shares of each such class owned directly or indirectly by Lessee. (r) Catastrophic Events. Neither Lessee, nor any of its Material Subsidiaries, nor to the knowledge of Lessee any other Subsidiary, and none of their properties is or has been affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or other casualty that is reasonably likely to have a Material Adverse Effect. There are no disputes presently subject to grievance procedure, arbitration or litigation under any of the collective bargaining agreements, employment contracts or employee welfare or incentive plans to which Lessee, any of its Material Subsidiaries, or to the knowledge of Lessee any of its Subsidiaries, is a party, and there are no strikes, lockouts, work stoppages or slowdowns, or, to the best knowledge of Lessee, jurisdictional disputes or organizing activities occurring or threatened which alone or in the aggregate are reasonably likely to have a Material Adverse Effect. (s) No Material Adverse Effect. No event has occurred and is continuing and no condition exists which is reasonably likely to have a Material Adverse Effect. (t) The Property. (i) The Land consists of approximately 43.5 acres located in the City of Scotts Valley, California, more particularly described in Exhibit A. (ii) The Lessor Improvements on the Land consist of a nine (9) building, multi-story facility containing approximately 210,140 square feet of floor area, together with parking, landscaping, recreational and related facilities, amenities and improvements. The Lessor Improvements are in good condition and fit for use as an administrative office and a manufacturing, research and development facility. 22 23 (iii) Access to the Land for pedestrians and motor vehicles from publicly dedicated streets and public highways is available. All utilities required to adequately service the Lessor Improvements for Lessee's use are available and "tapped on" and hooked up pursuant to adequate permits (including any that may be required under applicable Environmental Laws except where the absence of such permits will not have a Material Adverse Effect). (iv) No portion of the Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable Governmental Authority, or if any portion of the Property is located in such an area, flood insurance has been obtained for the Property or such portion thereof in accordance with Paragraph 3.03 of the Lease Agreement and the National Flood Insurance Act of 1968. (v) All of the Property complies and will comply at all times with all applicable Governmental Rules (including Title III of the Americans with Disabilities Act; except as has been previously disclosed to the Lessor Parties in writing in the Environmental Reports, Environmental Laws; and zoning, land use, building, planning and fire laws, rules, regulations and codes) and Insurance Requirements, except for violations which are not reasonably likely to have a Material Adverse Effect. Except as has been previously disclosed to the Lessor Parties in writing in the Environmental Reports, no Hazardous Materials have been used, generated, manufactured, stored, treated, disposed of, transported or present on or released or discharged from the Property in any manner that is reasonably likely to have a Material Adverse Effect. Except as has been previously disclosed to the Lessor Parties in writing, there are no claims or actions which are reasonably likely to have a Material Adverse Effect pending or, to Lessee's knowledge, threatened against any of the Property by any Governmental Authority or any other Person relating to Hazardous Materials or pursuant to any Environmental Laws. (vi) None of the Lessor Improvements encroach or will at any time encroach onto any adjoining land in any manner that is reasonably likely to have a Material Adverse Effect, except as permitted by express written and recorded encroachment agreements approved by Agent or as affirmatively insured against by appropriate title insurance. (vii) All licenses, approvals, authorizations, consents, permits, easements and rights-of-way which are required for the use of any of the Property and which are reasonably likely to have a Material Adverse Effect if not obtained have been obtained or, if not yet required, will be obtained before required. (viii) After the purchase of the Property on the Closing Date in accordance with the Operative Documents, Lessor will have good and valid fee simple title to such Property, subject to no Liens except for Permitted Property 23 24 Liens. As of the Closing Date, no Person, other than Lessee, leases or subleases all or any portion of the Property. (u) Chief Executive Office. Lessee's chief executive office is located at 101 Metro Drive, Suite 400, San Jose, CA 95110, or at such other location as Lessee may notify Lessor from time to time in accordance with Subparagraph 5.01(g). (v) Year 2000 Compatibility. Lessee and its Subsidiaries have reviewed the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer applications used by Lessee and its Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date on or after December 31, 1999), and have made related appropriate inquiry of material suppliers and vendors. Based on such review and program, Lessee believes that the "Year 2000 Problem" will not have a Material Adverse Effect. (w) Accuracy of Information Furnished. None of the Operative Documents and none of the other certificates, statements or information furnished to any Lessor Party by or on behalf of Lessee or any of its Subsidiaries in connection with the Operative Documents or the transactions contemplated thereby contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Lessee shall be deemed to have reaffirmed, for the benefit of the Lessor Parties, each representation and warranty contained in this Paragraph 4.01 on and as of the date of each Credit Event (except for representations and warranties expressly made as of a specified date, which shall be true as of such date). 4.02. Lessor's Representations and Warranties. In order to induce Lessee, Agent and the Participants to enter into this Agreement and the other Operative Documents to which they are parties, Lessor hereby represents and warranties to Lessee, Agent and the Participants as follows: (a) Due Organization, Qualification, etc. Lessor (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and (ii) has the power and authority to own, lease and operate its properties and carry on its business as now conducted. Lessor is a Wholly-Owned Subsidiary of KeyBank. (b) Authority. The execution, delivery and performance by Lessor of each Operative Document executed, or to be executed, by Lessor and the consummation of the transactions contemplated thereby (i) are within the power of Lessor and (ii) have been duly authorized by all necessary actions on the part of Lessor. 24 25 (c) Enforceability. Each Operative Document executed, or to be executed, by Lessor has been, or will be, duly executed and delivered by Lessor and constitutes, or will constitute, a legal, valid and binding obligation of Lessor, enforceable against Lessor in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally and general principles of equity. (d) Non-Contravention. The execution and delivery by Lessor of the Operative Documents executed by Lessor and the performance and consummation of the transactions contemplated thereby do not (i) violate any Requirement of Law applicable to Lessor; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other Person to accelerate (whether after the giving of notice or lapse of time or both), any Contractual Obligation of Lessor; or (iii) result in the creation or imposition of any Lien (or the obligation to create or impose any Lien) upon any property, asset or revenue of Lessor (except such Liens as may be created in favor of Agent pursuant to this Agreement or the other Operative Documents). (e) Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority or other Person (including, without limitation, the shareholders of any Person) is required in connection with the execution and delivery of the Operative Documents executed by Lessor and the performance and consummation of the transactions contemplated thereby, except such as have been made or obtained and are in full force and effect. (f) Litigation. No actions (including, without limitation, derivative actions), suits, proceedings or investigations are pending or, to the knowledge of Lessor, threatened against Lessor at law or in equity in any court or before any other Governmental Authority which (i) is reasonably likely (alone or in the aggregate) to materially and adversely affect the ability of Lessor to perform its obligations under the Operative Documents to which it is a party or (ii) seeks to enjoin, either directly or indirectly, the execution, delivery or performance by Lessor of the Operative Documents or the transactions contemplated thereby. (g) Other Regulations. Lessor is not subject to regulation under the Investment Company Act of 1940, the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code or to any other Governmental Rule limiting its ability to incur indebtedness. (h) Chief Executive Office. Lessor's chief executive office is located at 54 State Street, Albany, New York 12201. 4.03. Participants' Representations and Warranties. In order to induce Lessee, Lessor and Agent to enter into this Agreement and the other Operative Documents to which they are parties, each Participant hereby represents and warranties to Lessee, Lessor and Agent as follows: 25 26 (a) Due Organization, Qualification, etc. Such Participant (i) is a legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and (ii) has the power and authority to own, lease and operate its properties and carry on its business as now conducted. (b) Authority. The execution, delivery and performance by such Participant of each Operative Document executed, or to be executed, by such Participant and the consummation of the transactions contemplated thereby (i) are within the power of such Participant and (ii) have been duly authorized by all necessary actions on the part of such Participant. (c) Enforceability. Each Operative Document executed, or to be executed, by such Participant has been, or will be, duly executed and delivered by such Participant and constitutes, or will constitute, a legal, valid and binding obligation of such Participant, enforceable against such Participant in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally and general principles of equity. (d) Non-Contravention. The execution and delivery by such Participant of the Operative Documents executed by such Participant and the performance and consummation of the transactions contemplated thereby do not (i) violate any Requirement of Law applicable to such Participant; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other Person to accelerate (whether after the giving of notice or lapse of time or both), any Contractual Obligation of such Participant; or (iii) result in the creation or imposition of any Lien (or the obligation to create or impose any Lien) upon any property, asset or revenue of such Participant (except such Liens as may be created in favor of Lessor or Agent pursuant to this Agreement or the other Operative Documents). (e) Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority or other Person (including, without limitation, the shareholders of any Person) is required in connection with the execution and delivery of the Operative Documents executed by such Participant and the performance and consummation of the transactions contemplated thereby, except such as have been made or obtained and are in full force and effect. (f) Litigation. No actions (including, without limitation, derivative actions), suits, proceedings or investigations are pending or, to the knowledge of such Participant, threatened against such Participant at law or in equity in any court or before any other Governmental Authority which (i) is reasonably likely (alone or in the aggregate) to materially and adversely affect the ability of such Participant to perform its obligations under the Operative Documents to which it is a party or (ii) seeks to enjoin, either directly or indirectly, the execution, delivery or performance by such Participant of the Operative Documents or the transactions contemplated thereby. 26 27 (g) Own Account. Such Participant is acquiring its participation interest hereunder for its own account for investment and not with a view to any distribution (as such term is used in Section 2(11) of the Securities Act of 1933) thereof, and, if in the future it should decide to dispose of its participation interest, it understands that it may do so only in compliance with the Securities Act of 1933 and the rules and regulations of the Securities and Exchange Commission thereunder and any applicable state securities laws. SECTION 5. COVENANTS. 5.01. Lessee's Affirmative Covenants. Until the termination of this Agreement and the satisfaction in full by Lessee of all Lessee Obligations, Lessee will comply, and will cause compliance, with the following affirmative covenants, unless Lessor and Required Participants shall otherwise consent in writing: (a) Financial Statements, Reports, etc. Lessee shall furnish to Agent, with sufficient copies for Lessor and each Participant, the following, each in such form and such detail as Agent, Lessor or the Required Participants shall reasonably request: (i) As soon as available and in no event later than forty-five (45) days after the last day of each fiscal quarter of Lessee (other than the last quarter of each fiscal year), a copy of the Financial Statements of Lessee and its Subsidiaries (prepared on a consolidated basis) for such quarter and for the fiscal year to date, certified by the chief financial officer or treasurer of Lessee to present fairly the financial condition, results of operations and other information reflected therein and to have been prepared in accordance with GAAP (subject to normal year-end audit adjustments); (ii) As soon as available and in no event later than one hundred, five (105) days after the close of each fiscal year of Lessee, (A) copies of the audited Financial Statements of Lessee and its Subsidiaries (prepared on a consolidated basis) for such year, audited by Deloitte & Touche or other independent certified public accountants of recognized national standing or otherwise reasonably acceptable to Agent and Required Participants, (B) copies of the unqualified opinions (or qualified opinions reasonably acceptable to Agent and Required Participants) delivered by such accountants in connection with all such Financial Statements and (C) certificates of such accountants stating that in making the examination necessary for their opinion they have reviewed Paragraph 5.03 and have obtained no knowledge of any violation by Lessee and its Subsidiaries of the covenants set forth therein, or if, in the opinion of such accountants, any such violation has occurred, a statement as to the nature thereof; (iii) Contemporaneously with the quarterly and year-end Financial Statements required by the foregoing clauses (i) and (ii), a compliance certificate of the chief financial officer or treasurer of Lessee in a form acceptable to Agent (a "Compliance Certificate") which (A) states that no Default has occurred and is 27 28 continuing, or, if any such Default has occurred and is continuing, a statement as to the nature thereof and what action Lessee proposes to take with respect thereto; (B) sets forth, for the quarter or year covered by such Financial Statements or as of the last day of such quarter or year (as the case may be), the calculation of the financial ratios and tests provided in Paragraph 5.03; (C) states that the Year 2000 remediation efforts of Lessee and its Subsidiaries are proceeding as scheduled; and (D) indicates whether an auditor, regulator or third party consultant has issued a management letter or other communication regarding the Year 2000 exposure, program or progress of Lessee and/or its Subsidiaries; (iv) As soon as available and in no event later than forty-five (45) days after the last day of each fiscal quarter of Lessee, a certificate of the chief financial officer or treasurer of Lessee which sets forth, for the consecutive four quarter period ending on the last day of such quarter, the calculation of Lessee's EBITDA and Senior Debt/EBITDA Ratio for such period; (v) As soon as possible and in no event later than five (5) Business Days after any officer of Lessee knows of the occurrence or existence of (A) any Reportable Event under any Employee Benefit Plan or Multiemployer Plan; (B) any actual or threatened litigation, suits, claims or disputes against Lessee or any of its Subsidiaries involving potential monetary damages payable by Lessee or its Subsidiaries of $2,000,000 or more (alone or in the aggregate); (C) any other event or condition which is reasonably likely to have a Material Adverse Effect; or (D) any Default; the statement of the chief financial officer or treasurer of Lessee setting forth details of such event, condition or Default and the action which Lessee proposes to take with respect thereto; (vi) As soon as available and in no event later than ten (10) Business Days after they are sent, made available or filed, copies of (A) all registration statements and reports filed by Lessee or any of its Subsidiaries with any securities exchange or the Securities and Exchange Commission (including, without limitation, all 10-Q, 10-K and 8-Q reports); (B) all reports, proxy statements and financial statements sent or made available by Lessee or any of its Subsidiaries to its security holders; and (C) all press releases and other similar public announcements concerning any material developments in the business of Lessee or any of its Subsidiaries made available by Lessee or any of its Subsidiaries to the public generally; (vii) As soon as available and in no event later than one hundred, twenty (120) days after the first day of each fiscal year of Lessee, the consolidated plan and forecast of Lessee and its Subsidiaries for such fiscal year and the next two succeeding years; (viii) As soon as possible and in no event later than thirty (30) days after the establishment or acquisition by Lessee or any of its Subsidiaries of any new 28 29 Subsidiary or any new Equity Securities of any Existing Subsidiary, written notice thereof; and (ix) Such other instruments, agreements, certificates, opinions, statements, documents and information relating to the operations or condition (financial or otherwise) of Lessee or its Subsidiaries, and compliance by Lessee with the terms of this Agreement and the other Operative Documents as Agent may from time to time reasonably request. (b) Books and Records. Lessee and its Subsidiaries shall at all times keep proper books of record and account in which full, true and correct entries will be made of their transactions in accordance with GAAP. (c) Inspections. (i) If no Default then exists, at such Lessor Party's expense, Lessee and its Subsidiaries shall permit any Person designated by any Lessor Party, upon reasonable notice and during normal business hours, to visit and inspect any of the properties and offices of Lessee and its Subsidiaries, to examine the books and records of Lessee and its Subsidiaries and make copies thereof and to discuss the affairs, finances and business of Lessee and its Subsidiaries with, and to be advised as to the same by, their officers, auditors and accountants, all at such times and intervals as any Lessor Party may reasonably request. (ii) If a Default then exists, at the expense of Lessee, Lessee and its Subsidiaries shall permit any Person designated by any Lessor Party, to visit and inspect any of the properties and offices of Lessee and its Subsidiaries, to examine the books and records of Lessee and its Subsidiaries and make copies thereof and to discuss the affairs, finances and business of Lessee and its Subsidiaries with, and to be advised as to the same by, their officers, auditors and accountants, all at such times and intervals as any Lessor Party may reasonably request. (d) Insurance. In addition to the insurance requirements set forth in the Lease Agreement with respect to the Property, Lessee and its Subsidiaries shall: (i) Carry and maintain insurance of the types and in the amounts customarily carried from time to time during the term of this Agreement by others engaged in substantially the same business as such Person and operating in the same geographic area as such Person, including, but not limited to, fire, public liability, property damage and worker's compensation; (ii) Carry and maintain each policy for such insurance with financially sound insurers; and (iii) Deliver to Agent from time to time, as Agent may reasonably request, schedules setting forth all insurance then in effect. 29 30 (e) Governmental Charges and Other Indebtedness. Lessee and its Material Subsidiaries shall promptly pay and discharge when due (i) all taxes and other Governmental Charges prior to the date upon which penalties accrue thereon, (ii) all indebtedness which, if unpaid, could become a Lien upon the property of Lessee or its Subsidiaries (other than Liens permitted under Subparagraph 5.02(b)) and (iii) all other indebtedness which, in each case, if unpaid, is reasonably likely to have a Material Adverse Effect, except such Indebtedness as may in good faith be contested or disputed, or for which arrangements for deferred payment have been made, provided that in each such case appropriate reserves are maintained to the reasonable satisfaction of Agent. (f) Use of Proceeds. Lessee shall not use any part of the proceeds of the Acquisition Advance, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock or for the purpose of purchasing or carrying or trading in any securities under such circumstances as to involve Lessee or any Lessor Party in a violation of Regulations T, U or X issued by the Federal Reserve Board. (g) General Business Operations. Each of Lessee and its Material Subsidiaries shall (i) preserve and maintain its corporate existence and all of its rights, privileges and franchises reasonably necessary to the conduct of its business(except as otherwise permitted pursuant to Subparagraph 5.02(c) and Subparagraph 5.02(d)), (ii) conduct its business activities in compliance with all Requirements of Law and Contractual Obligations applicable to such Person, the violation of which is reasonably likely to have a Material Adverse Effect and (iii) keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. Lessee shall maintain its chief executive office and principal place of business in the United States and shall not relocate its chief executive office or principal place of business outside of California except upon not less than thirty (30) days prior written notice to Agent. (h) Year 2000 Compatibility. Each of Lessee and its Subsidiaries shall take all acts reasonably necessary so that all internal software, hardware, firmware, equipment, goods and systems utilized by or material to their business operations or financial condition will properly perform date sensitive functions before, during and after the year 2000. At the request of Agent, Lessee shall provide to Agent such certifications or other evidence of compliance with this Subparagraph 5.01(h) as Agent may from time to time reasonably require. 5.02. Lessee's Negative Covenants. Until the termination of this Agreement and the satisfaction in full by Lessee of all Lessee Obligations, Lessee will comply, and will cause compliance, with the following negative covenants, unless Lessor and Required Participants shall otherwise consent in writing: (a) Indebtedness. Neither Lessee nor any of its Subsidiaries shall create, incur, assume or permit to exist any Indebtedness except for the following ("Permitted Indebtedness"): 30 31 (i) The Lessee Obligations under the Operative Documents; (ii) Indebtedness of Lessee and its Subsidiaries listed in Schedule 5.02(a) of the Disclosure Letter and existing on the date of this Agreement; (iii) Indebtedness of Lessee and its Subsidiaries arising from the endorsement of instruments for collection in the ordinary course of Lessee's or a Subsidiary's business; (iv) Indebtedness of Lessee and its Subsidiaries for trade accounts payable, provided that (A) such accounts arise in the ordinary course of business and (B) no material part of such account is more than ninety (90) days (or such greater number of days to which the payee shall agree) past due (unless subject to a bona fide dispute and for which adequate reserves have been established); (v) Cash advances received from customers in the ordinary course of business; (vi) Indebtedness of Lessee and its Subsidiaries under Rate Contracts, provided that all such arrangements are entered into in connection with bona fide hedging operations and not for speculation; (vii) Indebtedness of Lessee and its Subsidiaries under purchase money loans and Capital Leases incurred by Lessee or any of its Subsidiaries to finance the acquisition by such Person of real property, fixtures or equipment provided that (A) in each case, (y) such Indebtedness is incurred at the time of, or not later than one hundred twenty (120) days after, the acquisition of the property so financed and (z) such Indebtedness does not exceed the purchase price of the property so financed and (B) the aggregate amount of such Indebtedness outstanding at any time does not exceed ten percent (10%) of Lessee's Tangible Net Worth on the last day of the immediately preceding fiscal year; (viii) Indebtedness of Lessee and its Subsidiaries under initial or successive refinancings of any Indebtedness permitted by clause (ii), (vii), (xii) or (xiii) hereof, provided that (A) the principal amount of any such refinancing does not exceed the principal amount of the Indebtedness being refinanced (except to the extent any excess is otherwise permitted by another clause of this Subparagraph 5.02(a)) and (B) the material terms and provisions of any such refinancing (including maturity, redemption, prepayment, default and subordination provisions) are no less favorable to Lessor and Participants than the Indebtedness being refinanced; (ix) Indebtedness of Lessee and its Subsidiaries with respect to surety, appeal, indemnity, performance or other similar bonds in the ordinary course of business; 31 32 (x) Indebtedness of Lessee and its Subsidiaries to and among each other; (xi) Indebtedness of any Subsidiary acquired by Lessee or any of its Subsidiaries after the date of this Agreement pursuant to Subparagraph 5.02(d), provided that (A) such Indebtedness exists at the time such Subsidiary is so acquired and (B) such Indebtedness was not created in contemplation of such acquisition; (xii) Indebtedness of Lessee under the Credit Documents, provided that the aggregate principal amount of such Indebtedness outstanding at any time does not exceed $150,000,000; (xiii) Indebtedness of Lessee under the ABN Synthetic Lease Facility, provided that the aggregate amount of the "Outstanding Lease Amount" (as such term is defined in the ABN Synthetic Lease Facility) outstanding at any time does not exceed $10,000,000; (xiv) Subordinated Indebtedness of Lessee, provided that the aggregate principal amount of such Indebtedness outstanding at any time does not exceed $250,000,000; and (xv) Other Indebtedness of Lessee and its Subsidiaries, provided that the aggregate amount of such other Indebtedness outstanding at any time does not exceed ten percent (10%) of Lessee's Tangible Net Worth on the last day of the immediately preceding fiscal year. (b) Liens. Neither Lessee nor any of its Subsidiaries shall create, incur, assume or permit to exist any Lien on or with respect to any of its assets or property of any character, whether now owned or hereafter acquired, except for the following ("Permitted Liens"): (i) Liens in favor of any Lessor Party created by the Operative Documents and securing the Lessee Obligations; (ii) Liens listed in Schedule 5.02(b) of the Disclosure Letter and existing on the date of this Agreement; (iii) Liens for taxes or other Governmental Charges not at the time delinquent or thereafter payable without penalty or being contested in good faith, provided that adequate reserves for the payment thereof have been established in accordance with GAAP; (iv) Liens of carriers, warehousemen, mechanics, materialmen, vendors, and landlords and other similar Liens imposed by law incurred in the ordinary course of business for sums not overdue or being contested in good faith, 32 33 provided that adequate reserves for the payment thereof have been established in accordance with GAAP; (v) (A) Deposits under workers' compensation, unemployment insurance and social security laws or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or to secure statutory obligations of surety or appeal bonds or to secure indemnity, performance or other similar bonds in the ordinary course of business and (B) Liens on equipment under operating leases entered into in the ordinary course of business; (vi) Zoning restrictions, easements, rights-of-way, title irregularities and other similar encumbrances, which alone or in the aggregate are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of Lessee or any of its Subsidiaries and (B) Liens on equipment under operating leases entered into in the ordinary course of business; (vii) Banker's Liens and similar Liens (including set-off rights) in respect of bank deposits or brokerage accounts; (viii) Liens on any property or assets acquired, or on the property or assets of any Persons acquired, by Lessee or any of its Subsidiaries after the date of this Agreement pursuant to Subparagraph 5.02(d), provided that (A) such Liens exist at the time such property or assets or such Persons are so acquired and (B) such Liens were not created in contemplation of such acquisitions; (ix) Judgement Liens, provided that such Liens do not constitute an Event of Default under Subparagraph 5.01(h) of the Lease Agreement; (x) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties and in connection with the importation of goods in the ordinary course of Lessee's and its Subsidiaries' businesses; (xi) Liens securing Indebtedness which constitutes Permitted Indebtedness under clause (vii) of Subparagraph 5.02(a) provided that, in each case, such Lien (A) covers only those assets, the acquisition of which was financed by such Permitted Indebtedness, and (B) secures only such Permitted Indebtedness; (xii) Liens on the property or assets of any Subsidiary of Lessee in favor of Lessee or any other Subsidiary of Lessee; (xiii) Liens incurred in connection with the extension, renewal or refinancing of the Indebtedness secured by the Liens described in clause (i), (ii), 33 34 (xii) above or clause (xv) below, provided that any extension, renewal or replacement Lien (A) is limited to the property covered by the existing Lien and (B) secures Indebtedness which is no greater in amount and has material terms no less favorable to the Participants than the Indebtedness secured by the existing Lien; (xiv) Permitted Property Liens in the Property; (xv) Liens securing the "Lessee Obligations" (as such term is defined in the ABN Synthetic Lease Facility) of Lessee arising under the ABN Synthetic Lease Facility or any replacement thereof; and (xvi) Other Liens, provided that the aggregate amount of the Indebtedness secured by such other Liens does not exceed at any time five percent (5%) of Lessee's Tangible Net Worth on the last day of the immediately preceding fiscal year; Provided, however, that the foregoing exceptions shall not be construed to permit any Liens, except for Permitted Property Liens, in any of the Property or in any Cash Collateral. (c) Asset Dispositions. Neither Lessee nor any of its Material Subsidiaries shall sell, lease, transfer or otherwise dispose of all or any part of its assets or property, whether now owned or hereafter acquired, except for the following: (i) Sales of inventory by Lessee and its Subsidiaries in the ordinary course of their businesses; (ii) Sales or other dispositions of surplus, damaged, worn or obsolete equipment or inventory in the ordinary course of their businesses; (iii) Sales or other dispositions of Investments permitted by clause (i) of Subparagraph 5.02(e) for not less than fair market value; (iv) Sales or assignments of defaulted receivables to a collection agency in the ordinary course of business; (v) Sales for cash of Accounts if such sales are on a non-recourse basis and at a discount not exceeding fifteen percent (15%) of the face amount of such Account; provided, however, that the aggregate amount of Accounts which can be so transferred in any fiscal quarter of Lessee shall not exceed the lesser of Twenty-Five Million Dollars ($25,000,000) and twenty percent (20%) of the gross amount of all Accounts created during the immediately preceding fiscal quarter; (vi) Sales of the capital stock of any non-Material Subsidiary; 34 35 (vii) Sales of the Property or any portion thereof permitted by the Operative Documents; (viii) Sales or other dispositions of assets or property in connection with mergers and acquisitions permitted under clause (i) of Subparagraph 5.02(d); (ix) Licenses by Lessee or its Subsidiaries of its patents, copyrights, trademarks, trade names and service marks in the ordinary course of its business provided that, in each case, the terms of the transaction are terms which then would prevail in the market for similar transactions between unaffiliated parties dealing at arm's length; (x) Sales or other dispositions of assets and property by Lessee to any of Lessee's Subsidiaries or by any of Lessee's Subsidiaries to Lessee or any of its other Subsidiaries, provided that unless such Subsidiary is not a Material Subsidiary or any other Subsidiary in which seventy-five percent (75%) or more of the equity interest in such Subsidiary is owned by Lessee or a Material Subsidiary, the terms of any such sales or other dispositions by or to Lessee are terms which are no less favorable to Lessee then would prevail in the market for similar transactions between unaffiliated parties dealing at arm's length; (xi) Transfers of property subject to synthetic leases in connection with the replacement or refinancing of a synthetic lease for such property, including without limitation, the sale and leaseback of such property; and (xii) Other sales, leases, transfers and disposals of assets and property, provided that (A) no Default has occurred and is continuing on the date of, or will result after giving effect to, any such sale, lease, transfer or disposal and (B) the aggregate book value of all such assets and property so sold, leased, transferred or otherwise disposed of in any fiscal year does not exceed five percent (5%) of Lessee's Tangible Net Worth on the last day of the immediately preceding fiscal year; Provided, however, that the foregoing exceptions shall not be construed to permit any sales, leases, transfers or other disposals of any of the Property, except as expressly permitted by the Lease Agreement, or of any of the Cash Collateral. (d) Mergers, Acquisitions, Etc. Neither Lessee nor any of its Subsidiaries shall consolidate with or merge into any other Person or permit any other Person to merge into it, acquire any Person as a new Subsidiary or acquire all or substantially all of the assets of any other Person, except for the following: (i) Lessee and its Subsidiaries may merge with each other, provided that (A) in any such merger involving Lessee, Lessee is the surviving corporation and (B) no Default has occurred and is continuing on the date of, or will result after giving effect to, any such merger; and 35 36 (ii) Other acquisitions of any Person as a new Subsidiary or of all or substantially all of the assets of any other Person, provided that: (A) No Default has occurred and is continuing on the date of, or will result after giving effect to, any such acquisition; and (B) The aggregate consideration paid by Lessee and its Subsidiaries for all such acquisitions during the period from the date of the Credit Agreement through the Scheduled Expiration Date does not exceed (1) $50,000,000 in either cash or seller-financed Indebtedness or (2) $100,000,000 in Equity Securities of Lessee and its Subsidiaries (calculated as of the date such consideration is paid). (e) Investments. Neither Lessee nor any of its Subsidiaries shall make any Investment except for Investments in the following: (i) Investments permitted by the investment policy of Lessee set forth in Schedule 5.02(e) or, if any changes to the investment policy of Lessee are hereafter duly approved by the Board of Directors of Lessee, in any subsequent investment policy which is the most recent investment policy delivered by Lessee to Agent with a certificate of Lessee's chief financial officer to the effect that such investment policy has been duly approved by Lessee's Board of Directors and is then in effect; (ii) Investments received by Lessee and its Subsidiaries in connection with the bankruptcy or reorganization of customers and suppliers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (iii) Investments by Lessee and its consolidated Subsidiaries in each other; (iv) Investments consisting of loans to employees and officers for travel, relocation and other similar expenses incurred in the ordinary course of business; (v) Investments by Lessee and its Subsidiaries in interest rate protection, currency swap and other Rate Contracts (including without limitation the Synthetic Lease Swap Agreement), provided that all such arrangements are entered into in connection with bona fide hedging operations and not for speculation; (vi) Deposit accounts; (vii) Endorsements of negotiable instruments in the ordinary course of business; 36 37 (viii) Investments permitted by Subparagraph 5.02(d); (ix) Loans, advances or other extensions of credit to suppliers in the ordinary course of Lessee's or such Subsidiary's business as presently conducted which do not exceed in the aggregate Seven Million Five Hundred Thousand Dollars ($7,500,000) at any time outstanding; and (x) Other Investments, provided that: (A) No Default has occurred and is continuing on the date of, or will result after giving effect to, any such Investment; and (B) The aggregate consideration paid by Lessee and its Subsidiaries for all such Investments in any fiscal year does not exceed $20,000,000. (f) Dividends, Redemptions, Etc. Neither Lessee nor any of its Subsidiaries shall pay any dividends or make any distributions on its Equity Securities; purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Securities; return any capital to any holder of its Equity Securities as such; make any distribution of assets, Equity Securities, obligations or securities to any holder of its Equity Securities as such; or set apart any sum for any such purpose; except as follows: (i) Either Lessee or any of its Subsidiaries may pay dividends on its capital stock payable solely in such Person's own capital stock; (ii) Any Subsidiary of Lessee may pay dividends to Lessee; and (iii) Lessee may repurchase or redeem its capital stock for cash, provided that, in each case, no Default has occurred and is continuing on the date of, or will result after giving effect to, any such payment, repurchase or redemption. (g) Change in Business. Neither Lessee nor any of its Subsidiaries shall engage in any business other than the designing, manufacturing, assembling, marketing, licensing and distributing, of semiconductor capital equipment, optical or related equipment or devices or components thereof, and related activities. (h) Employee Benefit Plans. Neither Lessee nor any ERISA Affiliate shall (A) adopt or institute any Employee Benefit Plan that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA, (B) take any action which will result in the partial or complete withdrawal, within the meanings of sections 4203 and 4205 of ERISA, from a Multiemployer Plan, (C) engage or permit any Person to engage in any transaction prohibited by section 406 of ERISA or section 4975 of the IRC involving any Employee Benefit Plan or Multiemployer Plan which would subject Lessee or any ERISA Affiliate to any tax, penalty or other liability including a liability to indemnify, 37 38 (D) incur or allow to exist any accumulated funding deficiency (within the meaning of section 412 of the IRC or section 302 of ERISA), (E) fail to make full payment when due of all amounts due as contributions to any Employee Benefit Plan or Multiemployer Plan, (F) fail to comply with the requirements of section 4980B of the IRC or Part 6 of Title I(B) of ERISA, or (G) adopt any amendment to any Employee Benefit Plan which would require the posting of security pursuant to section 401(a)(29) of the IRC, where singly or cumulatively, the above would be reasonably likely to have a Material Adverse Effect. (i) Transactions With Affiliates. Neither Lessee nor any of its Subsidiaries shall enter into any Contractual Obligation with any Affiliate (other than Lessee or one of its Subsidiaries) or engage in any other transaction with any such Affiliate except upon terms at least as favorable to Lessee or such Subsidiary as an arms-length transaction with unaffiliated Persons. (j) Accounting Changes. Neither Lessee nor any of its Subsidiaries shall (i) change its fiscal year (currently October 1 through September 30) or (ii) except as required by GAAP, change its accounting practices in any manner which would affect Lessee's compliance with Paragraph 5.03. 5.03. Lessee's Financial Covenants. Until the termination of this Agreement and the satisfaction in full by Lessee of all Lessee Obligations, Lessee will comply, and will cause compliance, with the following financial covenants, unless Lessor and Required Participants shall otherwise consent in writing: (a) Quick Ratio. Lessee shall not permit its Quick Ratio on the last day of any fiscal quarter to be less than 1.00. (b) Fixed Charge Coverage Ratio. Lessee shall not permit its Fixed Charge Coverage Ratio for any period set forth below to be less than the ratio set forth opposite such period below: The consecutive two-quarter period beginning on April 3, 1999 and ending on October 1, 1999 2.00; The consecutive three-quarter period beginning on April 3, 1999 and ending on December 31, 1999 2.50; The consecutive four-quarter period beginning on April 3, 1999 and ending on March 31, 2000 3.00;
38 39 Each consecutive four-quarter period ending on the last day of each quarter thereafter 3.50.
(c) Leverage Ratio. Lessee shall not permit its Leverage Ratio on the last day of any fiscal quarter to be greater than 0.25. (d) Tangible Net Worth. Lessee shall not permit its Tangible Net Worth on the last day of any fiscal quarter (such date to be referred to in this Subparagraph 5.03(d) as a "determination date") which occurs after March 31, 1999 (such date to be referred to in this Subparagraph 5.03(d) as the "base date") to be less than the sum on such determination date of the following: (i) Five Hundred Thirteen Million Three Hundred Thousand Dollars ($513,300,000); plus (ii) Eighty percent (80%) of the sum of: (A) The sum of Lessee's consolidated quarterly net income (ignoring any quarterly losses) for each fiscal quarter after the base date through and including the fiscal quarter ending on the determination date; and (B) The after tax effect of the lesser of (A) the sum of all Watkins-Johnson Charges taken by Lessee and its Subsidiaries for each fiscal quarter after the base date through and including the fiscal quarter ending on the determination date, and (B) fifteen million Dollars ($15,000,000); plus (iii) Seventy-five percent (75%) of the Net Proceeds of all Equity Securities issued by Lessee and its Subsidiaries (to Persons other than Lessee or its Subsidiaries) during the period commencing on the base date and ending on the determination date; plus (iv) Seventy-five percent (75%) of the principal amount of all debt securities of Lessee and its Subsidiaries converted into Equity Securities of Lessee and its Subsidiaries during the period commencing on the base date and ending on the determination date; minus 39 40 (v) The lesser of (A) the aggregate amount paid by Lessee (including reasonable expenses incurred in connection therewith) to repurchase up to one million shares of its common stock during the period commencing on the base date and ending on the determination date and (B) $10,000,000. (e) Profitability. (i) Lessee shall not permit its Adjusted Net Income for the consecutive three-quarter period beginning on April 3, 1999 and ending on December 31, 1999 to be a loss. (ii) Thereafter, Lessee shall not permit (A) its Adjusted Net Income for any quarter to be a loss exceeding $10,000,000, (B) its Adjusted Net Income to be a loss in more than two quarters in any consecutive four-quarter period (commencing with the consecutive four-quarter period ending on March 31, 2000) or (C) its Adjusted Net Income for any consecutive four-quarter period (commencing with the consecutive four-quarter period ending on March 31, 2000) to be a loss. 5.04. Lessor's Covenants. Until the termination of this Agreement and the satisfaction in full by Lessor of all Lessor Obligations, Lessor will comply, and will cause compliance, with the following covenants, unless Lessee and Required Participants shall otherwise consent in writing: (a) Use of Proceeds. Lessor shall use the proceeds of all amounts delivered to Lessor by Participants pursuant to Subparagraph 2.05(a) solely to fund the Acquisition Advance. (b) Lessor Liens. Lessor shall not create, incur, assume or permit to exist any Lessor Lien (other than any Lien granted to Agent or any Participant pursuant to the Operative Documents to secure the Lessor Obligations) and shall promptly discharge, at its sole cost and expense, any Lessor Lien on the Property (other than any Liens granted to Agent or any Participant pursuant to the Operative Documents to secure the Lessor Obligations); provided, however, that Lessor shall not be required so to discharge any such Lessor Lien if (i) the same is being (or promptly will be) contested in good faith by appropriate proceedings diligently prosecuted and there is no immediate risk of foreclosure upon any of the Property, and (ii) any such contest is completed and all Lessor Liens are discharged on or prior to the Expiration Date. (c) Property Disposition. Lessor shall not sell, lease, transfer or otherwise dispose of its right, title and interest in the Property and/or the Operative Documents except as provided in Subparagraph 2.11(b) or Subparagraph 7.05(d), as provided in the Purchase Agreement or after retaining the Property following the Expiration Date in accordance with the Purchase Agreement. 40 41 (d) Chief Executive Office. Lessor shall not change its chief executive office without giving Agent prompt written notice. 5.05. Participants' Covenants. Each Participant covenants that it will not fund its portion of the Acquisition Advance with the assets of any "employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any "plan" (as defined in Section 4975(e)(1) of the IRC. SECTION 6. LESSOR, AGENT AND THEIR RELATIONS WITH PARTICIPANTS. 6.01. Appointment of Agent. Each Participant hereby appoints and authorizes Agent to act as its agent hereunder and under the other Operative Documents with such powers as are expressly delegated to Agent by the terms of this Agreement and the other Operative Documents, together with such other powers as are reasonably incidental thereto. Lessor is not an agent for the Participants or Agent, and neither this Agreement nor any other Operative Document shall be construed to constitute or evidence a partnership among the Lessor Parties or otherwise to impose upon Lessor or Agent any fiduciary duty. 6.02. Powers and Immunities. Neither Lessor nor Agent shall have any duties or responsibilities except those expressly set forth in this Agreement or in any other Operative Document, be a trustee for any Participant or have any fiduciary duty to any Participant. Notwithstanding anything to the contrary contained herein, neither Lessor nor Agent shall be required to take any action which is contrary to this Agreement or any other Operative Document or any applicable Governmental Rule. Neither Lessor nor Agent nor any Participant shall be responsible to any Participant for any recitals, statements, representations or warranties made by Lessee or any of its Subsidiaries contained in this Agreement or in any other Operative Document, for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Operative Document or for any failure by Lessee or any of its Subsidiaries to perform their respective obligations hereunder or thereunder. Lessor and Agent may employ agents and attorneys-in-fact and shall not be responsible to any Participant for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither Lessor nor Agent nor any of their respective directors, officers, employees, agents or advisors shall be responsible to any Participant for any action taken or omitted to be taken by it or them hereunder or under any other Operative Document or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. Except as otherwise provided under this Agreement, Lessor and Agent shall take such action with respect to the Operative Documents as shall be directed by the Required Participants. 6.03. Reliance. Lessor or Agent shall be entitled to rely upon any certificate, notice or other document (including any cable, telegram, facsimile or telex) believed by it in good faith to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by Lessor or Agent with reasonable care. As to any other matters not expressly provided for by this Agreement, neither Lessor nor Agent shall be required to take any action or 41 42 exercise any discretion, but shall be required to act or to refrain from acting upon instructions of the Required Participants and shall in all cases be fully protected by the Participants in acting, or in refraining from acting, hereunder or under any other Operative Document in accordance with the instructions of the Required Participants, and such instructions of the Required Participants and any action taken or failure to act pursuant thereto shall be binding on all of the Participants. 6.04. Defaults. Neither Lessor nor Agent shall be deemed to have knowledge or notice of the occurrence of any Default unless Lessor and Agent have received a written notice from a Participant or Lessee, referring to this Agreement, describing such Default and stating that such notice is a "Notice of Default". If Lessor and Agent receive such a notice of the occurrence of a Default, Agent shall give prompt notice thereof to the Participants. Lessor and Agent shall take such action with respect to such Default as shall be reasonably directed by the Required Participants; provided, however, that until Lessor and Agent shall have received such directions, Lessor or Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Participants. 6.05. Indemnification. Without limiting the obligations of Lessee hereunder, each Participant agrees to indemnify Lessor and Agent, ratably in accordance with such Participant's Proportionate Share, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against Lessor or Agent in any way relating to or arising out of this Agreement or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or thereof; provided, however, that no Participant shall be liable for any of the foregoing to the extent they arise from Lessor's or Agent's gross negligence or willful misconduct. Lessor or Agent shall be fully justified in refusing to take or in continuing to take any action hereunder unless it shall first be indemnified to its satisfaction by the Participants against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The obligations of each Participant under this Paragraph 6.05 shall survive the payment and performance of the Lessee Obligations, the termination of this Agreement and any Participant ceasing to be a party to this Agreement (with respect to events which occurred prior to the time such Participant ceased to be a Participant hereunder). 6.06. Non-Reliance. Each Participant represents that it has, independently and without reliance on Lessor, Agent, or any other Participant, and based on such documents and information as it has deemed appropriate, made its own appraisal of the business, prospects, management, financial condition and affairs of Lessee and the Subsidiaries and its own decision to enter into this Agreement and agrees that it will, independently and without reliance upon Lessor, Agent or any other Participant, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decisions in taking or not taking action under this Agreement or any other Operative Document. Neither Lessor nor Agent nor any of their respective affiliates nor any of their respective directors, officers, employees, agents or advisors shall (a) be required to keep any Participant informed as to the performance or observance by Lessee or any of its Subsidiaries of the obligations under this Agreement or any 42 43 other document referred to or provided for herein or to make inquiry of, or to inspect the properties or books of Lessee or any of its Subsidiaries; (b) have any duty or responsibility to provide any Participant with any credit or other information concerning Lessee or any of its Subsidiaries which may come into the possession of Lessor or Agent, except for notices, reports and other documents and information expressly required to be furnished to the Participants by Lessor or Agent hereunder; or (c) be responsible to any Participant for (i) any recital, statement, representation or warranty made by Lessee or any officer, employee or agent of Lessee in this Agreement or in any of the other Operative Documents, (ii) the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any Operative Document, (iii) the value or sufficiency of the Property or the validity or perfection of any of the liens or security interests intended to be created by the Operative Documents, or (iv) any failure by Lessee to perform its obligations under this Agreement or any other Operative Document. 6.07. Resignation or Removal of Agent. Agent may resign at any time by giving thirty (30) days prior written notice thereof to Lessee and the Participants, and Agent may be removed at any time with or without cause by the Required Participants. Upon any such resignation or removal, the Required Participants shall have the right to appoint a successor Agent, which Agent, if not a Participant, shall be reasonably acceptable to Lessee; provided, however, that Lessee shall have no right to approve a successor Agent if an Event of Default has occurred and is continuing. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from the duties and obligations thereafter arising hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section VI and any other provision of this Agreement or any other Operative Document which by its terms survives the termination of this Agreement shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. 6.08. Authorization. Agent is hereby authorized by the Participants to execute, deliver and perform, each of the Operative Documents to which Agent is or is intended to be a party and each Participant agrees to be bound by all of the agreements of Agent contained in the Operative Documents. 6.09. Lessor and Agent in their Individual Capacities. Lessor, Agent and their respective affiliates may make loans to, accept deposits from and generally engage in any kind of banking or other business with Lessee and its Subsidiaries and affiliates as though Lessor were not Lessor hereunder and Agent were not Agent hereunder. With respect to the Acquisition Advance made by Agent in its capacity as a Participant, Agent in its capacity as a Participant shall have the same rights and powers under this Agreement and the other Operative Documents as any other Participant and may exercise the same as though it were not Agent, and the terms "Participant" or "Participants" shall include Agent in its capacity as a Participant. 43 44 SECTION 7. MISCELLANEOUS 7.01. Notices. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Lessor, Lessee, any Participant or Agent under this Agreement or the other Operative Documents shall be in writing and faxed, mailed or delivered, if to Lessor, Lessee or Agent, at its respective facsimile number or address set forth below or, if to any Participant, at the address or facsimile number specified beneath the heading "Address for Notices" under the name of such Participant in Part B of Schedule I (or to such other facsimile number or address for any party as indicated in any notice given by that party to the other parties); provided, however, that any notice to Lessor shall be delivered to Agent as provided in Subparagraph 2.02(c) hereof. All such notices and communications shall be effective (a) when sent by an overnight courier service of recognized standing, on the second Business Day following the deposit with such service; (b) when mailed, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d) when faxed, upon confirmation of receipt; provided, however, that any of the Acquisition Request, Notice of Rental Period Selection, Extension Request, Notice of Term Purchase Option Exercise or Notice of Return Option Exercise delivered to Lessor or Agent shall not be effective until received by Lessor or Agent. Lessee: Silicon Valley Group, Inc. 101 Metro Drive, Suite 400 San Jose, CA 95110 Attn: Chief Financial Officer Tel. No: (408) 434-0500 Fax. No: (408) 434-0216 Lessor: SELCO Service Corporation c/o KeyBank National Association 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young Tel. No: (206) 684-6085 Fax. No: (206) 684-6035 With a copy to: KeyCorp Leasing 54 State Street Albany, NY 12201 Attn: Donald Davis Tel. No: (518) 486-8984 Fax. No: (518) 487-4635 44 45 Agent: KEYBANK NATIONAL ASSOCIATION 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young Tel. No: (206) 684-6085 Fax. No: (206) 684-6035 With a copy to: KEYBANK NATIONAL ASSOCIATION 4 Embarcadero Center, Suite 3660 San Francisco, CA 94111-5812 Attn: Kevin McBride Tel. No: (415) 248-1252 Fax. No: (415) 243-1248 Each Acquisition Request, Notice of Rental Period Selection, Extension Request, Notice of Term Purchase Option Exercise and Notice of Return Option Exercise shall be given by Lessee to Agent's office located at its address referred to above during its normal business hours; provided, however, that any such notice received by Agent after 11:00 a.m. on any Business Day shall be deemed received by Agent on the next Business Day. In any case where this Agreement authorizes notices, requests, demands or other communications by Lessee to any Lessor Party to be made by telephone or facsimile, any Lessor Party may conclusively presume that anyone purporting to be a person designated in any incumbency certificate or other similar document received by such Lessor Party is such a person. 7.02. Expenses. Lessee shall pay on demand, whether or not the Acquisition Advance is made hereunder, (a) all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by Lessor and Agent in connection with the preparation, negotiation, execution and delivery of, the consummation of the transactions contemplated by and the exercise of their duties under, this Agreement and the other Operative Documents, and the preparation, negotiation, execution and delivery of amendments and waivers hereunder and thereunder and (b) all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by the Lessor Parties in the enforcement or attempted enforcement of any of the Lessee Obligations or in exercising or preserving any of the Lessor Parties' rights and remedies (including all such fees and expenses incurred in connection with any "workout" or restructuring affecting the Operative Documents or the Lessee Obligations or any bankruptcy or similar proceeding involving Lessee or any of its Subsidiaries). As used herein, the term "reasonable attorneys' fees and expenses" shall include, without limitation, allocable costs and expenses of Agent's and Participants' in-house legal counsel and staff. The obligations of Lessee under this Paragraph 7.02 shall survive the payment and performance of the Lessee Obligations and the termination of this Agreement. 7.03. Indemnification. To the fullest extent permitted by law, Lessee agrees to protect, indemnify, defend and hold harmless, on an after-tax basis, the Lessor Parties and the other 45 46 Indemnitees from and against any and all liabilities, losses, damages or expenses of any kind or nature (including Indemnified Taxes) and from any suits, claims or demands (including in respect of or for reasonable attorney's fees and other expenses) arising on account of or in connection with any matter or thing or action or failure to act by Indemnitees, or any of them, arising out of or relating to the Operative Documents, any transaction contemplated thereby (including arising under the Acquisition Agreement) or the Property, including any use by Lessee of the Property or the Acquisition Advance, except to the extent such liability arises from (a) the willful misconduct or gross negligence of such Indemnitee, (b) any act or occurrence which first occurs after the Lease Agreement has terminated and Lessee is no longer in possession of the Property, (c) the breach by any Lessor Party of its obligations under the Operative Documents; (d) Hazardous Materials to the extent such indemnification is limited pursuant to Subparagraph 3.06(c) of the Lease Agreement; or (e) except as otherwise specifically provided in the Operative Documents, the performance by any Lessor Party of its obligations thereunder. Upon receiving knowledge of any suit, claim or demand asserted by a third party that any Lessor Party believes is covered by this indemnity, such Lessor Party shall give Lessee notice of the matter and an opportunity to defend it, at Lessee's sole cost and expense, with legal counsel reasonably satisfactory to such Lessor Party; provided, however, that Lessee shall not be responsible for the costs and expenses of more than one such counsel (other than any local counsel and special counsel) in any such action. Such Lessor Parties may also require Lessee to defend the matter. Any failure or delay of any Lessor Party to notify Lessee of any such suit, claim or demand shall not relieve Lessee of its obligations under this Paragraph 7.03 but shall reduce such obligations to the extent of any increase in those obligations caused solely by any such failure or delay that is unreasonable. The obligations of Lessee under this Paragraph 7.03 shall survive the payment and performance of the Lessee Obligations and the termination of this Agreement. 7.04. Waivers; Amendments. Any term, covenant, agreement or condition of this Agreement or any other Operative Document may be amended or waived, and any consent under this Agreement or any other Operative Document may be given, if such amendment, waiver or consent is in writing and is signed by Lessor, Lessee and the Required Participants (or Agent on behalf of the Required Participants with the written approval of the Required Participants); provided, however that: (a) Any amendment, waiver or consent which (i) increases the Total Commitment, (ii) extends the Scheduled Expiration Date, (iii) reduces the Rental Rate or any fees or other amounts payable for the account of the Participants hereunder, (iv) postpones any date scheduled for any payment of Base Rent or any fees or other amounts payable for the account of the Participants hereunder or thereunder, (v) amends Paragraph 2.06 or this Paragraph 7.04, (vi) amends the definition of Required Participants or (vii) releases Lessor's interest in any substantial part of the Property, must be in writing and signed or approved in writing by all Participants; (b) Any amendment, waiver or consent which increases or decreases the Proportionate Share of any Participant must be in writing and signed by such Participant; and 46 47 (c) Any amendment, waiver or consent which affects the rights or obligations of Agent must be in writing and signed by Agent. No failure or delay by any Lessor Party in exercising any right under this Agreement or any other Operative Document shall operate as a waiver thereof or of any other right hereunder or thereunder nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right hereunder or thereunder. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. 7.05. Successors and Assigns. (a) Binding Effect. This Agreement and the other Operative Documents shall be binding upon and inure to the benefit of Lessee, Lessor, the Participants, Agent and their respective permitted successors and assigns. All references in this Agreement to any Person shall be deemed to include all successors and assigns of such Person. (b) Participant Assignments. (i) Any Participant may, at any time, sell and assign to any other Participant or any Eligible Assignee (individually, an "Assignee Participant") all or a portion of its rights and obligations under this Agreement and the other Operative Documents (such a sale and assignment to be referred to herein as an "Assignment") pursuant to an assignment agreement in the form of Exhibit K (an "Assignment Agreement"), executed by each Assignee Participant and such assignor Participant (an "Assignor Participant") and delivered to Agent for its acceptance and recording in the Register; provided, however, that: (A) Without the written consent of Lessor, Agent and, if no Default has occurred and is continuing, Lessee (which consent of Lessor, Agent and Lessee shall not be unreasonably withheld), no Participant may make any Assignment to any Assignee Participant which is not, immediately prior to such Assignment, a Participant hereunder or an Affiliate thereof; or (B) Without the written consent of Lessor, Agent and, if no Default has occurred and is continuing, Lessee (which consent of Lessor, Agent and Lessee shall not be unreasonably withheld), no Participant may make any Assignment to any Assignee Participant if, after giving effect to such Assignment, the Commitment of such Participant or such Assignee Participant would be less than Five Million Dollars ($5,000,000) (except that a Participant may make an Assignment which reduces its Commitment to zero without the written consent of Lessor, Agent or Lessee); 47 48 (C) Without the written consent of Lessor, Agent and, if no Default has occurred and is continuing, Lessee (which consent of Lessor, Agent and Lessee shall not be unreasonably withheld), no Participant may make any Assignment of its Outstanding Tranche A Participation Amount which does not assign and delegate an equal pro rata interest in (1) such Participant's Tranche A Percentage, and (2) such Participant's other rights, duties and obligations relating to the Tranche A Portion under this Agreement and the other Operative Documents; or (D) Without the written consent of Lessor, Agent and, if no Default has occurred and is continuing, Lessee (which consent of Lessor, Agent and Lessee shall not be unreasonably withheld), no Tranche B Participant may make any Assignment of its Outstanding Tranche B Participation Amount which does not assign and delegate an equal pro rata interest in (1) such Participant's Tranche B Percentage, and (2) such Participant's other rights, duties and obligations relating to the Tranche B Portion under this Agreement and the other Operative Documents. Upon such execution, delivery, acceptance and recording of each Assignment Agreement, from and after the Assignment Effective Date determined pursuant to such Assignment Agreement, (y) each Assignee Participant thereunder shall be a Participant hereunder with a Tranche A Percentage, Tranche B Percentage and Proportionate Share as set forth on Attachment 1 to such Assignment Agreement (under the caption "Tranche Percentages and Proportionate Shares After Assignment") and shall have the rights, duties and obligations of such a Participant under this Agreement and the other Operative Documents, and (z) the Assignor Participant thereunder shall be a Participant with a Tranche A Percentage, Tranche B Percentage and Proportionate Share as set forth on Attachment 1 to such Assignment Agreement (under the caption "Tranche Percentages and Proportionate Shares After Assignment") , or, if the Proportionate Share of the Assignor Participant has been reduced to 0%, the Assignor Participant shall cease to be a Participant and to have any obligation to fund any portion of the Acquisition Advance; provided, however, that any such Assignor Participant which ceases to be a Participant shall continue to be entitled to the benefits of any provision of this Agreement which by its terms survives the termination of this Agreement. Each such Assignment Agreement shall be deemed to amend Schedule I to the extent, and only to the extent, necessary to reflect the addition of each Assignee Participant, the deletion of each Assignor Participant which reduces its Proportionate Share to 0% and the resulting adjustment of Tranche A Percentages, Tranche B Percentages and Proportionate Shares arising from the purchase by each Assignee Participant of all or a portion of the rights and obligations of an Assignor Participant under this Agreement and the other Operative Documents. Each Assignee Participant which was not previously a Participant hereunder and which is not incorporated under the laws of the United States of America or a state thereof shall, within three (3) Business 48 49 Days of becoming a Participant, deliver to Lessee and Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 (or successor applicable form), as the case may be, certifying in each case that such Participant is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. (ii) Agent shall maintain at its address referred to in Paragraph 7.01 a copy of each Assignment Agreement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Participants and the Tranche A Percentage, Tranche B Percentage and Proportionate Share of each Participant from time to time. The entries in the Register shall be conclusive in the absence of manifest error, and Lessee, Agent and the Participants may treat each Person whose name is recorded in the Register as the owner of the interests recorded therein for all purposes of this Agreement. The Register shall be available for inspection by Lessee or any Participant at any reasonable time and from time to time upon reasonable prior notice. (iii) Upon its receipt of an Assignment Agreement executed by an Assignor Participant and an Assignee Participant (and, to the extent required by clause (i) of this Subparagraph 7.05(b), by Lessor, Agent and Lessee), together with payment to Agent by Assignor Participant of a registration and processing fee of $3000, Agent shall (A) promptly accept such Assignment Agreement and (B) on the Assignment Effective Date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to Lessor, the Participants and Lessee. Agent may, from time to time at its election, prepare and deliver to Lessor, the Participants and Lessee a revised Schedule I reflecting the names, addresses and respective Proportionate Shares of all Participants then parties hereto. (iv) Subject to Paragraph 7.13, the Lessor Parties may disclose the Operative Documents and any financial or other information relating to Lessee or any Subsidiary to each other or to any potential Assignee Participant. (c) Participant Subparticipations. Any Participant may at any time sell to one or more banks or other financial institutions ("Subparticipants") subparticipation interests in the rights and interests of such Participant under this Agreement and the other Operative Documents. In the event of any such sale by a Participant of subparticipation interests, such Participant's obligations under this Agreement and the other Operative Documents shall remain unchanged, such Participant shall remain solely responsible for the performance thereof and Lessee and the other Lessor Parties shall continue to deal solely and directly with such Participant in connection with such Participant's rights and obligations under this Agreement. Any agreement pursuant to which any such sale is effected may require the selling Participant to obtain the consent of the Subparticipant in order for such Participant to agree in writing to any amendment, waiver or consent of a type specified in clause (i), (ii), (iii) or (iv) of Subparagraph 7.04(a) but may not 49 50 otherwise require the selling Participant to obtain the consent of such Subparticipant to any other amendment, waiver or consent hereunder. Lessee agrees that any Participant which has transferred any subparticipation interest shall, notwithstanding any such transfer, be entitled to the full benefits accorded such Participant under Paragraph 2.12, Paragraph 2.13, and Paragraph 2.14, as if such Participant had not made such transfer. (d) Lessor Assignments. Lessor may, upon one (1) month's prior written notice to Lessee and Agent, sell and assign all of its right, title and interest in the Property and its rights, powers, privileges, duties and obligations under this Agreement and the other Operative Documents, provided that: (i) If such sale and assignment is effected after either (A) the occurrence of a Change of Law which makes it unlawful or unreasonably burdensome for Lessor to hold legal or beneficial title to the Property or to perform its obligations and duties under this Agreement and the other Operative Documents or (B) the resignation or removal of the Agent which was the Agent at the time Lessor became the Lessor, the purchaser/assignee (the "successor Lessor") shall be either (1) a Participant or an Eligible Assignee that is a multi-asset Person having substantial assets beyond its interest in the Property and the Operative Documents or (2) a Person approved as provided in clause (ii) below; or (ii) If such sale and assignment is effected in any other circumstance, the successor Lessor shall be a Person that is approved in writing by Agent, Required Participants and, if no Default has occurred and is continuing, Lessee (which consents of Agent, Required Participants and Lessee shall not be unreasonably withheld); and (iii) The successor Lessor executes such documents, instruments and agreements as may reasonably be necessary to evidence its agreement to assume all of the obligations and duties of the Lessor under this Agreement and the other Operative Documents. Upon the consummation of any such sale and assignment, (A) the successor Lessor shall become the "Lessor" and shall succeed to and become vested with all the rights, powers, privileges, duties and obligations of the Lessor under this Agreement and the other Operative Documents and (B) the retiring Lessor shall be discharged from the duties and obligations of the Lessor thereafter arising under this Agreement and the other Operative Documents which are assumed by the successor Lessor. After any retiring Lessor's discharge as the Lessor, the provisions of Section VI and any other provision of this Agreement or any other Operative Document which by its terms survives the termination of this Agreement shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Lessor. 7.06. Setoff. In addition to any rights and remedies of the Participants provided by law, each Participant shall have the right, with the prior written consent of Agent, but without prior 50 51 notice to or consent of Lessee, any such notice and consent being expressly waived by Lessee to the extent permitted by applicable law, upon the occurrence and during the continuance of an Event of Default, to set-off and apply against the Lessee Obligations any amount owing from such Participant to Lessee. The aforesaid right of set-off may be exercised by such Participant against Lessee or against any trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver or execution, judgment or attachment creditor of Lessee or against anyone else claiming through or against Lessee or such trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off may not have been exercised by such Participant at any prior time. Each Participant agrees promptly to notify Lessee after any such set-off and application made by such Participant, provided that the failure to give such notice shall not affect the validity of such set-off and application. 7.07. No Third Party Rights. Nothing expressed in or to be implied from this Agreement is intended to give, or shall be construed to give, any Person, other than the parties hereto and their permitted successors and assigns hereunder, any benefit or legal or equitable right, remedy or claim under or by virtue of this Agreement or under or by virtue of any provision herein. 7.08. Partial Invalidity. If at any time any provision of this Agreement or any other Operative Document is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement or the other Operative Documents nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 7.09. JURY TRIAL. EACH OF LESSEE AND THE LESSOR PARTIES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING TO THE OPERATIVE DOCUMENTS IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OPERATIVE DOCUMENT. 7.10. Counterparts. This Agreement may be executed in any number of identical counterparts, any set of which signed by all the parties hereto shall be deemed to constitute a complete, executed original for all purposes. 7.11. No Joint Venture, Etc. Neither this Agreement nor any other Operative Document nor any transaction contemplated hereby or thereby shall be construed to (a) constitute a partnership or joint venture between Lessee and any Lessor Party or (b) impose upon any Lessor Party any agency relationship with or fiduciary duty to Lessee. 7.12. Usury Savings Clause. Nothing contained in this Agreement or any other Operative Documents shall be deemed to require the payment of interest or other charges by Lessee in excess of the amount the applicable Lessor Parties may lawfully charge under applicable usury laws. In the event any Lessor Party shall collect monies which are deemed to constitute interest which would increase the effective interest rate to a rate in excess of that 51 52 permitted to be charged by applicable law, all such sums deemed to constitute excess interest shall, upon such determination, at the option of Lessor, be returned to Lessee or credited against other Lessee Obligations. 7.13. Confidentiality. No Lessor Party shall disclose to any Person any information with respect to Lessee or any of its Subsidiaries which is furnished pursuant to this Agreement or under the other Operative Documents, except that any Lessor Party may disclose any such information (a) to its own directors, officers, employees, auditors, counsel and other advisors and to its Affiliates; (b) to any other Lessor Party; (c) which is otherwise available to the public; (d) if required or appropriate in any report, statement or testimony submitted to any Governmental Authority having or claiming to have jurisdiction over such Lessor Party; (e) if required in response to any summons or subpoena; (f) in connection with any enforcement by any Lessor Party of its rights under this Agreement or the other Operative Documents or any litigation among the parties relating to the Operative Documents or the transactions contemplated thereby; (g) to comply with any Requirement of Law applicable to such Lessor Party; (h) to any Assignee Participant or Subparticipant or any prospective Assignee Participant or Subparticipant, provided that such Assignee Participant or Subparticipant or prospective Assignee Participant or Subparticipant agrees to be bound by this Paragraph 7.13; or (i) otherwise with the prior consent of Lessee; provided, however, that (i) any Lessor Party served with any summons or subpoena demanding the disclosure of any such information shall use reasonable efforts to notify Lessee promptly of such summons or subpoena if not prohibited by any Requirement of Law and, if requested by Lessee and not disadvantageous to such Lessor Party, to cooperate with Lessee in obtaining a protective order restricting such disclosure, and (ii) any disclosure made in violation of this Agreement shall not affect the obligations of Lessee and its Subsidiaries under this Agreement and the other Operative Documents. 7.14. Governing Law. Unless otherwise provided in any Operative Document, this Agreement and each of the other Operative Documents shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. [The first signature page follows.] 52 53 IN WITNESS WHEREOF, Lessee, Lessor, the Participants and Agent have caused this Agreement to be executed as of the day and year first above written. LESSEE: SILICON VALLEY GROUP, INC. By: -------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- LESSEE: SILICON VALLEY GROUP, INC. By: -------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- AGENT: KEYBANK NATIONAL ASSOCIATION By: -------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- By: -------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- PARTICIPANTS: KEYBANK NATIONAL ASSOCIATION By: -------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- By: -------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- SELCO SERVICE CORPORATION By: -------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- 53 54 SCHEDULE I PARTICIPANTS PART A TRANCHE PERCENTAGES AND PROPORTIONATE SHARES
TRANCHE A TRANCHE B PROPORTIONATE PARTICIPANT PERCENTAGE PERCENTAGE SHARE ---------- ----------- ---------- ------------- KeyBank National Association 81.49300000% 0% 81.49300000% SELCO Service Corporation 0% 18.50700000% 18.50700000% TOTAL 81.49300000% 18.50700000% 100.00000000%
I-1 55 PART B - ADDRESSES, ETC. KEYBANK NATIONAL ASSOCIATION Applicable Participating Office: KeyBank National Association 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young Tel. No: (206) 684-6085 Fax No: (206) 684-6035 Address for Notices: KeyBank National Association 431 E. Park Center Boulevard Boise, ID 83706 Attn: Vicky Heineck or Margaret Herring Tel. No: (800) 297-5518 Fax No: (800) 297-5495 With a copy to: KeyBank National Association 4 Embarcadero Center, Suite 3660 San Francisco, CA 94111 Attn: Kevin McBride Tel. No: (415) 248-1252 Fax No: (415) 243-1248 Wiring Instructions: KeyBank National Association Seattle, WA NW Region Specialty Services Account #: 01500163 Reference: Silicon Valley Group, Inc. Synthetic Lease I-2 56 SELCO SERVICE CORPORATION Applicable Participating Office: SELCO Service Corporation c/o KeyBank National Association 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young Tel. No: (206) 684-6085 Fax No: (206) 684-6035 Address for Notices: KeyBank National Association 431 E. Park Center Boulevard Boise, ID 83706 Attn: Vicky Heineck or Margaret Herring Tel. No: (800) 297-5518 Fax No: (800) 297-5495 With a copy to: KeyBank National Association 4 Embarcadero Center, Suite 3660 San Francisco, CA 94111 Attn: Kevin McBride Tel. No: (415) 248-1252 Fax No: (415) 243-1248 and KeyCorp Leasing 54 State Street Albany, NY 12201 Attn: Donald Davis Tel. No: (518) 486-8984 Fax. No: (518) 487-4635 Wiring Instructions: KeyBank National Association Seattle, WA NW Region Specialty Services Account #: 01500163 I-3 57 Reference: Silicon Valley Group, Inc. Synthetic Lease I-4 58 II-2 SCHEDULE II PRICING GRID (For LIBOR Rental Rate)
SENIOR DEBT/ PRICING APPLICABLE MARGIN EBITDA PERIOD FOR EBITDA RATIO LEVEL LIBOR RENTAL RATE ------ ----------- ------- ----------------- >/=$150,000,000 1.00, /=1.50, <2.00 4 1.335% >/=2.00 5 1.460%
EXPLANATION 1. The Applicable Margin with respect to the LIBOR Rental Rate will be set for each Pricing Period and will vary depending upon whether such period is a Level 1 Period, a Level 2 Period, a Level 3 Period, a Level 4 Period or a Level 5 Period. 2. The first Pricing Period, which commences on the date of this Agreement and ends on March 31, 2000, will be a Level 5 Period. 3. The second pricing period, which commences on April 1, 2000 and ends on June 30, 2000, will be a Level 1 Period, a Level 2 Period, a Level 3 Period, a Level 4 Period or a Level 5 Period depending upon Lessee's EBITDA and Senior Debt/EBITDA Ratio for the consecutive four-quarter period ending on December 31, 1999. (Lessee's EBITDA is a factor only in determining whether a Pricing Period will be a Level 1 Period or a Level 2 Period when Lessee's Senior Debt/EBITDA is less than 1.00.) 3. Each Pricing Period thereafter will be a Level 1 Period, a Level 2 Period, a Level 3 Period, a Level 4 Period or a Level 5 Period depending upon Lessee's EBITDA and Senior Debt/EBITDA Ratio for the consecutive four-quarter period ending on the last day of the fiscal quarter ending one quarter prior to the first day of such Pricing Period. 4. Examples: II-1 59 (a) Lessee's EBITDA and Senior Debt/EBITDA Ratio for the consecutive four-quarter period ending on March 31, 2000 are $160,000,000 and 0.90, respectively. The Pricing Period of July 1, 2000 through September 30, 2000 will be a Level 1 Period. (b) Lessee's EBITDA and Senior Debt/EBITDA Ratio for the consecutive four-quarter period ending on June 30, 2000 are $149,000,000 and 0.98, respectively. The Pricing Period of October 1, 2000 through December 31, 2000 will be a Level 2 Period. (c) Lessee's EBITDA and Senior Debt/EBITDA Ratio for the consecutive four-quarter period ending on September 30, 2000 are $160,000,000 and 1.35, respectively. The Pricing Period of January 1, 2001 through March 31, 2001 will be a Level 3 Period. II-2 60 SCHEDULE 1.01 DEFINITIONS "ABN Synthetic Lease Facility" shall mean that certain synthetic lease facility entered into on or about December 15, 1998 among Lessee, Lease Plan North America, Inc., the financial institutions from time to time party thereto, and ABN AMRO Bank N.V., as agent for such financial institutions, with respect to the lease by Lessee of certain land and improvements located in San Jose, California. "Accounts" shall mean, with respect to any Person, all accounts receivable owned by such Person including all "accounts" within the meaning of Section 9106 of the UCC, and "Account" shall mean any one of the Accounts. "Acquisition Advance" shall have the meaning given to that term in Subparagraph 2.01(b) of the Participation Agreement. "Acquisition Agreement" shall mean that certain Securities Purchase Agreement, dated April 30, 1999, by and among Lessee and Seller. "Acquisition Charge Cap" shall mean, as of any date of calculation, the lesser of (a) $50,000,000 and (b) an amount equal to five percent (5%) of Lessee's Tangible Net Worth on the last day of the immediately preceding fiscal year. "Acquisition Price" shall mean the total purchase price payable by Lessor for the Property pursuant to the Acquisition Agreement. "Acquisition Request" shall have the meaning given to that term in Paragraph 2.03 of the Participation Agreement. "Adjusted Net Income" shall mean, with respect to Lessee for any period, the sum, determined on a consolidated basis in accordance with GAAP where applicable, of: (a) The net income or net loss of Lessee and its Subsidiaries for such period after provision for income taxes; plus (b) To the extent deducted in calculating such net income or net loss for such period under clause (a) above, all non-recurring, non-cash charges taken by Lessee and its Subsidiaries during such period in connection with acquisitions permitted by Subparagraph 5.02(d) of the Participation Agreement (including charges for the write-off of in-process research and development costs relating to such acquisitions); provided, however, that the sum of all such charges so added to net income or net loss in calculating 1.01(a)-1 61 the Adjusted Net Income of Lessee during the period from the date of the ABN Synthetic Lease Facility through the Scheduled Expiration Date shall not at any time exceed the Acquisition Charge Cap at such time; plus (c) To the extent deducted in calculating such net income or net loss for such period under clause (a) above, all Watkins-Johnson Charges taken by Lessee and its Subsidiaries during such period; provided, however, that the sum of all such charges so added to net income or net loss in calculating the Adjusted Net Income of Lessee during the period from the date of the Credit Agreement through the Scheduled Expiration Date shall not at any time exceed fifteen million Dollars ($15,000,000). "Affiliate" shall mean, with respect to any Person, (a) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, five percent (5%) or more of any class of Equity Securities of such Person, (b) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person or (c) each of such Person's officers, directors, joint venturers and partners; provided, however, that in no case shall Lessor, Agent or any Participant be deemed to be an Affiliate of Lessee or any of its Subsidiaries for purposes of the Operative Documents. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agent" shall mean KeyBank, acting in its capacity as Agent for the Participants under the Operative Documents. "Agent's Structuring Fee Letter" shall mean the letter agreement dated as of April 22, 1999 between Lessee and Agent regarding certain fees payable by Lessee to Agent. "Agent's Structuring Fee" shall have the meaning given to that term in Subparagraph 2.04(a) of the Participation Agreement. "Alternate Rental Rate" shall mean, for any Rental Period (or portion thereof), the per annum rate equal to the Base Rate in effect from time to time during such period plus the Applicable Margin, such rate to change from time during such period as the Base Rate or Applicable Margin shall change. "Applicable Margin" shall mean: (a) With respect to the Outstanding Tranche A Participation Amounts, (i) the per annum rate determined pursuant to the Pricing Grid with respect to the LIBOR Rental Rate or (ii) zero percent (0%) per annum with respect to the Alternate Rental Rate; and (b) With respect to the Outstanding Tranche B Participation Amounts, (i) the per annum rate determined pursuant to the Pricing Grid with respect to the LIBOR Rental 1.01(a)-2 62 Rate plus one quarter of one percent (0.25%) or (ii) one quarter of one percent (0.25%) per annum with respect to the Alternate Rental Rate; provided, however, that each Applicable Margin set forth in subparagraphs (a) and (b) of this definition shall be increased by two percent (2.0%) per annum at the option of Lessor, Agent or Required Lenders on the date an Event of Default occurs and shall continue at such increased rate unless and until such Event of Default is waived in accordance with the Operative Documents. "Applicable Participating Office" shall mean, with respect to any Participant, (a) initially, its office designated as such in Part B of Schedule I (or, in the case of any Participant which becomes a Participant by an assignment pursuant to Subparagraph 7.05(b) of the Participation Agreement, its office designated as such in the applicable Assignment Agreement) and (b) subsequently, such other office or offices as such Participant may designate to Agent as the office at which such Participant's interest in the Lease Agreement will thereafter be maintained and for the account of which all payments of Rent and other amounts payable to such Participant under the Operative Documents will thereafter be made. "Appraisal" shall mean an appraisal of an interest in the Property or a portion thereof in a form satisfactory to Lessor, Agent and the Required Participants, prepared by an independent MAI appraiser that (a) complies with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and all other applicable Governmental Rules and (b) is approved by Lessor, Agent and the Required Participants (at the time such appraiser is selected). "Appurtenant Rights" shall mean all easements and rights-of-way, strips and gores of land, streets, ways, alleys, passages, sewer rights, water, water courses, water rights and powers, air rights and development rights, liberties, tenements, hereditaments and appurtenances of any nature whatsoever, in any way belonging, relating or pertaining to any Land or the Lessor Improvements thereto and the reversions, remainders, and all the estates, rights, titles, interests, property, possession, claim and demand whatsoever, both in law and in equity, of, in and to such Land and Lessor Improvements and every part and parcel thereof, with the appurtenances thereto. "Assignee Participant" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. "Assignee Purchaser" shall have the meaning given to that term in Subparagraph 5.03(b)of the Purchase Agreement. "Assignment" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. "Assignment Agreement" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. 1.01(a)-3 63 "Assignment Effective Date" shall have, with respect to each Assignment Agreement, the meaning set forth therein. "Assignment of Lease" shall have the meaning given to that term in Subparagraph 2.11(b) of the Participation Agreement. "Assignment of Remediation Agreements" shall have the meaning given to that term in Subparagraph 2.11(a) of the Participation Agreement. "Assignor Participant" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. "Base Rate" shall mean, on any day, the greater of (a) the Prime Rate in effect on such date and (b) the Federal Funds Rate for such day plus one-half percent (0.50%). "Base Rent" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Business Day" shall mean any day on which (a) commercial banks are not authorized or required to close in San Francisco, California, Boston, Massachusetts or New York, New York and (b) if such Business Day is related to a LIBOR Rental Rate, dealings in Dollar deposits are carried out in the London interbank market. "Capital Adequacy Requirement" shall have the meaning given to that term in Subparagraph 2.12(d) of the Participation Agreement. "Capital Asset" shall mean, with respect to any Person, any tangible fixed or capital asset owned or, in the case of a Capital Lease or "synthetic" lease, leased by such Person, and any expense incurred by such Person that is required by GAAP to be reported as a non-current asset on such Person's balance sheet. "Capital Expenditures" shall mean, with respect to any Person and any period, all amounts expended by such Person during such period for the acquisition of Capital Assets (including all amounts paid or accrued on Capital Leases and "synthetic" leases and other Indebtedness incurred or assumed to acquire Capital Assets). "Capital Leases" shall mean any and all lease obligations that, in accordance with GAAP, are required to be capitalized on the books of a lessee. "Cash Collateral" shall mean United States Treasury Securities and Deposit Accounts (including without limitation eurodollar deposit accounts) held or maintained by Agent and Participants to the extent such securities and accounts are held and maintained in accordance with the Cash Collateral Agreement and Lessor has a first priority perfected security interest therein securing the Lessee Obligations. "Cash Collateral Agreement" shall have the meaning given to that term in Subparagraph 2.11(a) of the Participation Agreement. 1.01(a)-4 64 "Casualty" shall mean any damage to, destruction of or decrease in the value of all or any portion of any of the Property as a result of fire, flood, earthquake or other natural cause; the actions or inactions of any Person or Persons (whether willful or unintentional and whether or not constituting negligence); or any other cause. "Casualty and Condemnation Proceeds" shall mean all awards, damages, compensation, reimbursement and other payments made or to be made to Lessee, Lessor or Agent from any insurer, Governmental Authority or other Person (other than Lessee or any Lessor Party) on account of any Casualty or Condemnation. "Change of Control" shall mean the occurrence of any of the following events: (a) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall (i) acquire beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of thirty percent (30%) or more of the outstanding Equity Securities of Lessee entitled to vote for members of the board of directors, or (ii) acquire all or substantially all of the assets of Lessee and its Subsidiaries taken as a whole, or (b) during any period of twelve (12) consecutive calendar months, individuals who are directors of Lessee on the first day of such period ("Initial Directors") and any directors of Lessee who are specifically approved by two-thirds of the Initial Directors and previously-approved Directors ("Approved Directors") shall cease to constitute a majority of the Board of Directors of Lessee before the end of such period. "Change of Law" shall have the meaning given to that term in Subparagraph 2.12(b) of the Participation Agreement. "Closing Date" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Closing Date Appraisal" shall mean, with respect to the Property on or as of a recent date prior to the Closing Date, an Appraisal that assesses at such time the Fair Market Value of Lessor's fee interest in the Property on the Closing Date. "Collateral" shall mean the Property Collateral, the Cash Collateral and all other property in which any Lessor Party has a Lien to secure any of the Lessee Obligations. "Commencement Date" shall have the meaning given to that term in Subparagraph 2.02(a) of the Lease Agreement. "Commitment" shall mean, with respect to any Participant at any time, the sum of such Participant's Proportionate Share of the Total Commitment at such time. "Commitment Period" shall have mean the period beginning on the date of this Agreement and ending on the earlier of the Closing Date and the Commitment Termination Date. 1.01(a)-5 65 "Commitment Termination Date" shall have the meaning given to that term in Subparagraph 2.03(b) of the Participation Agreement. "Compliance Certificate" shall have the meaning given to that term in Subparagraph 5.01(a) of the Participation Agreement. "Condemnation" shall mean any condemnation, requisition, confiscation, seizure or other taking or sale of the use, access, occupancy or other right in or to all or any portion of any of the Property (whether wholly or partially, temporarily or permanently), by or on account of any actual or threatened eminent domain proceeding or other taking of action by any Governmental Authority or other Person having the power of eminent domain, including an action by any such Governmental Authority or Person to change the grade of, or widen the streets adjacent to, such Property or alter the pedestrian or vehicular traffic flow to such Property so as to result in change in access to such Property, or by or on account of an eviction by paramount title or any transfer made in lieu of any such proceeding or action. A "Condemnation" shall be deemed to have occurred on the earliest of the dates that use, access, occupancy or other right is taken. "Contingent Obligation" shall mean, with respect to any Person, (a) any Guaranty Obligation of that Person; and (b) any direct or indirect obligation or liability, contingent or otherwise, of that Person (i) in respect of any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments, (ii) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (iii) in respect to any Rate Contract that is not entered into in connection with a bona fide hedging operation that provides offsetting benefits to such Person. The amount of any Contingent Obligation shall (subject, in the case of Guaranty Obligations, to the last sentence of the definition of "Guaranty Obligation") be deemed equal to the maximum reasonably anticipated liability in respect thereof, and shall, with respect to item (b)(iii) of this definition be marked to market on a current basis. "Contractual Obligation" of any Person shall mean, any indenture, note, lease, loan agreement, security, deed of trust, mortgage, security agreement, guaranty, instrument; contract, agreement or other form of contractual obligation or undertaking to which such Person is a party or by which such Person or any of its property is bound. "Credit Agreement" shall mean the Credit Agreement dated as of June 30, 1998 among Lessee, the lending institutions parties thereto and ABN AMRO Bank N.V., as agent for such lending institutions. "Credit Documents" shall mean the Credit Agreement and all other documents, instruments and agreements executed by Lessee and its Subsidiaries in connection therewith. "Credit Event" shall mean the making of the Acquisition Advance or the exercise of the Return Option under the Purchase Agreement. 1.01(a)-6 66 "Default" shall mean any Event of Default under the Lease Agreement or any event or circumstance not yet constituting an Event of Default under the Lease Agreement which, with the giving of any notice or the lapse of any period of time or both, would become an Event of Default under the Lease Agreement. "Defaulting Participant" shall mean a Participant which has failed to fund its portion of the Acquisition Advance which it is required to fund under the Participation Agreement and has continued in such failure for one (1) Business Day after written notice from Agent. "Deficiency" shall have the meaning given to that term in Subparagraph 3.03(a) of the Purchase Agreement. "Deposit Accounts" shall have the meaning given to that term in Subparagraph 2.01(a) of the Cash Collateral Agreement. "Depositary Bank" shall have the meaning given to that term in Paragraph 2.02 of the Cash Collateral Agreement. "Designated Purchaser" shall have the meaning given to that term in Subparagraph 3.02(b) of the Purchase Agreement. "Disclosure Letter" shall mean the letter dated June 30, 1999 delivered by Lessee to Agent pursuant to Schedule 3.01 of the Participation Agreement, which letter is identified as the "Disclosure Letter". "Dollars" and "$" shall mean the lawful currency of the United States of America and, in relation to any payment under the Operative Documents, same day or immediately available funds. "EBITDA" shall mean, with respect to Lessee for any period, the sum, determined on a consolidated basis in accordance with GAAP, of the following: (a) The net income or net loss of Lessee for such period before provision for income taxes; plus (b) To the extent deducted in calculating such net income or net loss for such period under clause (a) above, the sum of (i) all Interest Expenses of Lessee and its Subsidiaries accruing during such period and (ii) all depreciation and amortization expenses of Lessee and its Subsidiaries accruing during such period; minus (c) To the extent added in calculating such net income or net loss for such period under clause (a) above, all interest income of Lessee and its Subsidiaries accruing during such period; 1.01(a)-7 67 plus (d) To the extent deducted in calculating such net income or net loss for such period under clause (a) above, all non-recurring, non-cash charges taken by Lessee and its Subsidiaries during such period in connection with acquisitions permitted by Subparagraph 5.02(d) of the Participation Agreement (including charges for the write-off of in-process research and development costs relating to such acquisitions); provided, however, that the sum of all such charges so added to net income or net loss in calculating the EBITDA of Lessee during the period from the date of the Credit Agreement through the Scheduled Expiration Date shall not at any time exceed the Acquisition Charge Cap at such time; plus (e) For the purposes of calculating the Fixed Charge Coverage Ratio of Lessee for any period only, to the extent deducted in calculating such net income or net loss for such period under clause (a) above, all Watkins-Johnson Charges taken by Lessee and its Subsidiaries during such period; provided, however, that the sum of all such charges so added to net income or net loss in calculating the EBITDA of Lessee during the period from the date of the Credit Agreement through the Scheduled Expiration Date shall not at any time exceed fifteen million Dollars ($15,000,000). "Eligible Assignee" shall mean (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $250,000,000; (b) a commercial bank organized under the laws of any other country or a political subdivision thereof and having a combined capital and surplus of at least $250,000,000, provided that such bank is acting through a branch or agency located in the United States; or (c) a Person that is (i) a Subsidiary of a Participant, (ii) a Subsidiary of a Person of which a Participant is a Subsidiary, or (iii) a Person of which a Participant is a Subsidiary. "Employee Benefit Plan" shall mean any employee benefit plan within the meaning of section 3(3) of ERISA maintained of contributed to by Lessee or any ERISA Affiliate, other than a Multiemployer Plan. "Environmental Laws" shall mean the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq.; the Comprehensive Environment Response, Compensation and Liability Act of 1980 (including the Superfund Amendments and Reauthorization Act of 1986, "CERCLA"), 42 U.S.C. Section 9601 et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Occupational Safety and Health Act, 29 U.S.C. Section 651; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq.; the Mine Safety and Health Act of 1977, 30 U.S.C. Section 801 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; and all other Governmental Rules relating to the protection of human health and the environment, including all Governmental Rules pertaining to the reporting, licensing, permitting, transportation, storage, disposal, investigation, or remediation of emissions, discharges, releases, or threatened releases of 1.01(a)-8 68 Hazardous Materials into the air, surface water, groundwater, or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, or handling of Hazardous Materials. "Environmental Reports" shall have the meaning given to that term in Schedule 3.01 of the Participation Agreement. "Equity Securities" of any Person shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, modified, codified or reenacted from time to time and in effect at any given time. "ERISA Affiliate" shall mean any Person which is treated as a single employer with Lessee under Section 414 of the IRC. "Escrow Agreement" shall mean that certain Escrow Agreement, dated as of June 30, 1999, by and among Lessee, Seller, the Remediator and Norwest Bank of Colorado, N.A. pursuant to which the funds to be paid to the Remediator in connection with the Fixed Price Remediation Agreement shall be held in an escrow account and disbursed to the Remediator in accordance with the Fixed Price Remediation Agreement. "Event of Default" shall have the meaning given to that term in Paragraph 5.01 of the Lease Agreement. "Expiration Date" shall mean the earlier of (a) the Scheduled Expiration Date under the Lease Agreement, as such date may be extended pursuant to this Agreement, and (b) the Termination Date, if the Lease Agreement is terminated pursuant to Subparagraph 5.03(a) of the Lease Agreement or all Lessee Obligations are declared due pursuant to Subparagraph 5.04(a) of the Lease Agreement prior to the Scheduled Expiration Date in accordance with the terms of the Lease Agreement. "Expiration Date Appraisal" shall mean, with respect to the Property at any time, an Appraisal that assesses at such time the Fair Market Value of Lessor's fee interest in the Property on the Scheduled Expiration Date. "Expiration Date Purchase Option" shall have the meaning given to that term in Subparagraph 3.01(b) of the Purchase Agreement. "Fair Market Value" shall mean, with respect to any of the Property or any portion thereof, the maximum reasonable amount (not less than zero) that would be paid in cash in an arm's-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, for the ownership of the Property or such portion. 1.01(a)-9 69 "FASB 13" shall mean Financial Accounting Standards Board Statement No. 13. "Federal Funds Rate" shall mean, for any day, the rate per annum set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Board (including any such successor publication, "H.15 (519)") for such day opposite the caption "Federal Funds (Effective)". If on any relevant day, such rate is not yet published in H.15 (519), the rate for such day shall be the rate set forth in the daily statistical release designated as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any successor publication, published by the Federal Reserve Bank of New York (including any such successor publication, the "Composite 3:30 p.m. Quotations") for such day under the caption "Federal Funds Effective Rate". If on any relevant day, such rate is not yet published in either H.15 (519) or the Composite 3:30 p.m. Quotations, the rate for such day shall be the arithmetic means, as determined by Agent, of the rates quoted to Agent for such day by three (3) Federal funds brokers of recognized standing selected by Agent. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System. "Financial Statements" shall mean, with respect to any accounting period for any Person, statements of income, shareholders' equity and cash flows of such Person for such period, and a balance sheet of such Person as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year if such period is less than a full fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding annual audit, all prepared in reasonable detail and in accordance with GAAP. "Fixed Charge Coverage Ratio" shall mean, with respect to Lessee for any period, the ratio, determined on a consolidated basis in accordance with GAAP, of: (a) The sum of (i) Lessee's EBITDA for such period plus (ii) to the extent deducted in calculating such EBITDA for such period, all operating lease and "synthetic" lease payments of Lessee and its Subsidiaries for such period; to (b) The sum of (i) to the extent deducted in calculating such EBITDA for such period, all Interest Expenses of Lessee and its Subsidiaries for such period, plus (ii) to the extent deducted in calculating such EBITDA for such period, all operating lease and "synthetic" lease payments of Lessee and its Subsidiaries for such period, plus (iii) the aggregate principal amount of all long-term Indebtedness of Lessee and its Subsidiaries that matures during the consecutive four-quarter period immediately following such period, plus (iv) twenty percent (20%) of the Outstanding Revolver Credit on the last day of such period; Provided, however, that that, in calculating Lessee's Fixed Charge Coverage Ratio for the consecutive two-quarter period ending on October 1, 1999 and the consecutive three-quarter 1.01(a)-10 70 period ending on December 31, 1999, the amounts to be used in clauses (a)(i), (a)(ii), (b)(i) and (b)(ii) shall be the actual respective amounts for such periods annualized. "Fixed Price Remediation Agreement" shall mean that certain Guaranteed Fixed Price Remediation Agreement, dated as of June 30, 1999, by and among Lessee, Seller and the Remediator pursuant to which, inter alia, the Remediator has agreed to remediate the Property. "GAAP" shall mean generally accepted accounting principles and practices as in effect in the United States of America from time to time, consistently applied. "Governmental Authority" shall mean any domestic or foreign national, state or local government, any political subdivision thereof, any department, agency, authority or bureau of any of the foregoing, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Comptroller of the Currency, any central bank or any comparable authority. "Governmental Charges" shall mean, with respect to any Person, all levies, assessments, fees, claims or other charges imposed by any Governmental Authority upon such Person or any of its property or otherwise payable by such Person. "Governmental Rule" shall mean any law, rule, regulation, ordinance, order, code, interpretation, judgment, decree, directive, guidelines, policy or similar form of decision of any Governmental Authority. "Guaranty Obligation" shall mean, with respect to any Person, any direct or indirect liability of that Person with respect to any indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person, whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Guaranty Obligation shall be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof. "Hazardous Materials" shall mean all pollutants, contaminants and other materials, substances and wastes which are hazardous, toxic, caustic, harmful or dangerous to human health or the environment, including petroleum and petroleum products and byproducts, radioactive materials, asbestos, polychlorinated biphenyls and all materials, substances and wastes which are 1.01(a)-11 71 classified or regulated as "hazardous," "toxic" or similar descriptions under any Environmental Law. "Improvements" shall mean all buildings, structures, facilities, fixtures and other improvements of every kind and description now or hereafter located on any of the Land, including (a) all parking areas, roads, driveways, walks, fences, walls, drainage facilities and other site improvements; and (b) all water, sanitary and storm sewer, drainage, electricity, steam, gas, telephone and other utility equipment and facilities, all plumbing, lighting, heating, ventilating, air-conditioning, refrigerating, incinerating, compacting, fire protection and sprinkler, surveillance and security, public address and communications equipment and systems, partitions, elevators, escalators, motors, machinery, pipes, fittings and other items of equipment of every kind and description now or hereafter located on such Land or attached to the Improvements thereto which by the nature of their location thereon or attachment thereto are real property under applicable law. "Indebtedness" of any Person shall mean, without duplication: (a) All obligations of such Person evidenced by notes, bonds, debentures or other similar instruments and all other obligations of such Person for borrowed money (including obligations to repurchase receivables and other assets sold with recourse); (b) All obligations of such Person for the deferred purchase price of property or services (including obligations under letters of credit and other credit facilities which secure or finance such purchase price and the Lessee Obligations and obligations under other "synthetic" leases); (c) All obligations of such Person under conditional sale or other title retention agreements with respect to property acquired by such Person (to the extent of the value of such property if the rights and remedies of the seller or lender under such agreement in the event of default are limited solely to repossession or sale of such property); (d) All obligations of such Person as lessee under or with respect to Capital Leases; (e) All obligations of such Person, contingent or otherwise, under or with respect to Surety Instruments; (f) All obligations of such Person, contingent or otherwise, under or with respect to Rate Contracts; (g) All Guaranty Obligations of such Person with respect to the obligations of other Persons of the types described in clauses (a) - (f) above and all other Contingent Obligations of such Person; and 1.01(a)-12 72 (h) All obligations of other Persons of the types described in clauses (a) - (f) above to the extent secured by (or for which any holder of such obligations has an existing right, contingent or otherwise, to be secured by) any Lien in any property (including accounts and contract rights) of such Person, even though such Person has not assumed or become liable for the payment of such obligations. "Indemnified Taxes" shall mean all income taxes, stamp taxes, sales taxes, use taxes, rental taxes, gross receipts taxes, property (tangible and intangible) taxes, franchise taxes, excise taxes, value added taxes, turnover taxes, withholding taxes and other taxes and Governmental Charges, together with any and all assessments, penalties, fines, additions and interest thereon, except: (a) Any tax based on or measured by net income or net receipts (including taxes based on capital gains, minimum taxes and franchise taxes in lieu of net income taxes) imposed on any Lessor Party by its jurisdiction of incorporation or, in the case of any Participant, the jurisdiction in which its Applicable Participating Office is located (provided, however, that this definition shall not be construed to prevent a payment from being made on an after-tax basis); (b) Any tax or other Governmental Charge that has not become a Lien on any of the Property and that Lessee is contesting pursuant to Paragraph 3.12 of the Lease Agreement (but only while Lessee is so contesting such tax or Governmental Charge); (c) Any tax or other Governmental Charge that is imposed upon an Indemnitee primarily as a result of the gross negligence or willful misconduct of such Indemnitee itself (as opposed to gross negligence or willful misconduct imputed to such Indemnitee), but not taxes or other Governmental Charges imposed as a result of ordinary negligence of such Indemnitee (d) Any tax or other Governmental Charge to the extent it relates to any act, event or omission that occurs with respect to the Property after the termination of the Lease Agreement, redelivery or sale of the Property in accordance with the terms of the Operative Documents and payment by Lessee of all amounts due under the Operative Documents, unless and to the extent such tax or Governmental Charge is attributable to actions, omissions or events occurring in connection with the exercise of remedies following an Event of Default; provided, that this exclusion shall not apply to taxes or Governmental Charges that are related to or arising from payments made under the Operative Documents, or events, acts or omissions occurring or matters arising prior to or simultaneous with the time set forth above; or (e) Any tax which is a withholding tax if such tax is imposed in respect of payments to a Lessor Party that is required to deliver a United States Internal Revenue Service Form 1001 or 4224 if such form is not effective to entitle such Lessor Party to receive payment under the Operative Documents without deduction or withholding of United States federal income tax as a result of an act or omission of such Lessor Party. 1.01(a)-13 73 "Indemnitees" shall mean the Lessor Parties and their Affiliates and their respective directors, officers, employees, agents, attorneys and advisors. "Indemnity Amount" shall have the meaning given to that term in Subparagraph 3.03(a) of the Purchase Agreement. "Insurance Requirements" shall mean all terms, conditions and requirements imposed by the policies of insurance which Lessee is required to maintain by the Operative Documents. "Interest Expenses" shall mean, with respect to Lessee and its Subsidiaries for any period, the sum, determined on a consolidated basis in accordance with GAAP, of (a) all interest (including Base Rent) accrued on the Indebtedness of Lessee and its Subsidiaries during such period (including interest attributable to Capital Leases and imputed interest on zero-coupon, original issue discount and other similar instruments) and (b) all letter of credit fees payable by Lessee and its Subsidiaries accrued during such period. "Investment" of any Person shall mean any loan or advance of funds by such Person to any other Person (other than advances to employees of such Person for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business), any purchase or other acquisition of any Equity Securities or Indebtedness of any other Person, any capital contribution by such Person to or any other investment by such Person in any other Person; provided, however, that Investments shall not include (a) accounts receivable or other indebtedness owed by customers of such Person which are current assets and arose from sales of inventory in the ordinary course of such Person's business or (b) prepaid expenses of such Person incurred and prepaid in the ordinary course of business. "IRC" shall mean the Internal Revenue Code of 1986. "Issues and Profits" shall mean all present and future rents, royalties, issues, profits, receipts, revenues, income, earnings and other benefits accruing from any of the Land, Lessor Improvements or Appurtenant Rights (whether in the form of accounts, chattel paper, instruments, documents, investment property, general intangibles or otherwise) including all rents and other amounts payable pursuant to any Subleases, but excluding revenues to the extent received by Lessee as a result of its occupation of the Property and conduct of its business thereon. "KeyBank" shall mean KeyBank National Association. "Land" shall mean all lots, pieces, tracts or parcels of land described in Exhibit A to the Lease Agreement and leased by Lessee pursuant to the Lease Agreement. "Lease Agreement" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Lease Extension Request" shall have the meaning given to that term in Paragraph 2.09 of the Participation Agreement. 1.01(a)-14 74 "Lease Reduction Payments" shall mean each of the following to the extent applied to reduce the Outstanding Lease Amount pursuant to the Operative Documents: (a) Casualty and Condemnation Proceeds; (b) The purchase price paid for the Property (or any portion thereof) by Lessee, an Assignee Purchaser or a Designated Purchaser pursuant to the Purchase Agreement; (c) The Residual Value Guaranty Amount and the Indemnity Amount, paid by Lessee pursuant to the Purchase Agreement; (d) Any proceeds received by Lessee from any sale of the Property after the Expiration Date if such Property is retained by Lessor after such Expiration Date pursuant to the Purchase Agreement; (e) Any proceeds received by any Lessor Party from the exercise of any of its remedies under the Operative Documents after the occurrence of an Event of Default under the Lease Agreement; and (f) Any other amounts received by any Lessor Party which are applied or required by the Operative Documents to be applied to reduce the Outstanding Lease Amount. "Lessee" shall mean Silicon Valley Group, Inc., acting in its capacity as Lessee under the Operative Documents. "Lessee Improvements" shall mean all alterations, renovations, improvements and additions to the Property, and all substitutions and replacements therefor, not financed by the Acquisition Advance and not made part of the Lessor Improvements. "Lessee Obligations" shall mean and include all liabilities and obligations owed by Lessee to any Lessor Party under any of the Operative Documents (including, without limitation, the Synthetic Lease Swap Agreement) of every kind and description and however arising (whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising), including the obligation of Lessee to pay Rent, to pay the Residual Value Guaranty Amount, the Indemnity Amount and/or Outstanding Lease Amount and to pay all interest, fees, charges, expenses, attorneys' fees and accountants' fees chargeable to Lessee or payable by Lessee under the Operative Documents. "Lessee Property" shall have the meaning given to that term in Subparagraph 3.10(b) of the Lease Agreement. "Lessee Security Documents" shall mean and include the Lease Agreement, the Assignment of Remediation Agreements, the Cash Collateral Agreement and all other instruments, agreements, certificates, opinions and documents (including Uniform Commercial 1.01(a)-15 75 Code financing statements and fixture filings and landlord waivers) delivered by Lessee to any Lessor Party in connection with any Collateral or to secure the Lessee Obligations. "Lessor" shall mean SELCO Service Corporation, acting in its capacity as Lessor under the Operative Documents. "Lessor Deed of Trust" shall have the meaning given to that term in Subparagraph 2.11(b) of the Participation Agreement. "Lessor Improvements" shall mean all Improvements, other than Lessee Improvements, and all Modifications, except that (a) any Modifications removed from the Property prior to the Expiration Date in accordance with Paragraph 3.10 of the Lease Agreement shall cease to be Lessor Improvements and (b) any Lessee Improvements not removed from the Property prior to the Expiration Date in accordance with Paragraph 3.10 of the Lease Agreement shall, if Lessor shall so elect in accordance with such subparagraph, become Lessor Improvements. "Lessor/Lessee Deed of Trust" shall have the meaning given to that term in Subparagraph 2.11(c) of the Participation Agreement. "Lessor Liens" shall mean any Liens or other interests in any of the Property of any Person other than Lessee or a Lessor Party arising as a result of (a) any transfer or assignment by a Lessor Party to such Person of any of such Lessor Party's interests in such Property in violation of any of the Operative Documents or (b) any claim against a Lessor Party by any such Person unrelated to any of the Operative Documents or the transactions contemplated thereby. (Lessor Liens shall include Liens granted by Lessor to Agent or any Participant to secure the Lessor Obligations.) "Lessor Obligations" shall mean and include (a) with respect to Agent and the Participants, all liabilities and obligations owed by Lessor to Agent or any Participant under any of the Operative Documents of every kind and description and however arising (whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising), including the obligation of Lessor to share payments made by Lessee to Lessor under the Operative Documents as provided in Paragraph 2.06 of the Participation Agreement and (b) with respect to Lessee, all liabilities and obligations owed by Lessor to Lessee under any of the Operative Documents of every kind and description and however arising (whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising), including the obligation of Lessor to sell and convey the Property to Lessee pursuant to the Purchase Agreement. "Lessor Parties" shall mean Lessor, the Participants and Agent. "Lessor Security Agreement" shall have the meaning given to that term in Subparagraph 2.11(b) of the Participation Agreement. "Lessor's Retention Amount" shall have the meaning given to that term in Subparagraph 3.03(b) of the Purchase Agreement. 1.01(a)-16 76 "Leverage Ratio" shall mean, with respect to Lessee at any time, the ratio, determined on a consolidated basis in accordance with GAAP, of (a) the Senior Indebtedness of Lessee and its Subsidiaries at such time to (b) the Total Capital of Lessee and its Subsidiaries at such time. "LIBO Rate" shall mean, with respect to any Rental Period for a Portion, a rate per annum equal to the quotient (rounded upward if necessary to the nearest 1/100 of one percent) of (a) the arithmetic mean (rounded upward if necessary to the nearest 1/16 of one percent) of the rates per annum appearing on the Telerate Page 3750 (or any successor publication) on the second Business Day prior to the first day of such Rental Period at or about 11:00 A.M. (London time) (for delivery on the first day of such Rental Period) for a term comparable to such Rental Period, divided by (b) one minus the Reserve Requirement in effect from time to time. If for any reason rates are not available as provided in clause (a) of the preceding sentence, the rate to be used in clause (a) shall be the rate per annum at which Dollar deposits are offered to Agent in the London interbank eurodollar currency market on the second Business Day prior to the first day of such Rental Period at or about 10:00 A.M. (New York time) (for delivery on the first day of such Rental Period) in an amount substantially equal to Agent's Proportionate Share of the applicable Portion and for a term comparable to such Rental Period. The LIBO Rate shall be adjusted automatically as of the effective date of any change in the Reserve Requirement. "LIBOR Rental Rate" shall mean, for any Rental Period and Portion, the per annum rate equal to the LIBO Rate for such Rental Period and Portion, plus the Applicable Margin, such rate to change from time to time during such period as the Applicable Margin shall change. "Lien" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, Capital Lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. "Major Casualty" shall mean, with respect to the Property, any Casualty affecting the Property where (a) the damage to the Property is treated by any insurer of the Property as a total loss; or (b) the Property cannot reasonably be repaired and restored prior to the expiration of the Term of the Lease to substantially the condition in which it existed immediately prior to such Casualty. "Major Condemnation" shall mean, with respect to the Property, any Condemnation affecting the Property where (a) all or substantially all of the Property is taken by such Condemnation; or (b) the Property cannot reasonably be repaired and restored prior to the expiration of the Term of the Lease to a value that is not less than the Expiration Date Appraisal. "Margin Stock" shall have the meaning given to that term in Regulation U issued by the Federal Reserve Board. "Marketing Period" shall have the meaning given to that term in Subparagraph 3.02(a) of the Purchase Agreement. 1.01(a)-17 77 "Material Adverse Effect" shall mean a material adverse effect on (a) the business, assets, operations, prospects or financial or other condition of Lessee and its Subsidiaries, taken as a whole; (b) the ability of Lessee to pay or perform the Lessee Obligations when due in accordance with the terms of the Operative Documents; (c) the rights and remedies of any Lessor Party under the Operative Documents or any related document, instrument or agreement; (d) the perfection or the priority of any Lessor Party's security interests, Liens or other rights in the Property and the Collateral; or (e) the value of the Property and the Collateral. "Material Subsidiary" shall mean SVGL, SVGIS, Tinsley, and any other Subsidiary which at any time has assets with a book value equal to or greater than ten percent (10%) of the total consolidated assets of Lessee and its Subsidiaries and any Subsidiary which owns more than ten percent (10%) of the capital stock of any Material Subsidiary. "maturity" shall mean, with respect to any Rent, interest, fee or other amount payable by Lessee under the Operative Documents, the date such Rent, interest, fee or other amount becomes due, whether upon the stated maturity or due date, upon acceleration or otherwise. "Modifications" shall have the meaning given to that term in Subparagraph 3.01(b) of the Lease Agreement. "Multiemployer Plan" shall mean any multiemployer plan within the meaning of Section 3(37) of ERISA maintained or contributed to by Lessee or any ERISA Affiliate. "Net Proceeds" shall mean, with respect to any issuance of Equity Securities by Lessee or any of its Subsidiaries, the aggregate consideration received by Lessee or such Subsidiary from such issuance less the sum of the actual amount of the reasonable fees and commissions payable to Persons other than Lessee or any Affiliate of Lessee and the other reasonable costs and expenses (including reasonable legal expenses) directly related to such issuance that are to be paid by Lessee or any of its Subsidiaries. "Net Proceeds of Sale" shall mean, with respect to a sale of the Property by Lessor to a Designated Purchaser pursuant to Paragraph 3.02 of the Purchase Agreement, the net amount of the proceeds of the sale of the Property, after deducting from the gross proceeds of such sale (a) all sales taxes and other taxes as may be applicable to such sale or transfer of the Property, (b) all fees, costs and expenses of such sale incurred by Lessor and (c) any amounts for which, if not paid, Lessor would be liable or which, if not paid, would constitute a Lien on the Property. "Notice of Rental Period Selection" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Notice of Return Option Exercise" shall have the meaning given to that term in Subparagraph 3.01(a) of the Purchase Agreement. "Notice of Security Interest" shall have the meaning given to that term in Subparagraph 2.01(a) of the Cash Collateral Agreement. 1.01(a)-18 78 "Notice of Term Purchase Option Exercise" shall have the meaning given to that term in Paragraph 2.02 of the Purchase Agreement. "Operative Documents" shall mean and include the Participation Agreement, the Lease Agreement, the Purchase Agreement, the Lessee Security Documents, the Lessor Deed of Trust, the Lessor Security Agreement, the Assignment of Lease, the Agent's Structuring Fee Letter and the Synthetic Lease Swap Agreement; all other notices, requests, certificates, documents, instruments and agreements delivered to any Lessor Party pursuant to Paragraph 3.01 of the Participation Agreement; and all notices, requests, certificates, documents, instruments and agreements executed by Lessee and delivered to any Lessor Party in connection with any of the foregoing on or after the date of the Participation Agreement. (Without limiting the generality of the preceding definition, the term "Operative Documents" shall include all written waivers, amendments and modifications to any of the notices, requests, certificates, documents, instruments and agreements referred to therein.) "Outstanding Lease Amount" shall mean, on any date, the remainder of (a) the amount of the Acquisition Advance, minus (b) the sum of all Lease Reduction Payments applied on or prior to such date. "Outstanding Participation Amount" shall mean, with respect to any Participant on any date, the remainder of (a) the portion of the Acquisition Advance funded by such Participant on or prior to such date, minus (b) the sum of such Participant's share of all Lease Reduction Payments applied to the Outstanding Lease Amount on or prior to such date. "Outstanding Revolver Credit" shall mean, at any time, the sum of (a) the aggregate principal amount of all loans outstanding at such time under the Credit Agreement, (b) the aggregate amount available for drawing under all letters of credit outstanding at such time under the Credit Agreement and (c) the aggregate amount of all reimbursement obligation outstanding at such time under the Credit Agreement. "Outstanding Tranche A Participation Amount" shall mean, with respect to any Tranche A Participant on any date, the remainder of (a) such Participant's Tranche A Portion of the Acquisition Advance made by Lessor on or prior to such date, minus (b) such Participant's share of all Lease Reduction Payments applied to the Tranche A Portion of the Acquisition Advance on or prior to such date. "Outstanding Tranche B Participation Amount" shall mean, with respect to any Tranche B Participant on any date, the remainder of (a) such Participant's Tranche B Portion of the Acquisition Advance made by Lessor on or prior to such date, minus (b) such Participant's share of all Lease Reduction Payments applied to the Tranche B Portion of the Acquisition Advance on or prior to such date. "Participants" shall mean the financial institutions from time to time listed in Schedule I to the Participation Agreement (as amended from time to time pursuant to Subparagraph 7.05(b) of the Participation Agreement), acting in their capacities as Participants under the Operative Documents. 1.01(a)-19 79 "Participation Agreement" shall mean the Participation Agreement, dated as of June 30, 1999 among Lessee and the Lessor Parties. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Permitted Indebtedness" shall have the meaning given to that term in Subparagraph 5.02(a) of the Participation Agreement. "Permitted Liens" shall have the meaning given to that term in Subparagraph 5.02(b) of the Participation Agreement. "Permitted Property Liens" shall have the meaning given to that term in Subparagraph 3.07(a) of the Lease Agreement. "Permitted Transaction Expenses" shall mean the following costs and expenses to the extent payable by Lessee in connection with and directly related to the preparation, execution and delivery of the Operative Documents and the transactions contemplated thereby: (a) The reasonable fees and expenses of counsel for each of Lessor and Agent incurred in connection with the Operative Documents; (b) The reasonable fees and expenses incurred in recording, registering or filing any of the Operative Documents; (c) The title fees, premiums and escrow costs and other expenses relating to title insurance and the closing of the transactions contemplated by the Operative Documents; (d) The reasonable fees and expenses of required environmental audits; and (e) The reasonable fees and expenses for surveys and appraisals. "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, an unincorporated association, a limited liability company, a joint venture, a trust or other entity or a Governmental Authority. "Personal Property Collateral" shall have the meaning given to that term in Subparagraph 2.07(b) of the Lease Agreement. "Portion" shall mean a portion of the Outstanding Lease Amount. If, at any time, Lessee has not elected to divide the Outstanding Lease Amount into two or more portions, any reference to a Portion shall mean the total Outstanding Lease Amount at such time. "Pricing Grid" shall mean Schedule II to the Participation Agreement. "Pricing Period" shall mean (a) the period commencing on the date of this Agreement (i.e., June 30, 1999) and ending on September 30, 1999 and (b) each consecutive three-calendar 1.01(a)-20 80 month period thereafter which commences on the day following the last day of the immediately preceding three-calendar month period and ends on the last day of that time period. "Prime Rate" shall mean the per annum rate publicly announced by KeyBank from time to time at its office in Cleveland, Ohio as its "prime rate." The Prime Rate is determined by KeyBank from time to time as a means of pricing credit extensions to some customers and is neither directly tied to any external rate of interest or index nor necessarily the lowest rate of interest charged by KeyBank at any given time for any particular class of customers or credit extensions. Any change in the Base Rate resulting from a change in the Prime Rate shall become effective on the Business Day on which each change in the Prime Rate occurs. "Property" shall have the meaning given to that term in Paragraph 2.01 of the Lease Agreement. "Property Collateral" shall have the meaning given to that term in Subparagraph 2.11(a) of the Participation Agreement. "Proportionate Share" shall mean, with respect to each Participant, the percentage set forth under the caption "Proportionate Share" opposite such Participant's name in Part A of Schedule I or, if changed, such percentage as may be set forth for such Participant in the Register. The Proportionate Share of each Participant shall equal the sum of such Participant's Tranche A and Tranche B Percentage. "Purchase Agreement" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Purchase Documents" shall have the meaning given to that term in Subparagraph 4.01(a) of the Purchase Agreement. "Purchaser" shall have the meaning given to that term in Subparagraph 4.01(b) of the Purchase Agreement. "Quick Ratio" shall mean, with respect to Lessee at any time, the ratio, determined on a consolidated basis in accordance with GAAP, of: (a) The remainder at such time of (i) the sum of (A) all cash of Lessee and its Subsidiaries, (B) the current market value of all cash equivalents of Lessee and its Subsidiaries and (C) all accounts receivable of Lessee and its Subsidiaries (net of all reserves therefor) minus (ii) to the extent included in the foregoing sum, the sum of all cash, cash equivalents and accounts receivable of Lessee and its Subsidiaries that are subject to a Lien or otherwise restricted; to 1.01(a)-21 81 (b) The sum at such time of (i) the current liabilities of Lessee and its Subsidiaries and (ii) to the extent not included in such current liabilities, the Outstanding Revolver Credit at such time. "Rate Contracts" shall mean swap agreements (as that term is defined in Section 101 of the Federal Bankruptcy Reform Act of 1978, as amended) and any other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates, including without limitation, the Synthetic Lease Swap Agreement. "Real Property Collateral" shall have the meaning given to that term in Subparagraph 2.07(a) of the Lease Agreement. "Register" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. "Related Agreements" shall mean all chattel paper, accounts, instruments, documents, investment property and general intangibles relating to any of the Land, Lessor Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of any of the Land, Lessor Improvements or Appurtenant Rights, including (a) all plans, specifications, construction agreements, maps, surveys, studies, books of account, records, files, insurance policies, guarantees and warranties relating to such Land or Lessor Improvements or to the present or future development, construction, operation or use of such Land, Lessor Improvements or Appurtenant Rights; (b) all architectural, engineering, construction and management contracts, all supply and service contracts for water, sanitary and storm sewer, drainage, electricity, steam, gas, telephone and other utilities relating to such Land, Lessor Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of such Land, Lessor Improvements or Appurtenant Rights; and (c) all computer software and intellectual property, guaranties and warranties, letters of credit, and documents relating to such Land, Lessor Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of such Land, Lessor Improvements or Appurtenant Rights. "Related Goods" shall mean: (a) All machinery, furniture, equipment, fixtures and other goods and tangible personal property (including construction materials and supplies) financed by the Acquisition Advance, including all such property (if any) described in Exhibit B to the Lease Agreement; and (b) All machinery, equipment, fixtures and other goods and tangible personal property (including construction materials and supplies) hereafter made part of the Lessor Improvements or other Property, except that any Related Goods removed from the Property prior to the Expiration Date in accordance with Paragraph 3.10 of the Lease Agreement shall cease to be Lessor Improvements. 1.01(a)-22 82 "Related Permits" shall mean all licenses, authorizations, certificates, variances, consents, approvals and other permits, now or hereafter pertaining to any of the Land, Lessor Improvements or Appurtenant Rights and all tradenames or business names primarily relating to any of the Land, Lessor Improvements or Appurtenant Rights or the present or future development, construction, operation or use of any of the Land, Lessor Improvements or Appurtenant Rights, but shall not include any of the foregoing if primarily related to the conduct by an occupant of the Property of its business. "Remediation Agreements" shall have the meaning given to that term in the Paragraph 2.01 of the Assignment of Remediation Agreements. "Remediator" shall mean ARCADIS Geraghty & Miller, Inc., a Delaware corporation. "Rent" shall mean collectively Base Rent and Supplemental Rent. "Rental Periods" shall mean (a) with respect to the entire Outstanding Lease Amount, the initial period that begins on the Commencement Date for the Lease Agreement and ends on the first Business Day in the first calendar month immediately following the month in which the Commencement Date occurs; and (b) With respect to any Portion of the Outstanding Lease Amount thereafter, the time period selected by Lessee for such Portion pursuant to Subparagraph 2.03(a) of the Lease Agreement which commences on the first day of such Portion and ends on the last day of the period so selected by Lessee and each subsequent time period selected by Lessee pursuant to Subparagraph 2.03(a) of the Lease Agreement. Each Rental Period shall commence on the last day of the immediately preceding Rental Period. "Rental Rate" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Repair and Restoration Account" shall have the meaning given to that term in Subparagraph 3.04(c) of the Lease Agreement. "Reportable Event" shall have the meaning given to that term in ERISA and applicable regulations thereunder. "Required Participants" shall mean, at any time, Participants whose Proportionate Shares then equal or exceed sixty-six and two-thirds percent (66 2/3%), except at any time any Participant is a Defaulting Participant. At any time any Participant is a Defaulting Participant, all Defaulting Participants shall be excluded in determining "Required Participants", and "Required Participants" shall mean non-defaulting Participants having total Commitments that then equal or exceed sixty-six and two-thirds percent (66 2/3%) of the total Commitments of all non-defaulting Participants. "Requirement of Law" applicable to any Person shall mean (a) the Articles or Certificate of Incorporation and By-laws, Partnership Agreement or other organizational or governing documents of such Person, (b) any Governmental Rule applicable to such Person, (c) any license, permit, approval or other authorization granted by any Governmental Authority to or for the 1.01(a)-23 83 benefit of such Person or (d) any judgment, decision or determination of any Governmental Authority or arbitrator, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Reserve Requirement" shall mean, with respect to any day in any Rental Period, the aggregate of the reserve requirement rates (expressed as a decimal) in effect on such day for eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of the Federal Reserve Board) maintained by a member bank of the Federal Reserve System. As used herein, the term "reserve requirement" shall include, without limitation, any basic, supplemental or emergency reserve requirements imposed on any Participant by any Governmental Authority. (As of the Closing Date, the Reserve Requirement is zero percent (0%).) "Residual Value Guaranty Amount" shall have the meaning given to that term in Subparagraph 3.03(a) of the Purchase Agreement. "Return Option" shall have the meaning given to that term in Subparagraph 3.01(a) of the Purchase Agreement. "Scheduled Expiration Date" shall have the meaning given to that term in Subparagraph 2.02(a) of the Lease Agreement. "Scheduled Rent Payment Date" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Seller" shall mean Watkins-Johnson Company. "Senior Debt/EBITDA Ratio" shall mean, with respect to Lessee for any period, the ratio, determined on a consolidated basis in accordance with GAAP, of: (a) Lessee's Senior Indebtedness on the last day of such period; to (b) Lessee's EBITDA for such period. "Senior Indebtedness" shall mean, with respect to Lessee and its Subsidiaries at any time, the remainder, determined on a consolidated basis in accordance with GAAP, of (a) the total Indebtedness of Lessee and its Subsidiaries at such time minus (b) the total Subordinated Indebtedness of Lessee and its Subsidiaries at such time. "Solvent" shall mean, with respect to any Person on any date, that on such date (a) the fair value of the property of such Person is greater than the fair value of the liabilities (including contingent, subordinated, matured and unliquidated liabilities) of such Person, (b) the present fair saleable value of the assets of such Person is greater than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature and (d) such Person is not engaged in 1.01(a)-24 84 or about to engage in business or transactions for which such Person's property would constitute an unreasonably small capital. "Subleases" shall mean all leases and subleases of any of the Land, Lessor Improvements and/or Appurtenant Rights by Lessee as lessor or sublessor, now or hereafter in effect, whether or not of record, including all guaranties and security therefor and the right to bring actions and proceedings thereunder or for the enforcement thereof and to do anything which Lessee is or may become entitled to do thereunder. "Subordinated Indebtedness" shall mean Indebtedness which is unsecured and subordinated to the Lessee Obligations on terms reasonably acceptable to Lessor and the Required Participants. "Subparticipants" shall have the meaning given to that term in Subparagraph 7.05(c) of the Participation Agreement. "Subsidiary" of any Person shall mean (a) any corporation of which more than 50% of the issued and outstanding Equity Securities having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries, (b) any partnership, joint venture, limited liability company or other association of which more than 50% of the equity interest having the power to vote, direct or control the management of such partnership, joint venture or other association is at the time owned and controlled by such Person, by such Person and one or more of the other Subsidiaries or by one or more of such Person's other Subsidiaries or (c) any other Person included in the Financial Statements of such Person on a consolidated basis. "Supplemental Rent" shall have the meaning given to that term in Subparagraph 2.03(b) of the Lease Agreement. "Surety Instruments" shall mean all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "SVGL" shall mean SVG Lithography Systems, Inc., a Delaware corporation. "SVGIS" shall mean SVG International Service, a California corporation. "Synthetic Lease Swap Agreement" shall mean that certain interest rate swap agreement in the form of Exhibit L, dated as of June 29, 1999, between Lessee and KeyBank, pursuant to which Lessee is provided protection against fluctuations in the LIBOR Rental Rates payable by Lessee from time to time on the Outstanding Lease Amount. "Tangible Net Worth" shall mean, with respect to Lessee at any time, the remainder at such time, determined on a consolidated basis in accordance with GAAP, of: 1.01(a)-25 85 (a) The sum of (i) the total assets of Lessee and its Subsidiaries at such time plus (ii) the after tax effect of the lesser of (A) the sum of all Watkins-Johnson Charges taken by Lessee and its Subsidiaries prior to such time and (B) fifteen million Dollars ($15,000,000); minus (b) The sum (without limitation and without duplication of deductions) of (i) the total liabilities of Lessee and its Subsidiaries, (ii) all reserves established by Lessee and its Subsidiaries for anticipated losses and expenses (to the extent not deducted in calculating total assets in clause (a) above), and (iii) all intangible assets of Lessee and its Subsidiaries (to the extent included in calculating total assets in clause (a) above), including, without limitation, goodwill (including any amounts, however designated on the balance sheet, representing the cost of acquisition of businesses and investments in excess of underlying tangible assets), trademarks, trademark rights, trade name rights, copyrights, patents, patent rights, licenses, unamortized debt discount, marketing expenses, organizational expenses, non-compete agreements and deferred research and development. "Term" shall mean the period beginning on the Commencement Date and ending on the Expiration Date. "Termination Date" shall mean the earliest of (a) the date set forth in a Notice of Term Purchase Option as the Scheduled Rent Payment Date on which the Lease Agreement will be terminated by Lessee pursuant to Paragraph 4.01 of the Lease Agreement and the Property will be purchased by Lessee pursuant to Section II of the Purchase Agreement, (b) the date set forth in a written notice delivered by Lessor to Lessee pursuant to Subparagraph 5.03(a) of the Lease Agreement after the occurrence of an Event of Default thereunder as the date on which the Lease Agreement will be terminated, and (c) the date set forth in a written notice delivered by Lessor to Lessee pursuant to Subparagraph 5.04(a) of the Lease Agreement after the occurrence of an Event of Default thereunder as the date on which all unpaid Lessee Obligations are due and payable. "Term Purchase Option" shall have the meaning given to that term in Paragraph 2.01 of the Purchase Agreement. "Tinsley" shall mean Tinsley Laboratories, Inc., a California corporation. "Total Capital" shall mean, with respect to Lessee at any time, the sum, determined on a consolidated basis in accordance with GAAP, of (a) the total Indebtedness of Lessee and its Subsidiaries (including Subordinated Indebtedness) at such time plus (b) the stockholders' equity of Lessee and its Subsidiaries at such time. "Total Commitment" shall mean the amount set forth as such in Subparagraph 2.01(b) of the Participation Agreement or, if such amount is reduced pursuant to Subparagraph 2.08(a) of the Participation Agreement, the amount to which so reduced. 1.01(a)-26 86 "Tranche A Participant" shall mean, at any time, any Participant having an Outstanding Tranche A Participation Amount at such time. "Tranche A Percentage" shall mean, with respect to each Participant at any time, the percentage set forth under the caption "Tranche A Percentage" opposite such Participant's name in Part A of Schedule I or, if changed, such percentage as may be set forth for such Participant in the Register. "Tranche A Portion" shall mean, (a) with respect to the Acquisition Advance without reference to any Participant, the portion of the Acquisition Advance equal to the Tranche A Proportionate Share of the Acquisition Advance and (b) with respect to the Acquisition Advance with reference to any Participant, the portion of the Acquisition Advance equal to such Participant's Tranche A Percentage of the Acquisition Advance. "Tranche A Proportionate Share" shall mean eighty-five percent (85.00%). "Tranche B Participant" shall mean, at any time, any Participant having an Outstanding Tranche B Participation Amount at such time. "Tranche B Percentage" shall mean, with respect to each Participant, the percentage set forth under the caption "Tranche B Percentage" opposite such Participant's name in Part A of Schedule I or, if changed, such percentage as may be set forth for such Participant in the Register. "Tranche B Portion" shall mean, (a) with respect to the Acquisition Advance without reference to any Participant, the portion of the Acquisition Advance equal to the Tranche B Proportionate Share of the Acquisition Advance and (b) with respect to the Acquisition Advance with reference to any Participant, the portion of the Acquisition Advance equal to such Participant's Tranche B Percentage of the Acquisition Advance. "Tranche B Proportionate Share" shall mean fifteen percent (15.00%). "UCC" shall mean the California Uniform Commercial Code. "Watkins-Johnson Acquisition" shall mean the acquisition of certain assets and liabilities of Watkins-Johnson Semiconductor Equipment Group, a division of Watkins-Johnson Company. "Watkins-Johnson Charges" shall mean, with respect to any period, all non-recurring charges taken by Lessee and its Subsidiaries during such period in connection with the Watkins-Johnson Acquisition (including charges for the write-off of in-process research and development costs, consolidation, relocation and other charges relating to such acquisitions). "Water Supply Agreement" shall mean that certain Water Supply Agreement, dated as of June 30, 1999, by and between Lessee and the Remediator. 1.01(a)-27 87 SCHEDULE 1.02 RULES OF INTERPRETATION (a) GAAP. Unless otherwise indicated in any Operative Document, all accounting terms used in the Operative Documents shall be construed, and all accounting and financial computations thereunder shall be computed, in accordance with GAAP. If GAAP changes after the date of the Participation Agreement such that any covenants contained in the Operative Documents would then be calculated in a different manner or with different components, Lessee and the Lessor Parties agree to negotiate in good faith to amend the applicable Operative Documents in such respects as are necessary to conform those covenants as criteria for evaluating Lessee's financial condition to substantially the same criteria as were effective prior to such change in GAAP; provided, however, that, until Lessee and the Lessor Parties so amend the Operative Documents, all such covenants shall be calculated in accordance with GAAP as in effect immediately prior to such change. (b) Headings. Headings in each of the Operative Documents are for convenience of reference only and are not part of the substance thereof. (c) Plural Terms. All terms defined in any Operative Document in the singular form shall have comparable meanings when used in the plural form and vice versa. (d) Time. All references in each of the Operative Documents to a time of day shall mean San Francisco, California time, unless otherwise indicated. All references in each of the Operative Documents to a date (the "action date") which is one month prior to or after another date (the "reference date") shall mean the date in the immediately preceding or succeeding calendar month (as the case may be) which numerically corresponds to the reference date; provided, however, that (i) if such corresponding date in the immediately preceding or succeeding calendar month (as the case may be) is not a Business Day, the action date shall be the next succeeding Business Day after such corresponding date (unless, in the case of a Rental Period, such next Business Day falls in another calendar month, in which case the action date shall be the immediately preceding Business Day) and (ii) if the reference date is the last Business Day of a calendar month (or a day for which there is no numerically corresponding day in the immediately preceding calendar month) the action date shall be the last Business Day of the immediately preceding or succeeding calendar month (as the case may be). All references in each of the Operative Documents to an earlier date which is two or more months prior to a reference date or to a later date which is two or more months after a reference date shall be determined in a comparable manner. (e) Governing Law. Unless otherwise provided in any Operative Document, each of the Operative Documents shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. (f) Interpretation. The Operative Documents are the result of negotiations among, and have been reviewed by Lessee and each Lessor Party and their respective counsel. 1.02-1 88 Accordingly, the Operative Documents shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Lessee or any Lessor Party. (g) Entire Agreement. The Operative Documents, taken together, constitute and contain the entire agreement of Lessee and the Lessor Parties and supersede any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter thereof (including the proposal dated April 21, 1999) but excluding the Agent's Structuring Fee Letter). (h) Calculation of Base Rent, Interest and Fees. All calculations of Base Rent, interest and fees under the Operative Documents for any period (i) shall include the first day of such period and exclude the last day of such period and (ii) shall be calculated on the basis of a year of 360 days for actual days elapsed, except that during any period that Base Rent or any interest is to be calculated based upon the Base Rate, such Base Rent or interest shall be calculated on the basis of a year of 365 or 366 days, as appropriate, for actual days elapsed. (i) References. (i) References in any Operative Document to "Recitals," "Sections," "Paragraphs," "Subparagraphs," "Articles," "Exhibits" and "Schedules" are to recitals, sections, paragraphs, subparagraphs, articles, exhibits and schedules therein and thereto unless otherwise indicated. (ii) References in any Operative Document to any document, instrument or agreement (A) shall include all exhibits, schedules and other attachments thereto, (B) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (C) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. (iii) References in any Operative Document to any Governmental Rule (A) shall include any successor Governmental Rule, (B) shall include all rules and regulations promulgated under such Governmental Rule (or any successor Governmental Rule), and (C) shall mean such Governmental Rule (or successor Governmental Rule) and such rules and regulations, as amended, modified, codified or reenacted from time to time and in effect at any given time. (iv) References in any Operative Document to any Person in a particular capacity (A) shall include any permitted successors to and assigns of such Person in that capacity and (B) shall exclude such Person individually or in any other capacity. (j) Other Interpretive Provisions. The words "hereof," "herein" and "hereunder" and words of similar import when used in any Operative Document shall refer to such Operative Document as a whole and not to any particular provision of such Operative Document. The words "include" and "including" and words of similar import when used in any Operative Document shall not be construed to be limiting or exclusive. In the event of any inconsistency 1.02-2 89 between the terms of the Participation Agreement and the terms of any other Operative Document, the terms of the Participation Agreement shall govern. 1.02-3 90 SCHEDULE 3.01 CONDITIONS PRECEDENT TO ACQUISITION ADVANCE A. PRINCIPAL OPERATIVE DOCUMENTS EXECUTED BY LESSEE. (1) The Participation Agreement, duly executed by Lessee, Lessor, each Participant and Agent; (2) The Lease Agreement, duly executed by Lessee and Lessor and appropriately notarized for recording; (3) The Purchase Agreement, duly executed by Lessee and Lessor; (4) The Assignment of Remediation Agreements; (5) The Cash Collateral Agreement, duly executed by Lessee, Lessor, Agent and KeyBank; and (6) The Synthetic Lease Swap Agreement, duly executed by Lessee and KeyBank. B. LESSEE CORPORATE DOCUMENTS. (1) The Certificate or Articles of Incorporation of Lessee, certified as of a recent date prior to the Closing Date by the Secretary of State (or comparable official) of its jurisdiction of incorporation; (2) A Certificate of Good Standing (or comparable certificate) for Lessee, certified as of a recent date prior to the Closing Date by the Secretary of State (or comparable official) of its jurisdiction of incorporation; (3) A certificate of the Secretary or an Assistant Secretary of Lessee, dated the Closing Date, certifying (a) that attached thereto is a true and correct copy of the Bylaws of Lessee as in effect on the Closing Date; (b) that attached thereto are true and correct copies of resolutions duly adopted by the Board of Directors of Lessee and continuing in effect, which authorize the execution, delivery and performance by Lessee of the Operative Documents executed or to be executed by Lessee and the consummation of the transactions contemplated thereby; and (c) that there are no proceedings for the dissolution or liquidation of Lessee; (4) A certificate of the Secretary or an Assistant Secretary of Lessee, dated the Closing Date, certifying the incumbency, signatures and authority of the officers of Lessee authorized to execute, deliver and perform the Operative Documents and all other 3.01-1 91 documents, instruments or agreements related thereto executed or to be executed by Lessee; and (5) Certificates of Good Standing (including tax good standing) for Lessee, certified as of a recent date prior to the Closing Date by the Secretary of State of the State of California. C. FINANCIAL STATEMENTS, FINANCIAL CONDITION, ETC. (1) A copy of the unaudited Financial Statements of Lessee and its Subsidiaries for the fiscal quarter ended March 31, 1999 and for the fiscal year to such date (prepared on a consolidated and consolidating basis), certified by the chief financial officer of Lessee to present fairly the financial condition, results of operations and other information reflected therein and to have been prepared in accordance with GAAP (subject to normal year-end audit adjustments); (2) A copy of the audited consolidated Financial Statements of Lessee for the fiscal year ended September 30, 1998, prepared by Deloitte & Touche and a copy of the unqualified opinion delivered by such accountants in connection with such Financial Statements; (3) A copy of the 10-Q report filed by Lessee with the Securities and Exchange Commission for the quarter ended March 31, 1999; (4) A copy of the 10-K report filed by Lessee with the Securities and Exchange Commission for the fiscal year ended September 30, 1998; and (5) The consolidated plan and forecast of Lessee and its Subsidiaries for the fiscal year[s] to end September 30, 1999 and 2000. D. COLLATERAL DOCUMENTS. (1) A deed transferring to Lessor the fee interest in the Land, Lessor Improvements and Appurtenant Rights, duly executed by Seller and appropriately notarized for recording; (2) A Memorandum of Purchase Agreement, appropriately completed and duly executed by Lessee and Lessor and appropriately notarized for recording; (3) Evidence that the Assignment of Lease, the Lessor Deed of Trust, the Lessor/Lessee Deed of Trust, the deed, the Memorandum of Lease Agreement and the Memorandum of Purchase Agreement have been or will be properly recorded in the Official Records of Santa Cruz County, California; (4) An extended coverage owner's policy or binder of title insurance (or a commitment therefor) for the Property insuring Lessor's fee interest in the Property 3.01-2 92 (subject to such exceptions as Agent may approve), in such amounts and with such endorsements as Agent may reasonably require, issued by Chicago Title Insurance Company or another title insurer acceptable to Agent; (5) An extended coverage lender's policy of title insurance (or a commitment therefor) for the Property insuring the validity and priority of the Lease Agreement (subject to such exceptions as Agent may approve), in such amounts and with such endorsements as Agent may reasonably require, issued by Chicago Title Insurance Company or another title insurer acceptable to Agent; (6) An extended coverage lender's policy of title insurance (or a commitment therefor) for the Property insuring the validity and priority of the Lessor Deed of Trust (subject to such exceptions as Agent may approve), in such amounts and with such endorsements as Agent may reasonably require, issued by Chicago Title Insurance Company or another title insurer acceptable to Agent; (7) Uniform Commercial Code financing statements and fixture filings (appropriately completed and executed) for filing in such jurisdictions as Agent may request to perfect the Liens granted to Lessor and Agent in the Lessee Security Documents, the Lessor Security Agreement and the other Operative Documents; (8) Uniform Commercial Code search certificates from the jurisdictions in which Uniform Commercial Code financing statements are to be filed pursuant to item D(8) above reflecting no other financing statements or filings which evidence Liens of other Persons in the Collateral which are prior to the Liens granted to Lessor and Agent in the Lessee Security Documents, the Lessor Security Agreement and the other Operative Documents, except for any such prior Liens (a) which are expressly permitted by the Operative Documents to be prior or (b) for which Agent has received a termination statement pursuant to item D(9) above. E. OPINIONS. (1) A favorable written opinion of Wilson, Sonsini, Goodrich & Rosati, counsel to Lessee, dated the Closing Date, addressed to Lessor and Agent, for the benefit of Lessor, Agent and the Participants, and covering such legal matters as Agent may reasonably request and otherwise in form and substance satisfactory to Agent. F. OTHER ITEMS. (1) A duly completed and timely delivered Acquisition Request, duly executed by Lessee; (2) A Closing Date Appraisal for the Property, dated as of a recent date prior to the Closing Date, appraising the Property at not less than the Acquisition Price; 3.01-3 93 (3) An Expiration Date Appraisal for the Property, dated as of a recent date prior to the Closing Date, appraising the Property at not less than the Total Commitment; (4) An ALTA/ACSM survey of the Property (a) prepared and dated not more than two (2) months prior to the Closing Date by a registered surveyor reasonably satisfactory to Agent, (b) certified as correct and as (i) having been made in accordance with the most recent standards for "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys," jointly established and adopted by ALTA and ACSM, and (ii) meeting the accuracy requirements of a Class A survey (as defined therein) and including items 2-4, 6, 7(a), 7(b), 7(c), 8-10 and 13 of Table A thereof, and (c) disclosing, among other things, (i) the location of the perimeter of the Property by courses and distances, (ii) all easements and rights-of-way, (iii) the lines of the street abutting the Property and the width thereof, (iv) encroachments, if any, and the extent thereof in feet and inches upon the Property, and (v) all boundary and lot lines, and all other matters that would be disclosed by inspection of the Property and the public records; (5) Environmental reports and assessments of the Property satisfactory to Agent issued by environmental consultants acceptable to Agent with respect to the Property (collectively, the "Environmental Reports"); (6) A copy of the Fixed Price Remediation Agreement, the Escrow Agreement and the Water Supply Agreement, each duly executed by the parties thereto, together with a Consent to Assignment of Remediation Agreements, duly executed by Seller and Remediator, in the form attached as Exhibit B to the Assignment of Remediation Agreements; (7) Except as otherwise provided pursuant to Item F.(7) below, certificates of insurance evidencing the insurance Lessee is required to maintain pursuant to Paragraph 3.03 of the Lease Agreement; (8) Binders or similar commitments for the issuance of insurance with respect to the insurance that the Remediator is required to carry and maintain pursuant to the Fixed Price Remediation Agreement, in form and substance satisfactory to Lessor; (9) The Disclosure Letter; (10) A certificate of the Chief Financial Officer of Lessee, addressed to Lessor and Agent and dated the Closing Date, certifying that: (a) The representations and warranties set forth in Paragraph 4.01 of the Participation Agreement and in the other Operative Documents are true and correct in all material respects as of such date (except for such representations and warranties made as of a specified date, which shall be true as of such date); (b) No Default has occurred and is continuing as of such date; and 3.01-4 94 (c) All of the Operative Documents are in full force and effect on such date. (11) All fees and expenses payable to the Lessor Parties and demanded by the Lessor Parties to be paid on or prior to the Closing Date (including the Agent's Structuring Fee); and (12) All fees and expenses of Lessor's and Agent's counsels and demanded by Agent to be paid on or prior to the Closing Date. 3.01-5 95 SCHEDULE 4.01(q) SUBSIDIARIES See Disclosure Letter 4.01(q)-1 96 SCHEDULE 5.02(c) INVESTMENT POLICY See Disclosure Letter 5.02(e)-1 97 EXHIBIT A LAND A-1 98 EXHIBIT B LEASE AGREEMENT B-1 99 EXHIBIT C PURCHASE AGREEMENT C-1 100 EXHIBIT D ACQUISITION REQUEST [Date] SELCO Service Corporation c/o KeyBank National Association 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young 1. Reference is made to that certain Participation Agreement, dated as of June 30, 1999 (the "Participation Agreement"), among Silicon Valley Group, Inc. ("Lessee"), SELCO Service Corporation ("Lessor"), the financial institutions listed in Schedule I to the Participation Agreement (the "Participants") and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"). Unless otherwise indicated, all terms defined in the Participation Agreement have the same respective meanings when used herein. 2. Pursuant to Paragraph 2.03 of the Participation Agreement, Lessee hereby irrevocably requests Lessor to make the Acquisition Advance as follows: (a) The Acquisition Advance shall be in the aggregate amount of $________; and (b) The date of the Acquisition Advance shall be ____________, ____ (the "Closing Date"). 3. $_________ of the Acquisition Advance will be used to pay the Acquisition Price of the Property. 4. $________ of the Acquisition Advance will be used to pay the costs and expenses set forth in Attachment 1 hereto. All such costs and expenses are Permitted Transaction Expenses. 5. Lessee hereby certifies to the Lessor Parties that, on the date of this Acquisition Request and after giving effect to the Acquisition Advance: (a) The representations and warranties of Lessee set forth in Paragraph 4.01 of the Participation Agreement and in the other Operative Documents are true and correct in all material respects as if made on such date (except for representations and warranties expressly made as of a specified date, which shall be true as of such date); (b) No Default has occurred and is continuing; and (c) All of the Operative Documents are in full force and effect on such date. D-1 101 5. Please disburse the proceeds of the Acquisition Advance to - ---------------------------------------------------. IN WITNESS WHEREOF, Lessee has executed this Acquisition Request on the date set forth above. SILICON VALLEY GROUP, INC. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- D-2 102 EXHIBIT E LEASE EXTENSION REQUEST [Date] SELCO Service Corporation c/o KeyBank National Association 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young 1. Reference is made to that certain Participation Agreement, dated as of June 30, 1999 (the "Participation Agreement"), among Silicon Valley Group, Inc. ("Lessee"), SELCO Service Corporation ("Lessor"), the financial institutions listed in Schedule I to the Participation Agreement (the "Participants") and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"). Unless otherwise indicated, all terms defined in the Participation Agreement have the same respective meanings when used herein. 2. Pursuant to Paragraph 2.09 of the Participation Agreement, Lessee hereby irrevocably requests Lessor to extend (and the Participants to consent to such extension) the Term of the Lease Agreement for an additional one (1) year by extending the current Scheduled Expiration Date from [__________] to [__________]. 3. Lessee hereby certifies to the Lessor Parties that, on the date of this Lease Extension Request and after giving effect to the extension requested hereby: (a) The representations and warranties of Lessee set forth in Paragraph 4.01 of the Participation Agreement and in the other Operative Documents are true and correct in all material respects as if made on such date (except for representations and warranties expressly made as of a specified date, which shall be true as of such date); (b) No Default has occurred and is continuing; and (c) All of the Operative Documents are in full force and effect on such date. E-1 103 IN WITNESS WHEREOF, Lessee has executed this Lease Extension Request on the date set forth above. SILICON VALLEY GROUP, INC. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- CONSENT The undersigned hereby consents to the extension of the Scheduled Expiration Date requested above upon the terms set forth in the attachment hereto. ---------------------------------------- By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- Date: ----------------------------------- E-2 104 EXHIBIT F CASH COLLATERAL AGREEMENT F-1 105 EXHIBIT G ASSIGNMENT OF LEASE G-1 106 EXHIBIT H LESSOR DEED OF TRUST H-1 107 EXHIBIT I LESSOR SECURITY AGREEMENT I-1 108 EXHIBIT J LESSOR/LESSEE DEED OF TRUST J-1 109 EXHIBIT K ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT, dated as of the date set forth at the top of Attachment 1 hereto, by and among: (1) The party designated under item A of Attachment I hereto as the Assignor Participant ("Assignor Participant"); and (2) Each party designated under item B of Attachment I hereto as an Assignee Participant (individually, an "Assignee Participant"). RECITALS A. Assignor Participant is one of the "Participants" in a Participation Agreement dated as of June 30, 1999, among Silicon Valley Group, Inc. ("Lessee"), SELCO Service Corporation ("Lessor"), Assignor Participant and the other institutions parties thereto as "Participants" (collectively, the "Participants") and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"). (Such Participation Agreement, as amended, supplemented or otherwise modified in accordance with its terms from time to time to be referred to herein as the "Participation Agreement"). B. Assignor Participant wishes to sell, and each Assignee Participant wishes to purchase, all or a portion of Assignor Participant's rights under the Participation Agreement pursuant to Subparagraph 7.05(b) of the Participation Agreement. AGREEMENT Now, therefore, the parties hereto hereby agree as follows: 1. Definitions. Except as otherwise defined in this Assignment Agreement, all capitalized terms used herein and defined in the Participation Agreement have the respective meanings given to those terms in the Participation Agreement. 2. Sale and Assignment. Subject to the terms and conditions of this Assignment Agreement, Assignor Participant hereby agrees to sell, assign and delegate to each Assignee Participant and each Assignee Participant hereby agrees to purchase, accept and assume the rights, obligations and duties of a Participant under the Participation Agreement and the other Operative Documents equal to the Tranche A Percentage, Tranche B Percentage and Proportionate Share set forth under the captions "Tranche Percentages and Proportionate Shares Assigned" opposite such Assignee Participant's name on Part A of Attachment I hereto. Such sale, assignment and delegation shall become effective on the date designated in Part C of K-1 110 Attachment I hereto (the "Assignment Effective Date"), which date shall be, unless Agent shall otherwise consent, at least five (5) Business Days after the date following the date counterparts of this Assignment Agreement are delivered to Agent in accordance with Paragraph 3 hereof. 3. Assignment Effective Notice. Upon (a) receipt by Agent of five (5) counterparts of this Assignment Agreement (to each of which is attached a fully completed Attachment 1), each of which has been executed by Assignor Participant and each Assignee Participant (and, to the extent required by clause (i) of Subparagraph 7.05(b) of the Participation Agreement, by Lessor, Lessee and Agent) and (b) payment to Agent of the registration and processing fee specified in clause (iii) of Subparagraph 7.05(b) of the Participation Agreement, Agent will transmit to Lessor, Lessee, Assignor Participant and each Assignee Participant an Assignment Effective Notice substantially in the form of Attachment 2 hereto, fully completed (an "Assignment Effective Notice"). 4. Assignment Effective Date. At or before 12:00 noon (local time of Assignor Participant) on the Assignment Effective Date, each Assignee Participant shall pay to Assignor Participant, in immediately available or same day funds, an amount equal to the purchase price, as agreed between Assignor Participant and such Assignee Participant (the "Assignment Purchase Price"), for the respective Tranche A Percentage, Tranche B Percentage and Proportionate Share purchased by such Assignee Participant hereunder. Effective upon receipt by Assignor Participant of the Assignment Purchase Price payable by each Assignee Participant, the sale, assignment and delegation to such Assignee Participant of such Proportionate Share as described in Paragraph 2 hereof shall become effective. 5. Payments After the Assignment Effective Date. Assignor Participant and each Assignee Participant hereby agree that Agent shall, and hereby authorize and direct Agent to, allocate amounts payable under the Participation Agreement and the other Operative Documents as follows: (a) All payments applied to reduce the Outstanding Lease Amount after the Assignment Effective Date with respect to each Tranche A Percentage, Tranche B Percentage and Proportionate Share assigned to an Assignee Participant pursuant to this Assignment Agreement shall be payable to such Assignee Participant. (b) All Base Rent, interest, fees and other amounts accrued after the Assignment Effective Date with respect to each Tranche A Percentage, Tranche B Percentage and Proportionate Share assigned to an Assignee Participant pursuant to this Assignment Agreement shall be payable to such Assignee Participant. Assignor Participant and each Assignee Participant shall make any separate arrangements between themselves which they deem appropriate with respect to payments between them of amounts paid under the Operative Documents on account of the Tranche A Percentage, Tranche B Percentage and Proportionate Share assigned to such Assignee Participant, and neither Agent nor Lessee shall have any responsibility to effect or carry out such separate arrangements. K-2 111 6. Delivery of Copies of Operative Documents. Concurrently with the execution and delivery hereof, Assignor Participant will provide to each Assignee Participant (if it is not already a party to the Participation Agreement) conformed copies of all documents delivered to Assignor Participant on or prior to the Closing Date in satisfaction of the conditions precedent set forth in the Participation Agreement. 7. Further Assurances. Each of the parties to this Assignment Agreement agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Assignment Agreement. 8. Further Representations, Warranties and Covenants. Assignor Participant and each Assignee Participant further represent and warrant to and covenant with each other, Lessor, Agent and the other Participants as follows: (a) Other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned hereby free and clear of any adverse claim, Assignor Participant makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Participation Agreement or the other Operative Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Participation Agreement or the other Operative Documents furnished or the Collateral or any security interest therein. (b) Assignor Participant makes no representation or warranty and assumes no responsibility with respect to the financial condition of Lessee or any of its obligations under the Participation Agreement or any other Operative Documents. (c) Each Assignee Participant confirms that it has received a copy of the Participation Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement. (d) Each Assignee Participant will, independently and without reliance upon Lessor, Agent, Assignor Participant or any other Participant and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Participation Agreement and the other Operative Documents. (e) Each Assignee Participant appoints and authorizes Agent to take such action as Agent on its behalf and to exercise such powers under the Participation Agreement and the other Operative Documents as Agent is authorized to exercise by the terms thereof, together with such powers as are reasonably incidental thereto, all in accordance with Section 6 of the Participation Agreement. K-3 112 (f) Each Assignee Participant (i) affirms that each of the representations and warranties set forth in Paragraph 4.03 of the Participation Agreement is true and correct with respect to such Participant and (ii) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Participation Agreement and the other Operative Documents are required to be performed by it as a Participant. (g) Each Assignee Participant represents and warrants that, as of the date hereof, it would not have any basis for demanding any payment under Subparagraph 2.12(c) or Subparagraph 2.12(d) of the Participation Agreement or, to its knowledge, under Subparagraph 2.13(a) of the Participation Agreement. (h) Part B of Attachment 1 hereto sets forth administrative information with respect to each Assignee Participant. 9. Effect of this Assignment Agreement. On and after the Assignment Effective Date, (a) each Assignee Participant shall be a Participant with a Tranche A Percentage, Tranche B Percentage and Proportionate Share as set forth under the caption "Tranche Percentages and Proportionate Share After Assignment" opposite such Assignee Participant's name in Part A of Attachment 1 hereto and shall have the rights, duties and obligations of such a Participant under the Participation Agreement and the other Operative Documents and (b) Assignor Participant shall be a Participant with a Tranche A Percentage, Tranche B Percentage and Proportionate Share as set forth under the caption "Tranche Percentages and Proportionate Share After Assignment" opposite Assignor Participant's name in Part A of Attachment 1 hereto and shall have the rights, duties and obligations of such a Participant under the Participation Agreement and the other Operative Documents, or, if the Proportionate Share of Assignor Participant has been reduced to zero, Assignor Participant shall cease to be a Participant and shall have no further obligation to fund any portion of the Acquisition Advance. 10. Miscellaneous. This Assignment Agreement shall be governed by, and construed in accordance with, the laws of the State of California. Paragraph headings in this Assignment Agreement are for convenience of reference only and are not part of the substance hereof. K-4 113 IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be executed by their respective duly authorized officers as of the date set forth in Attachment 1 hereto. , as ------------------------------------------- Assignor Participant By: ---------------------------------------- Name: ------------------------------------ Title: ----------------------------------- , as an ------------------------------------ Assignor Participant By: ---------------------------------------- Name: ------------------------------------ Title: ----------------------------------- , as an ------------------------------------ Assignor Participant By: ---------------------------------------- Name: ------------------------------------ Title: ----------------------------------- , as an ------------------------------------ Assignor Participant By: ---------------------------------------- Name: ------------------------------------ Title: ----------------------------------- K-5 114 CONSENTED TO AND ACKNOWLEDGED BY: - ---------------------------------------- as Lessee By: ------------------------------------- Name: ---------------------------- Title: --------------------------- - ---------------------------------------- as Agent By: ------------------------------------- Name: ---------------------------- Title: --------------------------- - ---------------------------------------- As Lessor By: ------------------------------------- Name: ---------------------------- Title: --------------------------- ACCEPTED FOR RECORDATION IN REGISTER: - ---------------------------------------- As Agent By: ------------------------------------- Name: ---------------------------- Title: --------------------------- K-6 115 ATTACHMENT 1 TO ASSIGNMENT AGREEMENT PART A TRANCHE PERCENTAGES AND PROPORTIONATE SHARES Tranche Percentages and Proportionate Shares After Assignment
Tranche A Tranche B Proportionate Tranche A Tranche B Proportionate Percentage Percentage Share Percentage Percentage Share ------------- ----------- -------------- ------------- ------------ -------------- Assignor Participant: - --------- --. -------% --. -------% --. -------% --. -------% --. -------% --. --------% - --------- --. -------% --. -------% --. -------% --. -------% --. -------% --. --------% - --------- --. -------% --. -------% --. -------% --. -------% --. -------% --. --------% Assignee Participants: - --------- --. -------% --. -------% --. -------% --. -------% --. -------% --. --------% - --------- --. -------% --. -------% --. -------% --. -------% --. -------% --. --------% - --------- --. -------% --. -------% --. -------% --. -------% --. -------% --. --------% - --------- --. -------% --. -------% --. -------% --. -------% --. -------% --. --------%
K(1)-1 116 PART B [Assignee Participant] - ----------------------------- Applicable Participating Office: - ----------------------------- Address for notices: Telephone No: --------- Facsimile No: --------- Wiring Instructions: [Assignee Participant] - ----------------------------- Applicable Participating Office: - ----------------------------- Address for notices: Telephone No: --------- Facsimile No: --------- Wiring Instructions: K(1)-2 117 PART C ASSIGNMENT EFFECTIVE DATE ________, ____ K(1)-3 118 ATTACHMENT 2 TO ASSIGNMENT AGREEMENT FORM OF ASSIGNMENT EFFECTIVE NOTICE Reference is made to the Participation Agreement, dated as of June 30, 1999, among Silicon Valley Group, Inc. ("Lessee"), SELCO Service Corporation ("Lessor"), the financial institutions parties thereto as "Participants" (the "Participants") and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"). Agent hereby acknowledges receipt of five executed counterparts of a completed Assignment Agreement, a copy of which is attached hereto. [Note: Attach copy of Assignment Agreement.] Terms defined in such Assignment Agreement are used herein as therein defined. 1. Pursuant to such Assignment Agreement, you are advised that the Assignment Effective Date will be____________. 2. Pursuant to such Assignment Agreement, each Assignee Participant is required to pay its Purchase Price to Assignor Participant at or before 12:00 Noon on the Assignment Effective Date in immediately available funds. Very truly yours, KeyBank National Association, as Agent By: -------------------------------- Name: ---------------------------- Title: --------------------------- K(2)-1 119 EXHIBIT L SYNTHETIC LEASE SWAP AGREEMENT K(2)-1 120 EXHIBIT M ASSIGNMENT OF REMEDIATION AGREEMENTS THIS ASSIGNMENT OF REMEDIATION AGREEMENTS (this "Agreement" herein), dated as of June 30, 1999, is executed by (1) SILICON VALLEY GROUP, INC., a Delaware corporation ("Lessee"), in favor of (2) SELCO SERVICE CORPORATION, an Ohio corporation doing business in California as Ohio SELCO Service Corporation ("Lessor"). RECITALS A. Lessee has requested Lessor and the financial institutions which are "Participants" under the Participation Agreement referred to in Recital B below (such financial institutions to be referred to collectively as the "Participants") to provide to Lessee a lease facility pursuant to which: (1) Lessor would (a) purchase certain property, (b) lease such property to Lessee and (c) grant to Lessee the right to purchase such property; and (2) The Participants would participate in such lease facility by (a) funding the advance to be made by Lessor to purchase such property and (b) acquiring participation interests in the rental and certain other payments to be made by Lessee. B. Pursuant to a Participation Agreement dated of even date herewith (the "Participation Agreement") among Lessee, Lessor, the Participants and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"), Lessor and the Participants have agreed to provide such lease facility upon the terms and subject to the conditions set forth therein, including without limitation the execution and delivery of this Agreement setting forth the terms for the purchase of the Property by Lessee from Lessor. C. One of the conditions to the effectiveness of the Participation Agreement is the execution and delivery of this Agreement by the parties hereto setting forth the terms of the assignment by Lessee to Lessor of certain documents, instruments and agreements related to the remediation of the Property. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and the mutual covenants herein contained, the parties hereto hereby agree as follows: 121 SECTION 1. INTERPRETATION. 1.01. Definitions. Unless otherwise indicated in this Agreement or any other Operative Document, each term set forth in Schedule 1.01 to the Participation Agreement, when used in this Agreement or any other Operative Document, shall have the respective meaning given to that term in such Schedule 1.01 or in the provision of this Agreement or other document, instrument or agreement referenced in such Schedule 1.01. 1.02. Rules of Construction. Unless otherwise indicated in this Agreement or any other Operative Document, the rules of construction set forth in Schedule 1.02 to the Participation Agreement shall apply to this Agreement and the other Operative Documents. SECTION 2. ASSIGNMENT. 2.01. Assignment. Subject to Paragraph 2.02 hereof, Lessee hereby assigns to Lessor all of Lessee's right, title and interest in, to and under all documents, instruments and agreements between Lessee and any other Person relating to the remediation of the Property and/or use of the groundwater on the Property for a water supply (including, without limitation, the Fixed Price Remediation Agreement, the Escrow Agreement and the Water Supply Agreement) (collectively, the "Remediation Agreements") and all future Remediation Agreements which may be entered into by Lessee and/or issued for the benefit of Lessee prior to the termination of this Agreement. Upon execution or receipt of any new Remediation Agreement, Lessee shall promptly notify Lessor as to the existence of such Remediation Agreement. Upon Lessor's request, Lessee shall provide Lessor with copies of the Remediation Agreement. 2.02. Absolute Assignment. This Agreement constitutes a present and absolute assignment to Lessor; provided, however, that (a) Lessor may not enforce the terms of the Remediation Agreement unless and until an Event of Default occurs and (b) so long as no Event of Default has occurred, Lessee shall have the right to enforce the terms and exercise the rights granted to Lessee pursuant to the Remediation Agreements for the benefit of Lessee and Lessor provided that such exercise is not otherwise inconsistent with the terms of this Agreement and the other Operative Documents. Upon the occurrence of any Event of Default, Lessor may, in its sole discretion, give notice to any Person referred to in the Remediation Agreement or any other party to a Remediation Agreement of its intent to enforce the rights of Lessee under the Remediation Agreements and may initiate or participate in any legal proceedings respecting the enforcement of said rights. Lessee acknowledges that, by accepting this assignment, Lessor does not assume any of Lessee's obligations under the Remediation Agreements. 2.03. Seller's and Remediator's Consent. In connection with the execution and delivery to Lessor of this Agreement, Lessee shall obtain and deliver to Lessor consents from each of Seller and Remediator in the form attached hereto as Exhibit A with respect to the assignment by Lessee of all of its right, title and interest in and to the Fixed Price Remediation Agreement, the Escrow Agreement and the Water Supply Agreement. Upon Lessor's request, Lessee shall obtain and provide to Lessor a Consent to Assignment for any new Remediation Agreements entered into by Lessee after the date hereof which Lessor determines in its sole 3 122 discretion is material to the remediation of the Property. SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSEE. 3.01. Representations and Warranties. Lessee represents and warrants to Lessor that (a) all Remediation Agreements entered into by Lessee are in full force and effect and are enforceable in accordance with their terms (subject to applicable laws regarding insolvency and principles of equity) and, to the best of Lessee's knowledge, no default, or event which would constitute a default after notice or the passage of time, or both, exists with respect to said Remediation Agreements; (b) all copies of the Remediation Agreements delivered to Lessor are complete and correct; and (c) Lessee has not assigned any of its rights under the Remediation Agreements, except as otherwise provided herein or in the other Operative Documents. 3.02. Covenants. Lessee agrees (a) to pay and perform all obligations of Lessee under the Remediation Agreements; (b) to enforce the payment and performance of all obligations of any other Person under the Remediation Agreements; (c) not to amend or modify the Remediation Agreements (including, without limitation, the Fixed Price Remediation Agreement, the Escrow Agreement and the Water Supply Agreement), not exercise its rights under Paragraph 1.C. of the Fixed Price Remediation Agreement with respect to the placement of any deed or use restrictions on the Property, nor enter into any future Remediation Agreements without Lessor's prior written approval which shall not be unreasonably withheld, except as otherwise may be permitted by the Operative Documents; and (d) not to further assign, for security or any other purposes, its rights under the Remediation Agreements without Lessor's prior written approval. SECTION 4. MISCELLANEOUS. 4.01. Notices. Except as otherwise specified herein, all notices, requests, demands, consents, instructions or other communications to or upon Lessee or Lessor under this Agreement shall be given as provided in Subparagraph 2.02(c) and Paragraph 7.01 of the Participation Agreement. 4.02. Waivers; Amendments. Any term, covenant, agreement or condition of this Agreement may be amended or waived only as provided in the Participation Agreement. No failure or delay by any Lessor Party in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. Unless otherwise specified in any such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. 4.03. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Lessor Parties and Lessee and their permitted successors and assigns; provided, however, that the Lessor Parties and Lessee shall not sell, assign or delegate their respective rights and obligations hereunder except as provided in the Participation Agreement. 4.04. No Third Party Rights. Nothing expressed in or to be implied from this 4 123 Agreement is intended to give, or shall be construed to give, any Person, other than the Lessor Parties and Lessee and their permitted successors and assigns, any benefit or legal or equitable right, remedy or claim under or by virtue of this Agreement or under or by virtue of any provision herein. 4.05. Partial Invalidity. If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 4.06. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. 4.07. Termination. After the expiration of the Lease Agreement and the satisfaction in full of all Lessee Obligations, the assignment of the Remediation Agreements set forth herein shall terminate, Lessor shall re-assign to Lessee its interests in such Remediation Agreements and this Agreement shall terminate. [The signature page follows.] 5 124 IN WITNESS WHEREOF, Lessee has caused this Agreement to be executed as of the day and year first above written. LESSEE: SILICON VALLEY GROUP, INC. By: -------------------------------- Name: --------------------------- Title: -------------------------- 6 125 EXHIBIT A CONSENT TO ASSIGNMENT 1. Reference is made to (a) the property located at 440 Kings Village Road, as more particularly described in Exhibit A to the Participation Agreement (the "Property") and (b) the agreement[s] described in Attachment 1 hereto. 2. Silicon Valley Group, Inc. ("Lessee") has notified the undersigned that, pursuant to an Assignment of Remediation Agreements dated as of June 30, 1999 between Lessee and SELCO Service Corporation, an Ohio corporation doing business in California as Ohio SELCO Service Corporation ("Lessor") (the "Assignment"), Lessee has assigned to Lessor the agreement[s] described in Attachment 1 hereto and all future documents, instruments and agreements relating to the remediation of the Property (collectively, the "Remediation Agreements"). 3. The undersigned hereby consents to the Assignment and acknowledges and agrees as follows for the benefit of Lessor that: (a) Pursuant to the Assignment, Lessee may not amend or modify the Remediation Agreements (including, without limitation, the agreement[s] described in Attachment 1 hereto), [not exercise its rights under Paragraph 1.C. of the Fixed Price Remediation Agreement with respect to the placement of any deed or use restrictions on the Property,] nor enter into any future Remediation Agreements without Lessor's prior written approval which shall not be unreasonably withheld; and (b) If requested by Lessor in the exercise of Lessor's rights under the Assignment, the undersigned shall continue to perform its obligations under the Remediation Agreements in accordance with the terms thereof. The undersigned acknowledges that Lessor may have no means of discovering when or if the undersigned claims a default under the Remediation Agreements and agrees that it will give Lessor prior written notice of any default claimed by the undersigned under the Remediation Agreements. Said notice shall set forth a description of the default and a request to Lessor to cure the same within thirty (30) days. Said notice shall be deemed served upon delivery or, if mailed, upon the first to occur of receipt or the expiration of seventy-two (72) hours after deposit in United States Postal Service certified mail, postage prepaid and addressed to the address of Lessor appearing below. No termination of the Remediation Agreements by the undersigned shall be binding upon Lessor unless Lessor has received such notice and has failed to cure the described default within said thirty (30) days. The undersigned further acknowledges that, unless and until Lessor elects to exercise its rights under the Assignment and requests the undersigned's performance under the Remediation Agreements in writing, Lessor neither undertakes nor assumes any obligations or liability under the Remediation Agreements. Upon any such election, Lessor agrees to be bound by the terms and conditions of the Remediation Agreements to the same extent as Lessee (including, without limitation, all obligations and liabilities of Lessee arising prior to such L-1 126 election as to which the undersigned has notified Lessor in writing prior to such election that such obligations or liabilities have yet to be performed by Lessee). L-2 127 IN WITNESS WHEREOF, the undersigned has executed this Consent on this ___________ day of___________, ____. [________________________________] By: ________________________________ Name: ___________________________ Title: __________________________ Signatory's Address: [__________________________] [__________________________] [__________________________] [__________________________] Lessor's Address: SELCO Service Corporation c/o KeyBank National Association 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young L-3 128 EXECUTION VERSION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PARTICIPATION AGREEMENT AMONG SILICON VALLEY GROUP, INC. AND SELCO SERVICE CORPORATION An Ohio corporation during business in California Ohio SELCO Service Corporation AND THE PARTICIPANTS NAMED HEREIN AND KEYBANK NATIONAL ASSOCIATION, AS AGENT FOR THE PARTICIPANTS JUNE 30, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 129 TABLE OF CONTENTS
PAGE SECTION 1.INTERPRETATION....................................................................................... 1 1.01. Definitions........................................................................................... 1 1.02. Rules of Interpretation............................................................................... 2 SECTION 2.LEASE FACILITY....................................................................................... 2 2.01. Acquisition, Lease, Amount Limitations, Etc........................................................... 2 2.02. Participation Agreement............................................................................... 2 2.03. Acquisition Request................................................................................... 4 2.04. Agent Fees............................................................................................ 4 2.05. Funding of Acquisition Advance........................................................................ 4 2.06. Sharing of Payments................................................................................... 4 2.07. Other Payment Terms................................................................................... 6 2.08. Commitment Termination................................................................................ 8 2.09. Lease Extensions...................................................................................... 8 2.10. Nature of the Transaction............................................................................. 8 2.11. Security.............................................................................................. 10 2.12. Change of Circumstances............................................................................... 11 2.13. Taxes on Payments..................................................................................... 14 2.14. Funding Loss Indemnification.......................................................................... 16 2.15. Replacement of Participants........................................................................... 16 2.16. Limitation on Collection of Costs..................................................................... 16 SECTION 3.CONDITIONS PRECEDENT................................................................................. 17 3.01. Acquisition Advance................................................................................... 17 3.02. Other Conditions Precedent............................................................................ 17 3.03. Covenant to Deliver................................................................................... 17 SECTION 4.REPRESENTATIONS AND WARRANTIES....................................................................... 17 4.01. Lessee's Representations and Warranties............................................................... 17 4.02. Lessor's Representations and Warranties............................................................... 23 4.03. Participants' Representations and Warranties.......................................................... 25
-i- 130 TABLE OF CONTENTS (CONTINUED)
PAGE SECTION 5.COVENANTS............................................................................................ 26 5.01. Lessee's Affirmative Covenants........................................................................ 26 5.02. Lessee's Negative Covenants........................................................................... 29 5.03. Lessee's Financial Covenants.......................................................................... 37 5.04. Lessor's Covenants.................................................................................... 39 5.05. Participants' Covenants............................................................................... 39 SECTION 6.LESSOR, AGENT AND THEIR RELATIONS WITH PARTICIPANTS.................................................. 39 6.01. Appointment of Agent.................................................................................. 39 6.02. Powers and Immunities................................................................................. 40 6.03. Reliance.............................................................................................. 40 6.04. Defaults.............................................................................................. 40 6.05. Indemnification....................................................................................... 41 6.06. Non-Reliance.......................................................................................... 41 6.07. Resignation or Removal of Agent....................................................................... 41 6.08. Authorization......................................................................................... 42 6.09. Lessor and Agent in their Individual Capacities....................................................... 42 SECTION 7.MISCELLANEOUS........................................................................................ 42 7.01. Notices............................................................................................... 42 7.02. Expenses.............................................................................................. 44 7.03. Indemnification....................................................................................... 44 7.04. Waivers; Amendments................................................................................... 45 7.05. Successors and Assigns................................................................................ 45 7.06. Setoff................................................................................................ 49 7.07. No Third Party Rights................................................................................. 49 7.08. Partial Invalidity.................................................................................... 49 7.09. JURY TRIAL............................................................................................ 49 7.10. Counterparts.......................................................................................... 49 7.11. No Joint Venture, Etc................................................................................. 50
-ii- 131
PAGE 7.12. Usury Savings Clause.................................................................................. 50 7.13. Confidentiality....................................................................................... 50 7.14. Governing Law......................................................................................... 50
SCHEDULES I Participants II Pricing Grid 1.01 Definitions 1.02 Rules of Interpretation 3.01 Conditions Precedent to Acquisition Advance 4.01(q) Subsidiaries 5.02(e) Investment Policy
EXHIBITS - -------- A Land (Recital A; Schedule 1.01)) B Lease Agreement (2.01(a)) C Purchase Agreement (2.01(a)) D Acquisition Request (2.03) E Lease Extension Request (2.09) F Cash Collateral Agreement (2.11(a)) G Assignment of Lease (2.11(b)) H Lessor Deed of Trust (2.11(b)) I Lessor Security Agreement (2.11(b)) J Lessor/Lessee Deed of Trust (2.11(c)) K Assignment Agreement (7.05(b)) L Synthetic Lease Swap Agreement (Schedule 3.01)) M Assignment of Remediation Agreements (2.11(a))
-iii- EX-10.55 7 EX-10.55 1 EXHIBIT 10.55 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT (this "Agreement" herein), dated as of June 30, 1999, is entered into by and between: (1) SILICON VALLEY GROUP, INC., a Delaware corporation ("Lessee"); and (2) SELCO SERVICE CORPORATION, an Ohio corporation doing business in California as Ohio SELCO Service Corporation ("Lessor"). RECITALS A. Lessee has requested Lessor and the financial institutions which are "Participants" under the Participation Agreement referred to in Recital B below (such financial institutions to be referred to collectively as the "Participants") to provide to Lessee a lease facility pursuant to which: (1) Lessor would (a) purchase certain property, (b) lease such property to Lessee and (c) grant to Lessee the right to purchase such property; and (2) The Participants would participate in such lease facility by (a) funding the advance to be made by Lessor to purchase such property and (b) acquiring participation interests in the rental and certain other payments to be made by Lessee. B. Pursuant to a Participation Agreement dated of even date herewith (the "Participation Agreement") among Lessee, Lessor, the Participants and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"), Lessor and the Participants have agreed to provide such lease facility upon the terms and subject to the conditions set forth therein, including without limitation the execution and delivery of this Agreement setting forth the terms for the purchase of the Property by Lessee from Lessor. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. INTERPRETATION. 1.01. Definitions. Unless otherwise indicated in this Agreement or any other Operative Document, each term set forth in Schedule 1.01 to the Participation Agreement, when used in this Agreement or any other Operative Document, shall have the respective meaning given to 2 that term in such Schedule 1.01 or in the provision of this Agreement or other document, instrument or agreement referenced in such Schedule 1.01. 1.02. Rules of Interpretation. Unless otherwise indicated in this Agreement or any other Operative Document, the rules of interpretation set forth in Schedule 1.02 to the Participation Agreement shall apply to this Agreement and the other Operative Documents. SECTION 2. OPTIONAL PURCHASE BY LESSEE DURING THE TERM. 2.01. Term Purchase Option. Subject to the terms and conditions of this Agreement and the other Operative Documents (including those set forth below in this Section 2), Lessee may, at its option on any Business Day selected by Lessee prior to the Scheduled Expiration Date, terminate the Lease Agreement and purchase all of the Property (the "Term Purchase Option"). 2.02. Notice of Term Purchase Option Exercise. Lessee shall notify Lessor of Lessee's exercise of the Term Purchase Option by delivering to Lessor an irrevocable written notice in the form of Exhibit A, appropriately completed (the "Notice of Term Purchase Option Exercise"), which states that Lessee is exercising its right to terminate the Lease Agreement prior to the Scheduled Expiration Date pursuant to Paragraph 4.01 of the Lease Agreement and purchase all of the Property pursuant to this Section 2 and specifies the Business Day on which such termination and purchase are to occur (which date, after the delivery of such notice, shall be the Expiration Date). Lessee shall give the Notice of Term Purchase Option Exercise to Lessor at least one (1) month prior to the Business Day on which such termination and purchase are to occur. The Notice of Term Purchase Option Exercise shall be delivered as required by Subparagraph 2.02(c) and Paragraph 7.01 of the Participation Agreement; provided, however, that Lessee shall promptly deliver the original of any Notice of Term Purchase Option Exercise initially delivered by facsimile. 2.03. Purchase Price . Lessee shall pay to Lessor on the Expiration Date, as the purchase price for the Property, an amount equal to the Outstanding Lease Amount on such date. 2.04. Effect of Certain Events. Lessee may exercise the Term Purchase Option as provided in this Section 2, notwithstanding: (a) The prior election by Lessee of the Return Option pursuant to Subparagraph 3.01(a), provided that (i) Lessee completes the purchase of the Property pursuant to the Term Purchase Option and this Agreement on or prior to the Scheduled Expiration Date and (ii) Lessor has not previously entered into an agreement with (A) a Designated Purchaser following Lessee's election of the Return Option pursuant to Subparagraph 3.01(a) or (b) an Assignee Purchaser following Lessee's election and subsequent assignment of the Expiration Date Purchase Option pursuant to Paragraph 3.02; or 2 3 (b) The occurrence of any Event of Default or the exercise by the Lessor Parties of any of their rights or remedies under the Operative Documents following the occurrence of such Event of Default, provided that (i) such exercise by Lessee of the Term Purchase Option after the occurrence of any Event of Default shall not require the Lessor Parties to cease exercising such rights and remedies unless and until Lessee completes the purchase of the Property pursuant to the Term Purchase Option and this Agreement and (ii) Lessee completes the purchase of the Property pursuant to the Term Purchase Option and this Agreement prior to the earlier of the Scheduled Expiration Date and the date the Lessor Parties complete any judicial or non-judicial foreclosure sale of the Property. SECTION 3. OBLIGATIONS OF LESSEE ON THE EXPIRATION DATE. 3.01. Alternative. Unless Lessee has exercised the Term Purchase Option or the Lease Agreement has otherwise been earlier terminated pursuant to Subparagraph 5.03(a) of the Lease Agreement, Lessee may elect to exercise one of the following options on the Expiration Date: (a) Return Option. Lease may elect to return to Lessor on the Expiration Date all, but not less than all, of the Property by delivering to Lessor an irrevocable written notice in the form of Exhibit B, appropriately completed ("Notice of Return Option Exercise"), which states that Lessee is exercising its right to return the Property to Lessor pursuant to this Paragraph 3.01 (the "Return Option"). Lessee shall give the Notice of Return Option Exercise to Lessor at least three hundred sixty-four (364) days prior to the then Scheduled Expiration Date, in which case the Property shall be returned to Lessor in accordance with Subparagraph 4.02 of the Lease Agreement on the Expiration Date of the Lease Agreement, and the provisions of Subparagraph 3.03(b) hereof shall apply (unless on or before such Expiration Date, Lessee purchases the Property in accordance with Section 2 or Subparagraph 3.01(b), or the Property is to delivered to Designated Purchaser in accordance with Subparagraph 3.02(b) hereof, in which case the provisions of Subparagraph 3.03(a) hereof shall apply). The Notice of Return Option Exercise shall be delivered as required by Subparagraph 2.02(c) and Paragraph 7.01 of the Participation Agreement; provided, however, that Lessee shall promptly deliver to Lessor the original of any notice initially delivered by facsimile. If Lessee has not given the Notice of Return Option Exercise to Lessor as provided above, Lessee shall have been conclusively deemed to have elected to purchase the Property on the Expiration Date as provided in Subparagraph 3.01(b) hereof; provided, however, that in no event shall such election constitute a waiver by Lessee of its right to exercise the Term Purchase Option prior to the Expiration Date. If Lessee has duly elected to exercise the Return Option on the Expiration Date and the Property has not been so returned or delivered to Lessor on the Expiration Date, Lessee shall pay to Lessor such amounts as are required to be paid pursuant to Subparagraph 4.03 of the Lease Agreement. (b) Expiration Date Purchase Option. Subject to Subparagraph 5.03, if Lessee does not elect to exercise the Return Option on the Expiration Date in accordance with 3 4 Subparagraph 3.01(a) hereof, Lessee shall be deemed to have elected to purchase Lessor's interest in all, but not less than all, of the Property on the Expiration Date in accordance with Section 4 hereof, for an amount equal to the Outstanding Lease Amount (the "Expiration Date Purchase Option"). Notwithstanding the provisions of this Subparagraph 3.01(b), Lessee may freely assign to an Assignee Purchaser its option to purchase the Property from Lessor on the Expiration Date provided that such Assignee Purchaser purchases Lessor's interest in all, but not less than all, of the Property on the Expiration Date in accordance with Section 4 hereof, for an amount equal to the Outstanding Lease Amount. 3.02. Sale of Property to Third Party Purchaser. (a) Remarketing Obligations Upon Exercise of Return Option. If Lessee elects to exercise the Return Option in accordance with Subparagraph 3.01(a) hereof, then Lessee shall have the obligation during the final three hundred sixty-four (364) days of the Term (the "Marketing Period"), to use such commercially reasonable efforts as would be made by a self-interested property owner in the geographic area or areas in which the Property is located to actively market commercial property and to obtain bona fide bids for such Property from prospective purchasers who are financially capable of purchasing the Property for cash on an as-is, where-is basis, without recourse or warranty by Lessor (other than a warranty against Lessor Liens) on the terms and conditions set forth in this Subparagraph 3.02. Lessee shall be responsible for hiring brokers who shall be reasonably acceptable to Lessor, and promptly upon Lessor's request, shall permit inspection of the Property and any maintenance records relating to the Property by Lessor, or any potential purchasers, and shall otherwise do all things reasonably necessary to sell and deliver possession of the Property to any such third party purchaser. All such marketing of the Property shall be at Lessee's sole cost and expense. Lessee shall allow Lessor and any potential purchaser access to the Property for purposes of showing the same. All bids received by Lessee during the Marketing Period shall be immediately certified to Lessor in writing, setting forth the amount of such bid and the name and address of the third party purchaser submitting such bid. (b) Delivery of Property to Third Party Purchaser. On the Expiration Date, Lessee shall deliver the Property to the third party purchaser (if any) who shall have submitted the highest bid during the Marketing Period (such third party purchaser, the "Designated Purchaser"), and Lessor shall simultaneously therewith sell (or cause to be sold), its ownership interest in the Property to such Designated Purchaser; provided, however, that Lessor shall not be obligated to sell the Property to such Designated Purchaser if the Net Proceeds of Sale of the Property would be less than the Tranche B Proportionate Share of the Outstanding Lease Amount. (c) Delivery of Appraisals and Reports. Lessor shall have the right (but not the obligation) in its sole discretion, but at Lessee's sole cost and expense, to retain one or more Persons to act as its agent for the purpose of determining compliance by Lessee with the conditions applicable to a return of the Property pursuant to Subparagraph 4.02 4 5 of the Lease Agreement. Upon the request of Lessor and at Lessee's sole cost and expense, Lessee shall provide Lessor with a written report describing in reasonable detail Lessee's efforts during the Marketing Period to obtain bona fide bids for the purchase of the Property, including a list of all Persons approached for the purpose of soliciting bids to purchase the Property. 3.03. End of Term Adjustment. (a) This Subparagraph 3.03(a) shall apply only if the Property has been sold to a Designated Purchaser on the Expiration Date pursuant to Paragraph 3.02 hereof. If the Net Proceeds of Sale of the Property from a sale to a Designated Purchaser are less than the Outstanding Lease Amount on the date of the sale, Lessee shall, on the Expiration Date, pay to Lessor, in immediately available funds, an amount equal to such deficiency (a "Deficiency"); provided, however, that the amount of the Deficiency to be paid by Lessee with respect to the Property shall not exceed the following sum: (i) An amount (the "Residual Value Guaranty Amount") equal to the total Tranche A Proportionate Share of the Outstanding Lease Amount on such date; plus (ii) An amount (the "Indemnity Amount") equal to the decrease, if any, between the Commencement Date and the Expiration Date in the fair market value of the Property caused by (A) any representation or warranty of Lessee or any of its Affiliates regarding the Property set forth in any of the Operative Documents proving to be false or inaccurate when made, (B) the existence of, or the failure of Lessee to pay any Governmental Charge, Indebtedness or other obligation which might give rise to, any Liens in the Property (other than Permitted Property Liens), (C) the failure of Lessee to complete any Modifications, (D) the impairment of the value, utility or useful life of the Property or any part thereof in connection with Modifications, (E) the failure of Lessee to comply with the Lease Agreement in removing any of the Property or in removing or failing to remove any Lessee Property; or (F) any other failure of Lessee to comply with any of its obligations regarding the Property set forth in any of the Operative Documents. If the Net Proceeds of Sale of the Property exceed the Outstanding Lease Amount on the date of such sale, Lessor shall pay to Lessee an amount equal to such excess. Lessor's obligation to sell (or cause to be sold) the Property to a Designated Purchaser in accordance with Paragraph 3.02 hereof is contingent upon the receipt of the amounts, if any, payable by Lessee pursuant to this Subparagraph 3.03 (a). (b) If, on the Expiration Date, either (i) Lessee or an Assignee Purchaser does not purchase the Property pursuant to Subparagraph 3.01(b) hereof, or (ii) a Designated Purchaser does not purchase the Property in accordance with Paragraph 3.02 hereof, 5 6 Lessee shall immediately pay to Lessor (in addition to all unpaid Rent accrued through or due and payable on or prior to such date and all other amounts, if any, due and payable by Lessee under the Operative Documents on or prior to such date) the Residual Value Guaranty Amount and the Indemnity Amount. Thereafter, Lessor shall use commercially reasonable efforts to sell the Property in a reasonable time to one or more unrelated third parties for the fair market value of the Property. Upon the consummation of any such sale of the Property, the total amount realized from such sale shall be retained by Lessor, provided, however, that if the Net Proceeds of Sale realized by Lessor exceed the Tranche B Proportionate Share of the Outstanding Lease Amount on the Expiration Date plus seven percent (7%) per annum thereon from and after the Expiration Date to the date such sale is consummated (such sum, the "Lessor's Retention Amount"), Lessee shall be entitled to receive from Lessor an amount equal to the lesser of: (i) the amount by which the Net Proceeds of Sale exceeds said Lessor's Retention Amount, and (ii) the sum of the Residual Value Guaranty Amount and the Indemnity Amount as paid to Lessor. Lessee shall remain liable for the payment of, and upon the consummation by Lessor of the sale of the Property after the Expiration Date, Lessee shall pay or reimburse Lessor for the payment of, all applicable sales, excise, transfer, recording or other taxes imposed as a result of such sale, and fees and all other expenses reasonably incurred by Lessor as a result of such sale, including without limitation, expenses incurred in titling and registering the conveyance of Lessor's title to the Property, title insurance fees and expenses, Indemnified Taxes and reasonable fees and expenses of Lessor's legal counsel. SECTION 4. TERMS OF ALL PURCHASES. 4.01. Representations and Warranties of Parties. (a) Representations and Warranties of Certain Purchasers. Each Designated Purchaser shall represent and warrant to Lessor on the Expiration Date as follows: (i) Such Person is a legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization or an individual with legal capacity to purchase the Property. (ii) The execution, delivery and performance by such Person of each document, instrument and agreement executed, or to be executed, by such Person in connection with its purchase of the Property (the "Purchase Documents") and the consummation of the transactions contemplated thereby (A) are within the power of such Person and (B) have been duly authorized by all necessary actions on the part of such Person. (iii) Each Purchase Document executed, or to be executed, by such Person has been, or will be, duly executed and delivered by such Person and constitutes, or will constitute, a legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, except as limited by 6 7 bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally and general principles of equity. (iv) Such Person has not (A) made a general assignment for the benefit of creditors, (B) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by such Person's creditors, (C) suffered the appointment of a receiver to take possession of all, or substantially all, of such Person `s assets, (D) suffered the attachment or other judicial seizure of all, or substantially all, of such Person `s assets, (E) admitted in writing its inability to pay its debts as they come due, or (F) made an offer of settlement, extension or composition to its creditors generally. (v) Such Person is not a "party in interest" within the meaning of Section 3(14) of the ERISA, with respect to any investor in or beneficiary of Lessor. (b) Representations and Warranties of Lessor and Lessee. Each of Lessor and Lessee shall represent and warrant to each purchaser of the Property, whether Lessee, an Assignee Purchaser or a Designated Purchaser (a "Purchaser"), on the Expiration Date as follows: (i) Such Person is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. (ii) The execution, delivery and performance by such Person of each Purchase Document executed, or to be executed, by such Person and the consummation of the transactions contemplated thereby (A) are within the power of such Person and (B) have been duly authorized by all necessary actions on the part of such Person. (iii) Each Purchase Document executed, or to be executed, by such Person has been, or will be, duly executed and delivered by such Person and constitutes, or will constitute, a legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally and general principles of equity. (iv) Such Person has not (A) made a general assignment for the benefit of creditors, (B) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by such Person's creditors, (C) suffered the appointment of a receiver to take possession of all, or substantially all, of such Person's assets, (D) suffered the attachment or other judicial seizure of all, or substantially all, of such Person's assets, (E) admitted in writing its inability to pay its debts as they come due, or (F) made an offer of settlement, extension or composition to its creditors generally. 7 8 In addition to the foregoing, (A) Lessee shall represent and warrant to the Designated Purchaser (or Lessor if Lessor is to retain the Property) on the Expiration Date that no Liens are attached to the Property, except for Permitted Property Liens, and (B) Lessor shall represent and warrant to Purchaser on the Expiration Date that no Lessor Liens are attached to the Property. Lessee shall also provide to the Designated Purchaser all customary seller's indemnities (including environmental indemnities), representations and warranties regarding the condition of the Property. Except for the foregoing representations and warranties to be made by Lessor on the Expiration Date, no Lessor Party shall make any representation or warranty regarding the Property or the sale of the Property. (c) Survival of Representations and Warranties. The representations and warranties of Purchaser, Lessor and Lessee shall survive for a period of twelve (12) months after the Expiration Date. Any claim which any such party may have at any time against any other such party for a breach of any such representation or warranty, whether known or unknown, which is not asserted by written notice within such twelve (12) month period shall not be valid or effective, and the party shall have no liability with respect thereto. 4.02. "As Is" Purchase. All purchases of the Property hereunder shall be "as is, with all faults" and without any representations, warranties or indemnities by the Lessor Parties except for any representations, warranties or indemnities provided by Lessor pursuant to Subparagraph 4.01(b). Purchaser shall specifically acknowledge and agree that Lessor is selling and Purchaser is purchasing the Property on an "as is, with all faults" basis and that Purchaser is not relying on any representations or warranties of any kind whatsoever, express or implied, from any Lessor Party, its agents, or brokers as to any matters concerning the Property (except for any representations and warranties provided by Lessor pursuant to Subparagraph 4.01(b)), including (a) the condition of the Property (including any Improvements or other Modifications to the Property made prior to the Commencement Date or during the Term of the Lease Agreement); (b) title to the Property (including possession of the Property by any Person or the existence of any Lien or any other right, title or interest in or to any of the Property in favor of any Person); (c) the value, habitability, usability, design, operation or fitness for use of the Property; (d) the availability or adequacy of utilities and other services to the Property; (e) any latent, hidden or patent defect in the Property; (f) the zoning or status of the Property or any other restrictions on the use of the Property; (g) the economics of the Property; (h) any Casualty or Condemnation; or (i) the compliance of the Property with any applicable Governmental Rule or Insurance Requirement. 4.03. Release. Without limiting the foregoing, Purchaser shall, on behalf of itself and its successors and assigns, waive its right to recover from, and forever release and discharge, Lessor and the other Indemnitees from any and all demands, claims, legal or administrative proceedings, losses, liabilities, damages, penalties, fines, liens, judgments, costs or expenses whatsoever (including attorneys' fees and costs), whether direct or indirect, known or unknown, foreseen or unforeseen, that may arise on account of or in any way be connected with the physical condition of the Property or any Governmental Rule applicable thereto, including any 8 9 Environment Law. Purchaser shall expressly waive the benefits of Section 1542 of the California Civil Code, which provides that, "a general release does not extend to claims which the creditor does not know or expect to exist in his favor at the time of executing the release, which if known to him must have materially affected the settlement with the debtor." 4.04. Permits, Approvals, Etc. Lessee shall obtain all permits, licenses and approvals from and make all filings with Governmental Authorities and other Persons, comply and cause compliance with all applicable Governmental Rules and take all other actions required for the marketing, purchase and sale of the Property. 4.05. Costs. Lessee shall pay directly, without deduction from the purchase price or any other amount payable to Lessor hereunder, all costs and expenses of Lessee and Lessor associated with the marketing and sale of the Property, including brokers' fees and commissions; title insurance premiums; survey charges; utility, tax and other prorations; fees and expenses of environmental consultants and attorneys; appraisal costs; escrow fees; recording fees; documentary, transfer and other taxes; and all other fees, costs and expenses which might otherwise be deducted from the purchase price or any other amount payable to Lessor hereunder. 4.06. Lessor Liens. Lessor shall remove all Lessor Liens from the Property on or before the Expiration Date. 4.07. Transfer Documents. (a) Lessor. Subject to receipt by Lessor on the Expiration Date of the full amount required to be paid for the Property pursuant to Paragraph 2.03, Subparagraph 3.01(b) or Subparagraph 3.03 (as applicable), Lessor shall transfer its interest in the Property to Purchaser on the Expiration Date (unless Lessor is to retain the Property pursuant to Subparagraph 3.01(a)) by executing and delivering to Purchaser a Deed in substantially the form of Exhibit C(1) , an Acknowledgment of Disclaimer of Representations and Warranties in substantially the form of Exhibit C(2), and (if applicable) a Bill of Sale in substantially the form of Exhibit D and such other documents, instruments and agreements as such Person may reasonably request. (b) Lessee. On the Expiration Date, unless Lessee is to purchase the Property, Lessee shall transfer its interest in the Property to the Designated Purchaser or the Assignee Purchaser (or Lessor if Lessor is to retain the Property) by executing and delivering to such Person a Deed in substantially the form of Exhibit E, and (if applicable) a Bill of Sale in substantially the form of Exhibit F and such other documents, instruments and agreements as such Person may reasonably request. 4.08. Casualty and Condemnation Proceeds. If, on the Expiration Date, any Casualty and Condemnation Proceeds are held by Lessor in a Repair and Restoration Account or otherwise, Lessor shall (a) if Lessee is to purchase the Property on the Expiration Date and Lessee shall so direct, apply such proceeds to the purchase price to be paid by Lessee or (b) in all other cases, release such proceeds to Lessee; provided, however, that Lessor shall not have any 9 10 obligation so to apply or release such proceeds unless Lessee and/or any Designated Purchaser has complied with all of the terms and conditions of this Agreement. 4.09. Payments. Purchaser and Lessee shall make all payments in lawful money of the United States and in same day or immediately available funds not later than 11:00 a.m. on the date due. 4.10. Environmental Reports. Lessee shall obtain and deliver to Lessor, in accordance with Paragraph 4.02 of the Lease Agreement, environmental reports and assessments with respect to the Property. 4.11. Further Assurances. Lessee shall, and shall cause any Designated Purchaser to, execute and deliver such documents, instruments and agreements and take such other actions as Lessor may reasonably request to effect the purposes of this Agreement and comply with the terms hereof. Similarly, Lessor shall execute and deliver such documents, instruments and agreements and take such other actions as Lessee or a Designated Purchaser may reasonably request to effect the purposes of this Agreement and comply with the terms hereof. 10 11 SECTION 5. MISCELLANEOUS. 5.01. Notices. Except as otherwise specified herein, all notices, requests, demands, consents, instructions or other communications to or upon Lessee or Lessor under this Agreement shall be given as provided in Subparagraph 2.02(c) and Paragraph 7.01 of the Participation Agreement. 5.02. Waivers, Amendments. Any term, covenant, agreement or condition of this Agreement may be amended or waived only as provided in the Participation Agreement. No failure or delay by any Lessor Party in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. Unless otherwise specified in any such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. 5.03. Successors and Assigns. (a) General. This Agreement shall be binding upon and inure to the benefit of the Lessor Parties and Lessee and their permitted successors and assigns; provided, however, that the Lessor Parties and Lessee shall not sell, assign or delegate their respective rights and obligations hereunder except as provided in the Participation Agreement and in Subparagraph 5.03(b). (b) Assignment by Lessee of Purchase Rights. Lessee may assign to a third party (an "Assignee Purchaser") its right to purchase the Property pursuant to the Term Purchase Option or the Expiration Date Purchase Option; provided, however, that (i) such an assignment shall not relieve Lessee of its obligations to consummate or cause the consummation of any such purchase in accordance with the terms of this Agreement and (ii) Lessee assumes all responsibility for determining the creditworthiness of any such Assignee Purchaser. If, after any purchase by an Assignee Purchaser hereunder, the purchase price paid by such Assignee Purchaser is recovered from any Lessor Party, Lessee shall reimburse such Lessor Party for such recovery unless such recovery is due solely to a material misrepresentation or covenant breach by such Lessor Party. 5.04. No Third Party Rights. Nothing expressed in or to be implied from this Agreement is intended to give, or shall be construed to give, any Person, other than the Lessor Parties and Lessee and their permitted successors and assigns, any benefit or legal or equitable right, remedy or claim under or by virtue of this Agreement or under or by virtue of any provision herein. 5.05. Partial Invalidity. If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 11 12 5.06. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. 5.07. Counterparts. This Agreement may be executed in any number of identical counterparts, any set of which signed by all the parties hereto shall be deemed to constitute a complete, executed original for all purposes. 5.08. Nature of Lessee's Obligations. (a) Independent Obligation. The obligation of Lessee to pay the amounts payable by Lessee under this Agreement and the other Operative Documents and to perform the other Lessee Obligation are absolute, unconditional (except as expressly provided herein) and irrevocable obligations which are separate and independent of the obligations of the Lessor Parties under this Agreement and the other Operative Documents and all other events and circumstances, including the events and circumstances set forth in Subparagraph 5.08(c). (b) No Termination or Abatement. This Agreement and the other Operative Documents and Lessee's obligation to pay all amounts hereunder and to pay and perform all other Lessee Obligations shall continue in full force and effect without abatement notwithstanding the occurrence or existence of any event or circumstance, including any event or circumstance set forth in Subparagraph 5.08(c). (c) Full Payment and Performance. Lessee shall make all payments under this Agreement and the other Operative Documents in the full amounts and at the times required by the terms of this Agreement and the other Operative Documents without setoff, deduction or reduction of any kind and shall perform all other Lessee Obligations as and when required, without regard to any event or circumstances whatsoever, including (i) the condition of the Property (including any Improvements or other Modifications to the Property made prior to the Commencement Date or during the Term of the Lease Agreement); (ii) title to the Property (including possession of the Property by any Person or the existence of any Lien or any other right, title or interest in or to any of the Property in favor of any Person); (iii) the value, habitability, usability, design, operation or fitness for use of the Property; (iv) the availability or adequacy of utilities and other services to the Property; (v) any latent, hidden or patent defect in the Property; (vi) the zoning or status of the Property or any other restrictions on the use of the Property; (g) the economics of the Property; (vii) any Casualty or Condemnation; (viii) the compliance of the Property with any applicable Governmental Rule or Insurance Requirement; (ix) any failure by any Lessor Party to perform any of its obligations under this Agreement or any other Operative Document (other than the obligations of Lessor pursuant to Paragraph 4.06 and Subparagraph 4.07(a)); or (x) the exercise by any Lessor Party of any of its remedies under this Agreement or any other Operative Document; provided, however, that (A) Lessee shall have no obligation to purchase the Property on the Expiration Date if Lessor fails to remove Lessor Liens or deliver the required deed and bill of sale or other documents required to be delivered by Lessor hereunder and (B) 12 13 this Paragraph 5.08 shall not abrogate any right which Lessee may have to recover damages from any Lessor Party for any material breach by such Lessor Party of its obligations under this Agreement or any other Operative Document to the extent permitted hereunder or thereunder. 13 14 IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be executed as of the day and year first above written. LESSEE: SILICON VALLEY GROUP, INC. By: ----------------------------------- Name: ------------------------------ Title: ----------------------------- LESSOR: SELCO SERVICE CORPORATION By: ----------------------------------- Name: ------------------------------ Title: ----------------------------- 14 15 EXHIBIT A NOTICE OF TERM PURCHASE OPTION EXERCISE [Date] SELCO Service Corporation c/o KeyBank National Association 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young 1. Reference is made to the following: (a) The Participation Agreement, dated as of June 30, 1999 (the "Participation Agreement"), among Silicon Valley Group, Inc. ("Lessee"), SELCO Service Corporation ("Lessor"), the financial institutions listed in Schedule I to the Participation Agreement (the "Participants") and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"); (b) The Lease Agreement, dated as of June 30, 1999 (the "Lease Agreement"), between Lessee and Lessor; and (c) The Purchase Agreement, dated as of June 30, 1999 (the "Purchase Agreement"), between Lessee and Lessor. Unless otherwise indicated, all terms defined in the Participation Agreement have the same respective meanings when used herein. 2. Pursuant to Paragraph 4.01 of the Lease Agreement and Section 2 of the Purchase Agreement, Lessee hereby irrevocably notifies Lessor that Lessee is exercising its right to terminate the Lease Agreement prior to the Scheduled Expiration Date and purchase the Property on [_________, ____] (which date is a Business Day and which date, after the delivery of this notice, shall be the Expiration Date). IN WITNESS WHEREOF, Lessee has executed this Notice of Term Purchase Option Exercise on the date set forth above. SILICON VALLEY GROUP, INC. By: ----------------------------------- Name: ------------------------------ Title: ----------------------------- A-1 16 EXHIBIT B NOTICE OF RETURN OPTION EXERCISE [Date] SELCO Service Corporation c/o KeyBank National Association 700 Fifth Avenue, 48th Floor Seattle, WA 98104 Attn: Mary Young 1. Reference is made to the following: (a) The Participation Agreement, dated as of June 30, 1999 (the "Participation Agreement"), among Silicon Valley Group, Inc. ("Lessee"), SELCO Service Corporation ("Lessor"), the financial institutions listed in Schedule I to the Participation Agreement (the "Participants") and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"); and (b) The Purchase Agreement, dated as of June 30, 1999 (the "Purchase Agreement"), between Lessee and Lessor. Unless otherwise indicated, all terms defined in the Participation Agreement have the same respective meanings when used herein. 2. Pursuant to Paragraph 3.01 of the Purchase Agreement, Lessee hereby notifies Lessor that Lessee is electing to exercise the Return Option on the Scheduled Expiration Date of [_____, ____]. 3. Lessee hereby certifies to Lessor, Agent and the Participants that, on the date of this notice: (a) The representations and warranties of Lessee set forth in Paragraph 4.01 of the Participation Agreement are true and correct in all material respects as if made on such date (except for representations and warranties expressly made as of a specified date, which shall be true as of such date); (b) No Default has occurred and is continuing; and (c) All of the Operative Documents are in full force and effect on such date. B-1 17 IN WITNESS WHEREOF, Lessee has executed this Notice of Return Option Exercise on the date set forth above. SILICON VALLEY GROUP, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- B-2 18 EXHIBIT C(1) RECORDING REQUESTED BY WHEN RECORDED RETURN TO AND MAIL TAX STATEMENTS TO: [Purchaser] - ------------------ - ------------------ - ------------------ Documentary Transfer Tax is not of public record and is shown on a separate sheet attached to this deed. - ---------------------------------------------------------------------------- QUITCLAIM DEED FOR VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged, SELCO Service Corporation, an Ohio corporation doing business in California as Ohio SELCO Service Corporation ("Grantor"), hereby releases, remises and forever quitclaims to [Purchaser], a _____________ ("Grantee"), the real property located in the County of [________________], State of California, described on EXHIBIT A attached hereto and made a part hereof (the "Property"). Executed as of ________________, ____. SELCO SERVICE CORPORATION, an Ohio corporation By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- C(1)-1 19 EXHIBIT A LEGAL DESCRIPTION Assessor's Parcel No.: ------------------ C(1)(A)-1 20 State of ---------------- County of ---------------------- On before me, , ------------------- ------------------------- Date Name, Title of Officer personally appeared , ----------------------------------------------------------- Name(s) of signer(s) (personally known to me -OR- (proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ------------------------------------ 21 ----------------------, ---- [___________] Recorder Re: Request That Statement of Documentary Transfer Tax Not be Recorded Dear Sir: Request is hereby made in accordance with Section 11932 of the Revenue and Taxation Code that this statement of tax due not be recorded with the attached deed but be affixed to the deed after recordation and before return as directed on the deed. The attached deed names SELCO SERVICE CORPORATION, an Ohio corporation doing business in California as Ohio SELCO Service Corporation, as grantor, and [PURCHASER], a _________________, as grantee. The property being transferred and described in the attached deed is located in the [City of _________ and County of_______], State of California. The amount of Documentary Transfer Tax due on the attached deed is $__________, computed on full value of the property conveyed. SELCO SERVICE CORPORATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 22 EXHIBIT C(2) ACKNOWLEDGMENT AND DISCLAIMER OF REPRESENTATIONS AND WARRANTIES THIS ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES (this "Certificate") is made as of ___________, ____ by [PURCHASER], a _____________ ("Grantee"). Contemporaneously with execution of this Acknowledgement, SELCO SERVICE CORPORATION, an Ohio corporation doing business in California as Ohio SELCO Service Corporation ("Grantor"), is executing and delivering to Grantee a Quitclaim Deed and a Bill of Sale (the foregoing documents and any other documents to be executed and delivered to Grantee in connection therewith are herein called the "Conveyancing Documents" and any of the properties, rights or other matters assigned, transferred or conveyed pursuant thereto are herein collectively called the "Property") pursuant to the terms of a Purchase Agreement dated as of June 30, 1999 by and between Grantor and Silicon Valley Group, Inc., a Delaware corporation ("Lessee"). Notwithstanding any provision contained in the Conveyancing Documents to the contrary, Grantee acknowledges that Grantor is selling and Grantee is purchasing the Property on an "as is, with all faults" basis and that, except as expressly set forth in the Conveyancing Documents executed by Grantor to the contrary, Grantee is not relying on any representations or warranties of any kind whatsoever, express or implied, from Grantor, its agents, or brokers as to any matters concerning the Property including (a) the condition of the Property (including any improvements to the Property); (b) title to the Property (including possession of the Property by any individual or entity or the existence of any lien or any other right, title or interest in or to any of the Property in favor of any person, but excluding any Lessor Liens as defined in that certain Participation Agreement dated as of June 30, 1999 among Grantor, Lessee, the Participants and KeyBank National Association, as agent for the Participants (in such capacity, "Agent")); (c) the value, habitability, usability, design, operation or fitness for use of the Property; (d) the availability or adequacy of utilities and other services to the Property; (e) any latent, hidden or patent defect in the Property; (f) the zoning or status of the Property or any other restrictions on the use of the Property; (g) the economics of the Property; (h) any damage to, destruction or, or decrease in the value of all or any portion of the Property or any condemnation or other taking or sale of all or any portion of the Property, by or on account of any actual or threatened eminent domain proceeding or other taking of action by any governmental authority or other person have the power of eminent domain; or (i) the compliance of the Property with any applicable law, rule, regulation, ordinance, order, code, judgment or similar form of decision of any governmental authority or any terms, conditions or requirements imposed by any policies of insurance relating to the Property. [See next page] C(2)-1 23 The provisions of this Acknowledgement shall be binding on Grantee, its successors and assigns and any other party claiming through Grantee. Grantee hereby acknowledges that Grantor is entitled to rely and is relying on this Certificate. EXECUTED as of ____________, _______. [PURCHASER] By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- C(2)-2 24 EXHIBIT D BILL OF SALE FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged, SELCO SERVICE CORPORATION, an Ohio corporation doing business in California as Ohio SELCO Service Corporation ("Seller") does hereby sell, transfer and convey to [PURCHASER], a _________________________ ("Purchaser"), the personal property owned by Seller in connection with that certain real property commonly known as _______________, _________, California, including, without limitation, the personal property itemized on SCHEDULE 1 attached hereto and incorporated herein by this reference (the "Property"). Seller is selling and Purchaser is purchasing the Property on an "as is, with all faults" basis and, except as expressly set forth in the Conveyancing Documents executed by Seller to the contrary, Purchaser is not relying on any representations or warranties of any kind whatsoever, express or implied, from Seller, its agents, or brokers as to any matters concerning the Property including (a) the condition of the Property; (b) title to the Property (including possession of the Property by any individual or entity or the existence of any lien or any other right, title or interest in or to any of the Property in favor of any person); (c) the value, habitability, usability, design, operation or fitness for use of the Property; or (d) any latent, hidden or patent defect in the Property. Dated: ____________, ____ SELCO SERVICE CORPORATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- [PURCHASER] By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- D-1 25 SCHEDULE 1 PROPERTY D(1)-1 26 EXHIBIT E RECORDING REQUESTED BY WHEN RECORDED RETURN TO AND MAIL TAX STATEMENTS TO: - ------------------------- - ------------------------- Attention: --------------- Documentary Transfer Tax is not of public record and is shown on a separate sheet attached to this deed. - -------------------------------------------------------------------------------- QUITCLAIM DEED FOR VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged, SILICON VALLEY GROUP, INC., a Delaware corporation ("Grantor"), hereby releases, remises and forever quitclaims to [PURCHASER] ("Grantee"), the real property located in the [County of _______], State of California, described on EXHIBIT A attached hereto and made a part hereof (the "Property"). Executed as of __________, ____. SILICON VALLEY GROUP, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- E-1 27 EXHIBIT A LEGAL DESCRIPTION Assessor's Parcel No.: ____________________ E(A)-1 28 State of ---------------------- County of --------------------- On before me, , ------------------- ------------------------- Date Name, Title of Officer personally appeared , --------------------- Name(s) of signer(s) (personally known to me -OR- (proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. 29 -------------------- , ---- [___________] Recorder Re: Request That Statement of Documentary Transfer Tax Not be Recorded Dear Sir: Request is hereby made in accordance with Section 11932 of the Revenue and Taxation Code that this statement of tax due not be recorded with the attached deed but be affixed to the deed after recordation and before return as directed on the deed. The attached deed names SILICON VALLEY GROUP, INC., a Delaware corporation, as grantor, and [PURCHASER], as grantee. The property being transferred and described in the attached deed is located in the [City of _______, County of _______], State of California. The amount of Documentary Transfer Tax due on the attached deed is $__________, computed on full value of the property conveyed. SILICON VALLEY GROUP, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 30 EXHIBIT F BILL OF SALE For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Silicon Valley Group, Inc., a Delaware corporation ("Seller"), does hereby sell, transfer, and convey unto [PURCHASER] ("Buyer"), the personal property owned by Seller in connection with that certain real property commonly known as _______________, ________, California, which Seller warrants to be free and clear of all liens and encumbrances other than Lessor Liens and those disclosed on EXHIBIT A, including, without limitation, the personal property itemized on SCHEDULE 1 attached hereto and incorporated herein by this reference. Seller does hereby covenant with Buyer that Seller is the lawful owner of such personal property, and that the undersigned has good right to sell the same as aforesaid and will warrant and defend the title thereto unto Buyer, its successors and assigns, against the claims and demands of all persons whomsoever. DATED this ____ day of __________, ____. SILICON VALLEY GROUP, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- G-1 31 EXHIBIT A PROPERTY F-1 32 SCHEDULE 1 PROPERTY F(1)-1 33 EXECUTION VERSION ================================================================================ PURCHASE AGREEMENT BETWEEN SILICON VALLEY GROUP, INC. AND SELCO SERVICE CORPORATION JUNE 30, 1999 ================================================================================ 34 TABLE OF CONTENTS
PAGE ---- SECTION 1. INTERPRETATION.............................................................................1 1.01. Definitions................................................................................1 1.02. Rules of Interpretation....................................................................2 SECTION 2. OPTIONAL PURCHASE BY LESSEE DURING THE TERM................................................2 2.01. Term Purchase Option.......................................................................2 2.02. Notice of Term Purchase Option Exercise....................................................2 2.03. Purchase Price.............................................................................2 2.04. Effect of Certain Events...................................................................2 SECTION 3. OBLIGATIONS OF LESSEE ON THE EXPIRATION DATE...............................................3 3.01. Alternative................................................................................3 3.02. Sale of Property to Third Party Purchaser..................................................4 3.03. End of Term Adjustment.....................................................................4 SECTION 4. TERMS OF ALL PURCHASES.....................................................................6 4.01. Representations and Warranties of Parties..................................................6 4.02. "As Is" Purchase...........................................................................8 4.03. Release....................................................................................8 4.04. Permits, Approvals, Etc....................................................................8 4.05. Costs......................................................................................8 4.06. Lessor Liens...............................................................................9 4.07. Transfer Documents.........................................................................9 4.08. Casualty and Condemnation Proceeds.........................................................9 4.09. Payments...................................................................................9 4.10. Environmental Reports......................................................................9 4.11. Further Assurances.........................................................................9 SECTION 5. MISCELLANEOUS.............................................................................10 5.01. Notices...................................................................................10 5.02. Waivers, Amendments.......................................................................10 5.03. Successors and Assigns....................................................................10 5.04. No Third Party Rights.....................................................................10 5.05. Partial Invalidity........................................................................10 5.06. Governing Law.............................................................................10
-i- 35 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 5.07. Counterparts..............................................................................11 5.08. Nature of Lessee's Obligations............................................................11
EXHIBITS
A Notice of Term Purchase Option Exercise (2.02) B Notice of Return Option Exercise (3.01) C(1) Deed (Lessor) (4.07(a)) C(2) Acknowledgement and Disclaimer of Representations and Warranties (4.07(a)) D Bill of Sale (Lessor) (4.07(a)) E Deed (Lessee) (4.07(b)) F Bill of Sale (Lessee) (4.07(b))
-ii- EX-10.56 8 EX-10.56 1 EXHIBIT 10.56 LEASE AGREEMENT, DEED OF TRUST WITH ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING THIS LEASE AGREEMENT, DEED OF TRUST WITH ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this "Agreement" herein), dated as of June 30, 1999 is entered into by and between: (1) SILICON VALLEY GROUP, INC., a Delaware corporation ("Lessee"); and (2) SELCO SERVICE CORPORATION, an Ohio corporation doing business in California as Ohio SELCO Service Corporation, as lessor under this Agreement and as trustee under the deed of trust contained herein ("Lessor"). RECITALS A. Lessee has requested Lessor and the financial institutions which are "Participants" under the Participation Agreement referred to in Recital B below (such financial institutions to be referred to collectively as the "Participants") to provide to Lessee a lease facility pursuant to which: (1) Lessor would (a) purchase certain property, (b) lease such property to Lessee and (c) grant to Lessee the right to purchase such property; and (2) The Participants would participate in such lease facility by (a) funding the advance to be made by Lessor to purchase such property and (b) acquiring participation interests in the rental and certain other payments to be made by Lessee. B. Pursuant to a Participation Agreement dated of even date herewith (the "Participation Agreement") among Lessee, Lessor, the Participants and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"), Lessor and the Participants have agreed to provide such lease facility upon the terms and subject to the conditions set forth therein, including without limitation the execution and delivery of this Agreement setting forth the terms of the lease by Lessor to Lessee of the property. AGREEMENT NOW, THEREFORE, in consideration of the above Recitals and the mutual covenants herein contained, the parties hereto hereby agree as follows: 2 SECTION 1. INTERPRETATION. 1.01. Definitions. Unless otherwise indicated in this Agreement or any other Operative Document, each term set forth in Schedule 1.01 to the Participation Agreement, when used in this Agreement or any other Operative Document, shall have the respective meaning given to that term in such Schedule 1.01 or in the provision of this Agreement or other document, instrument or agreement referenced in such Schedule 1.01. 1.02. Rules of Interpretation. Unless otherwise indicated in this Agreement or any other Operative Document, the rules of interpretation set forth in Schedule 1.02 to the Participation Agreement shall apply to this Agreement and the other Operative Documents. SECTION 2. BASIC PROVISIONS. 2.01. Lease of the Property. Subject to the acquisition thereof by Lessor pursuant to the Participation Agreement and the Acquisition Agreement (either as of the date hereof or during the term hereof), Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor the following property (the "Property") to the extent of Lessor's estate, right, title and interest therein, thereto or thereunder: (a) All lots, pieces, tracts and parcels of land described in Exhibit A (the "Land"); (b) All Lessor Improvements located on the Land; (c) All Appurtenant Rights belonging, relating or pertaining to any of the Land or Lessor Improvements; (d) All Related Goods (including those described in Exhibit B), Related Permits and Related Agreements related to any of the foregoing Land, Lessor Improvements or Appurtenant Rights; and (e) All accessions and accretions to and replacements and substitutions for the foregoing. 2.02. Term. (a) Original Term. The original term of this Agreement shall commence on the Closing Date (the "Commencement Date") and shall end on the fifth anniversary of the Closing Date (such date as it may be extended pursuant to Subparagraph 2.02(b) to be referred to as the "Scheduled Expiration Date"). (b) Extensions. Lessee may request Lessor to extend the Scheduled Expiration Date in effect for three (3) additional periods of one (1) year each, as provided in Paragraph 2.09 of the Participation Agreement. If Lessor and each Participant consents to any such a request in accordance with such provision, the then current 2 3 Scheduled Expiration Date shall be deemed extended by one (1) year. Lessee acknowledges that neither Lessor nor any Participant has any obligation or commitment (either express or implied) to extend, or consent to the extension of, the Scheduled Expiration Date at any time. 2.03. Rent. (a) Base Rent. (i) Lessee shall pay to Lessor as base rent hereunder ("Base Rent") for each Rental Period for each Portion an amount equal to the product of (A) the Rental Rate for such Rental Period, times (B) the amount of the Portion on the first day of such Rental Period, times (C) a fraction, the numerator of which is the number of days in such Rental Period and the denominator of which is 360. If the Rental Rate shall change during any Rental Period, the Rental Rate for such Rental Period shall be the weighted average of the Rental Rates in effect from time to time during such Rental Period. (ii) After the initial Rental Period, Lessee may select the number and amounts of the Portions into which the Outstanding Lease Amount is to be divided and the Rental Period for each such Portion by delivering to Lessor, at least three (3) Business Days prior to the last day of each Rental Period for a Portion, an irrevocable written notice in the form of Exhibit C, appropriately completed (a "Notice of Rental Period Selection"), subject to the following: (A) Each Portion shall be in the amount of $2,000,000 or an integral multiple of $100,000 in excess thereof; provided, however, that (1) the total number of Portions outstanding at any time shall not exceed two (2), and (2) the Outstanding Lease Amount shall consist of a single Portion in the amount of the Outstanding Lease Amount if the Outstanding Lease Amount is less than $4,000,000. (B) The initial and each subsequent Rental Period selected by Lessee for each Portion shall be one (1) month, or if the Synthetic Lease Swap Agreement is no longer in effect, two (2), three (3) or six (6) months; provided, however, that (1) each Rental Period shall begin and end on the first Business Day of a calendar month, (2) no Rental Period shall end after the Scheduled Expiration Date, (3) no Rental Period shall be longer than one (1) month if an Event of Default has occurred and is continuing on the date three (3) Business Days prior to the first day of such Rental Period and (4) each Rental Period after the initial Rental Period for any Portion for which Lessee fails to make a selection by delivering a Notice of Rental Period Selection in accordance with this clause (ii) shall be one (1) month. 3 4 Lessee shall deliver each Notice of Rental Period Selection by overnight courier, first-class mail or facsimile as required by Subparagraph 2.02(c) and Paragraph 7.01 of the Participation Agreement; provided, however, that Lessee shall promptly deliver the original of any Notice of Rental Period Selection initially delivered by facsimile. (iii) The rental rate for each Rental Period ("Rental Rate") shall be the LIBOR Rental Rate for such Rental Period, except as follows: (A) The Rental Rate for the initial Rental Period shall be the Alternate Rental Rate; (B) If any other Rental Period is less than one (1) month, the Rental Rate for such Rental Period shall be the Alternate Rental Rate; or (C) If the LIBOR Rental Rate is unavailable for any Rental Period pursuant to Subparagraph 2.12(a) or Subparagraph 2.12(b) of the Participation Agreement, the Rental Rate for such Rental Period shall be the Alternate Rental Rate. (iv) Lessee shall pay Base Rent in arrears (A) for each Portion, on the last day of each Rental Period therefor and, in the case of any Rental Period which exceeds three (3) months, each day occurring every three (3) months after the first day of such Rental Period (individually, a "Scheduled Rent Payment Date") and (B) for all Portions, on the Expiration Date. (b) Supplemental Rent. Lessee shall pay as supplemental rent hereunder ("Supplemental Rent") all amounts (other than Base Rent, the purchase price payable by Lessee for any purchase of the Property by Lessee pursuant to the Purchase Agreement and the Residual Value Guaranty Amount payable under the Purchase Agreement) payable by Lessee under this Agreement and the other Operative Documents. Lessee shall pay all Supplemental Rent amounts on the dates specified in this Agreement and the other Operative Documents for the payment of such amounts or, if no date is specified for the payment of any such amount, upon the demand of Lessor or any other Person to whom such amount is payable. 2.04. Use. Lessee may use the Property for office purposes, and for any other purpose which is in compliance with applicable zoning laws and ordinances for the Property. 2.05. "As Is" Lease. Lessee has conducted, or will conduct from time to time with regard to property that may be added hereto after the date hereof, all due diligence which it deems appropriate regarding the Property and agrees that no Lessor Party has any obligation to conduct any such due diligence. Lessee is leasing the Property "as is, with all faults" without any representation, warranty, indemnity or undertaking by any Lessor Party regarding any aspect of the Property, including (a) the condition of the Property (including the Lessor Improvements); (b) title to the Property (including possession of the Property by any Person or the existence of 4 5 any Lien or any other right, title or interest in or to any of the Property in favor of any Person); (c) the value, habitability, usability, design, operation or fitness for use of the Property; (d) the availability or adequacy of utilities and other services to the Property; (e) any latent, hidden or patent defect in the Property; (f) the zoning or status of the Property or any other restrictions on the use of the Property; (g) the economics of the Property; (h) any Casualty or Condemnation; or (i) the compliance of the Property with any applicable Governmental Rule or Insurance Requirement; provided, however, that Lessor shall be obligated to remove Lessor Liens to the extent required in Subparagraph 5.04(b) of the Participation Agreement. Without limiting the generality of the foregoing, Lessee specifically waives any covenant of quiet enjoyment except as otherwise provided in Subparagraph 5.04(b) of the Participation Agreement. 2.06. Nature of Transaction. As more fully provided in Paragraph 2.10 of the Participation Agreement, Lessee and the Lessor Parties intend that the transaction evidenced by this Agreement and the other Operative Documents constitute an operating lease for purposes of Lessee's financial and SEC reporting and a loan secured by the Property for purposes of state and local income tax and commercial, real estate and bankruptcy law. 2.07. Security, Etc. In order to secure the Lessee Obligations and otherwise to assure the Lessor Parties the benefits hereof in the event that the transaction evidenced by this Agreement and the other Operative Documents is, pursuant to the intent of Lessee and the Lessor Parties, treated as a loan for certain purposes, Lessee hereby makes the following grants and agrees as follows: (a) Real Property Security. As security for the Lessee Obligations, Lessee hereby irrevocably and unconditionally grants, conveys, transfers and assigns to Lessor, as beneficiary (in trust for the benefit of the Lessor Parties), with power of sale and right of entry and possession, all estate, right, title and interest of Lessee in the following property, whether now owned or leased or hereafter acquired, (collectively, the "Real Property Collateral"): (i) The Land; (ii) All Lessor Improvements located on the Land; (iii) All Appurtenant Rights belonging, relating or pertaining to any of the foregoing Land or Lessor Improvements; (iv) All Subleases of and all Issues and Profits accruing from any of the foregoing Land, Lessor Improvements or Appurtenant Rights to the extent that such Subleases and Issues and Profits constitute real property; (v) All Related Goods, Related Permits and Related Agreements related to any of the foregoing Land, Lessor Improvements or Appurtenant Rights to the extent that such Related Goods, Related Agreements and Related Permits constitute real property; 5 6 (vi) All other Property to the extent that such property constitutes real property; and (vii) All proceeds of the foregoing, including Casualty and Condemnation Proceeds. (b) Personal Property Security. As security for the Lessee Obligations, Lessee hereby irrevocably and unconditionally assigns and grants to Lessor, for the benefit of the Lessor Parties, a security interest in all estate, right, title and interest of Lessee in the following property, whether now owned or leased or hereafter acquired, (collectively, the "Personal Property Collateral"): (i) All Subleases of and all Issues and Profits accruing from any of the Land, Lessor Improvements or Appurtenant Rights to the extent that such Subleases and Issues and Profits constitute personal property; (ii) All Related Goods, Related Permits and Related Agreements related to any of the Land, Lessor Improvements or Appurtenant Rights to the extent that such Related Goods, Related Agreements and Related Permits constitute personal property; (iii) All Cash Collateral and all other deposit accounts, instruments, investment property and monies held by any Lessor Party in connection with this Agreement or any other Operative Document (including any Repair and Restoration Account); (iv) All other Property to the extent such Property constitutes personal property; and (v) All proceeds of the foregoing, including Casualty and Condemnation Proceeds. This Agreement constitutes a fixture filing for purposes of the California Commercial Code with respect to the Related Goods and Modifications which are or are to become fixtures on the Land or Lessor Improvements. (c) Absolute Assignment of Subleases, Issues, and Profits. Lessee hereby irrevocably assigns to Lessor, for the benefit of the Lessor Parties, all of Lessee's estate, right, title and interest in, to and under the Subleases and the Issues and Profits, whether now owned or hereafter acquired. This is a present and absolute assignment, not an assignment for security purposes only, and Lessor's right to the Subleases and Issues and Profits is not contingent upon, and may be exercised without possession of, the Property. (i) If no Event of Default has occurred and is continuing, Lessee shall have a revocable license to collect and retain the Issues and Profits as they become due. Upon the occurrence and during the continuance of an Event of 6 7 Default, such license shall automatically terminate, and Lessor may collect and apply the Issues and Profits pursuant to Subparagraph 5.02(d) without further notice to Lessee or any other Person and without taking possession of the Property. All Issues and Profits thereafter collected by Lessee shall be held by Lessee as trustee in a constructive trust for the benefit of Lessor. Lessee hereby irrevocably authorizes and directs the sublessees under the Subleases, without any need on their part to inquire as to whether an Event of Default has actually occurred or is then existing, to rely upon and comply with any notice or demand by Lessor for the payment to Lessor of any rental or other sums which may become due under the Subleases or for the performance of any of the sublessees' undertakings under the Subleases. Collection of any Issues and Profits by Lessor shall not cure or waive any default or notice of default hereunder or invalidate any acts done pursuant to such notice, but shall be applied by Lessor to pay Lessee Obligations in such order as Lessor shall determine in accordance with the Operative Documents. (ii) The foregoing irrevocable assignment shall not cause any Lessor Party to be (A) a mortgagee in possession; (B) responsible or liable for (1) the control, care, management or repair of the Property or for performing any of Lessee's obligations or duties under the Subleases, (2) any waste committed on the Property by the sublessees under any of the Subleases or by any other Persons, (3) any dangerous or defective condition of the Property, or (4) any negligence in the management, upkeep, repair or control of the Property resulting in loss or injury or death to any sublessee, licensee, employee, invitee or other Person; or (C) responsible for or impose upon any Lessor Party any duty to produce rents or profits. No Lessor Party, in the absence of gross negligence or willful misconduct on its part, shall be liable to Lessee as a consequence of (y) the exercise or failure to exercise any of the rights, remedies or powers granted to Lessor hereunder or (z) the failure or refusal of Lessor to perform or discharge any obligation, duty or liability of Lessee arising under the Subleases. SECTION 3. OTHER LESSEE AND LESSOR RIGHTS AND OBLIGATIONS. 3.01. Maintenance, Repair, Etc. (a) General. Lessee shall not permit any waste of the Property, except for ordinary wear and tear, and shall, at its sole cost and expense, maintain the Property in good working order, mechanical condition and repair and make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case as required by all applicable Governmental Rules and Insurance Requirements and on a basis consistent with the operation and maintenance of commercial properties comparable in type and location to the Property and in compliance with prudent industry practice. 7 8 (b) Modifications. Lessee, at its sole cost and expense, may from time to time make alterations, renovations, improvements and additions to the Property and substitutions and replacements therefor (collectively, except for any such property removed in accordance with Paragraph 3.10, "Modifications"); provided that: (i) No Modification materially impairs the value, utility or useful life of the Property or any part thereof from that which existed immediately prior to such Modification; (ii) All Modifications are made expeditiously and, in all cases, unless Lessee currently is exercising either the Term Purchase Option or the Expiration Date Purchase Option, completed not later than six (6) months prior to the Scheduled Expiration Date; (iii) All Modifications are made in a good and workmanlike manner and in compliance with all applicable Governmental Rules and Insurance Requirements; (iv) Subject to Paragraph 3.12 relating to permitted contests, Lessee pays all costs and expenses and discharges (or cause to be insured or bonded over) any Liens arising in connection with any Modification not later than the earlier of (A) sixty (60) days after the same shall be filed (or otherwise becomes effective) and (B) unless Lessee currently is exercising either the Term Purchase Option or the Expiration Date Purchase Option, six (6) months prior to the Scheduled Expiration Date; (v) At least one (1) month prior to the commencement of (A) any Modifications which are anticipated to cost $1,000,000 or more in the aggregate, or (B) any Modifications which cause the total of all Modifications undertaken during the previous twelve-month period to exceed an aggregate cost of $2,500,000, Lessee shall deliver to Lessor, with sufficient copies for Agent and each Participant, a brief written description of such Modifications; and (vi) All Modifications otherwise comply with this Agreement and the other Operative Documents. (c) Abandonment. Lessee shall not abandon the Property or any material portion thereof for any period in excess of thirty (30) consecutive days during the term hereof, except as a part of any Modifications as permitted herein or in the other Operative Documents. (d) Maintenance. Lessee shall maintain the Property and each material portion thereof in a manner consistent with other similar properties in the same area. 3.02. Risk of Loss. Lessee assumes all risks of loss arising from any Casualty or Condemnation which arises or occurs prior to the Expiration Date or while Lessee is in 8 9 possession of the Property and all liability for all personal injuries and deaths and damages to property suffered by any Person or property on or in connection with the Property which arises or occurs prior to the Expiration Date or while Lessee is in possession of the Property, except in each case to the extent any such loss or liability is primarily caused by the gross negligence or willful misconduct of a Lessor Party. Lessee hereby waives the provisions of California Civil Code Sections 1932(1), 1932(2) and 1933(4), and any and all other applicable existing or future Governmental Rules permitting the termination of this Agreement as a result of any Casualty or Condemnation, and Lessor shall in no event be answerable or accountable for any risk of loss of or decrease in the enjoyment and beneficial use of the Property as a result of any such event. 3.03. Insurance. (a) Coverage. Lessee, at its sole cost and expense, shall carry and maintain the insurance coverage not less than set forth in Schedule 3.03 and such additional insurance of the types (including the types set forth in Schedule 3.03), in amounts, in a form and with deductibles customarily carried by a reasonably prudent Person owning or operating properties similar to the Property in the same geographic area as the Property. (b) Carriers. Any insurance carried and maintained by Lessee pursuant to this Paragraph 3.03 shall be underwritten by an insurance company which (i) has, at the time such insurance is placed and at the time of each renewal thereof, a general policyholder rating of "A" and a financial rating of at least 13 from A.M. Best and Company or any successor thereto (or if there is none, an organization having a similar national reputation) or (ii) is otherwise approved by Lessor and Required Participants. (c) Terms. Each insurance policy maintained by Lessee pursuant to this Paragraph 3.03 shall provide as follows, whether through endorsements or otherwise: (i) Lessor and Agent shall be named as additional insureds, in the case of each policy of liability insurance and property insurance, and additional loss payees, in the case of each policy of property insurance. (ii) In respect of the interests of Lessor in the policy, the insurance shall not be invalidated by any action or by inaction of Lessee or by any Person having temporary possession of the Property while under contract with Lessee to perform maintenance, repair, alteration or similar work on the Property, and shall insure the interests of Lessor regardless of any breach or violation of any warranty, declaration or condition contained in the insurance policy by Lessee, Lessor or any other additional insured (other than by such additional insured, as to such additional insured); provided, however, that the foregoing shall not be deemed to (A) cause such insurance policies to cover matters otherwise excluded from coverage by the terms of such policies or (B) require any insurance to remain in force notwithstanding non-payment of premiums except as provided in clause (iii) below. 9 10 (iii) If the insurance policy is cancelled for any reason whatsoever, or substantial change is made in the coverage that affects the interests of Lessor, or if the insurance coverage is allowed to lapse for non-payment of premium, such cancellation, change or lapse shall not be effective as to Lessor for thirty (30) days after receipt by Lessor of written notice from the insurers of such cancellation, change or lapse. (iv) No Lessor Party shall have any obligation or liability for premiums, commissions, assessments, or calls in connection with the insurance. (v) The insurer shall waive any rights of set-off or counterclaim or any other deduction, whether by attachment or otherwise, that it may have against any Lessor Party. (vi) The insurance shall be primary without right of contribution from any other insurance that may be carried by any Lessor Party with respect to its interest in the Property. (vii) The insurer shall waive any right of subrogation against any Lessor Party. (viii) All provisions of the insurance, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured party. (ix) The insurance shall not be invalidated should Lessee or any Lessor Party waive, in writing, prior to a loss, any or all rights of recovery against any Person for losses covered by such policy, nor shall the insurance in favor of any Lessor Party or Lessee, as the case may be, or their respective rights under and interests in said policies be invalidated or reduced by any act or omission or negligence of any Lessor Party or Lessee, as the case may be, or any other Person having any interest in the Property. (x) All insurance proceeds with a value of less than one million Dollars ($1,000,000) in respect of any loss or occurrence with respect to the Property shall be paid to and adjusted solely by Lessee and all other insurance proceeds shall be paid to Lessor and adjusted jointly by Lessor and Lessee, except that, from and after the date on which the insurer receives written notice from Lessor that an Event of Default has occurred and is continuing (and unless and until such insurer receives written notice from Lessor that all Events of Default have been waived), all losses shall be adjusted solely by, and all insurance proceeds shall be paid solely to, Lessor. (xi) Each policy of property insurance shall contain a standard form mortgagee endorsement in favor of Lessor. 10 11 (xii) Each insurance policy shall provide that the coverage to be provided thereunder shall not be invalidated in the event Lessee or any Lessor Party fails to maintain other insurance covering losses of a similar type or types. (xiii) Each insurance policy shall contain a "severability of interest" provision. (xiv) Each insurance policy which is written as "excess insurance" shall contain a provision that it will drop down in the event that any underlying insurance coverage has been reduced or exhausted by reason of losses paid thereunder. (xv) In the event of claims, losses and damages arising from a single incident or occurrence (or related incidents or occurrences) that relate to the Property and other property of Lessee and that are covered by a "blanket" policy, claims, losses and damages relating to the Property shall be separately adjusted. (d) Evidence of Insurance. Lessee, at its sole cost and expense, shall furnish to Lessor from time to time upon the request of Lessor such certificates or other documents as Lessor may reasonably request to evidence Lessee's compliance with the insurance requirements set forth in this Paragraph 3.03. (e) Release of Lessor Parties. Lessee hereby waives, releases and discharges each Lessor Party and its directors, officers, employees, agents and advisors from all claims whatsoever arising out of any loss, claim, expense or damage to or destruction covered or coverable by insurance required under this Paragraph 3.03 to the extent the policies for such insurance permit such waiver, notwithstanding that such loss, claim, expense or damage may have been caused by any such Person, and, as among Lessee and such Persons, Lessee agrees to look to the insurance coverage only in the event of such loss. (f) Insurance to be Maintained Pursuant to the Fixed Price Remediation Agreement. In addition to the other insurance requirements set forth in this Paragraph 3.03 and in Subparagraph 5.01(d) of the Purchase Agreement , Lessee shall: (i) Within ninety (90) days after the Commencement Date, provide Lessor with evidence in form and substance satisfactory to Lessor that (A) the policies of insurance of the types and in the amounts required to be carried and maintained by the Remediator pursuant to the Fixed Price Remediation Agreement as indicated in the binders therefor delivered to Lessor on the Commencement Date pursuant to Schedule 3.01 of the Participation Agreement have been obtained; and (B) that Lessor has been named additional insured or loss payee (as applicable) with respect to all such policies of insurance to the extent required pursuant to the Fixed Price Remediation Agreement; 11 12 (ii) Cause the Remediator to continue to carry and maintain at all times such insurance of the types and in the amounts required pursuant to the Fixed Price Remediation Agreement; and; (iii) Deliver to Lessor from time to time, as Lessor may reasonably request, schedules setting forth all such insurance then in effect. With respect to all such insurance to be maintained pursuant to the Remediation Agreement, Lessee acknowledges and agrees that neither Lessor nor the other Lessor Parties shall be responsibility for co-payments, deductibles and/or self-insured retentions to paid by any Person with respect thereto. 3.04. Casualty and Condemnation. (a) Notice. Lessee shall give Lessor prompt written notice of the occurrence of any Casualty affecting, or the institution of any proceedings for the Condemnation of, the Property or any portion thereof. (b) Repair or Purchase Option. After the occurrence of any Casualty or any Condemnation affecting the Property or any portion thereof, Lessee shall either (i) repair and restore the Property as required by Subparagraph 3.04(c) or (ii) exercise the Term Purchase Option and purchase the Property pursuant to the Purchase Agreement; provided, however, that Lessee may not elect to repair and restore the Property if such Casualty or Condemnation is a Major Casualty or Major Condemnation or if any other Event of Default has occurred and is continuing, unless Lessor and the Required Participants shall consent in writing. Not later than one (1) month after the occurrence of any Casualty or any Condemnation, Lessee shall deliver to Lessor a written notice indicating whether it elects to repair and restore or purchase the Property. (c) Repair and Restoration. If Lessee elects to repair and restore the Property following any Casualty or any Condemnation, Lessee shall diligently proceed to repair and restore the Property to the condition in which it existed immediately prior to such Casualty or such Condemnation and shall complete all such repairs and restoration as soon as reasonably practicable, but not later than the earlier of (y) six (6) months after the occurrence of the Casualty or the Condemnation and (z) six (6) months prior to the Scheduled Expiration Date unless Lessee currently is exercising either the Term Purchase Option or the Expiration Date Purchase Option. Lessee shall use its own funds to make such repairs and restoration, except to the extent any Casualty and Condemnation Proceeds are available and are released to Lessee for such purpose pursuant to Subparagraph 3.04(f). Lessee's exercise of the repair and restoration option shall, if Lessor or Required Participants direct, be subject to satisfaction of the following conditions: (i) Within one (1) month after the occurrence of the Casualty or the Condemnation, Lessee shall deposit in an interest bearing deposit account acceptable to and controlled by Lessor (a "Repair and Restoration Account") 12 13 funds (including any Casualty and Condemnation Proceeds which are available and are released to Lessee pursuant to Subparagraph 3.04(f)) in the amount which Lessor determines is needed to complete and fully pay all costs of the repair or restoration (including taxes, financing charges, insurance and rent during the repair period). (ii) As soon as reasonably possible and in no event later than two (2) months after the occurrence of the Casualty or the Condemnation, Lessee shall establish an arrangement for lien releases and disbursement of funds acceptable to Lessor and in a manner and upon such terms and conditions as would be required by a prudent interim construction lender. (iii) As soon as reasonably possible and in no event later than two (2) months after the occurrence of the Casualty or the Condemnation, Lessee shall deliver to Lessor the following, each in form and substance acceptable to Lessor: (A) Evidence that the Property can, in Lessor's reasonable judgment, with diligent restoration or repair, be returned to a condition at least equal to the condition thereof that existed prior to the Casualty or Condemnation causing the loss or damage within the earlier to occur of (A) six (6) months after the occurrence of the Casualty or Condemnation and (B) unless Lessee currently is exercising either the Term Purchase Option or the Expiration Date Purchase Option, six (6) months prior to the Scheduled Expiration Date; (B) Evidence that all necessary governmental approvals can be timely obtained to allow the rebuilding and reoccupancy of the Property; (C) Copies of all plans and specifications for the work; (D) Copies of contracts for all material aspects of the work, signed by a contractor reasonably acceptable to Lessor; (E) A cost breakdown for the work; (F) A payment and performance bond for the work or other security satisfactory to Lessor; (G) Evidence that, upon completion of the work, the size, capacity and total value of the Property will be at least as great as it was before the Casualty or Condemnation occurred; and (H) Evidence of satisfaction of any additional conditions that Lessor or Required Participants may reasonably establish to protect their rights under this Agreement and the other Operative Documents. 13 14 All plans and specifications for the work must be reasonably acceptable to Lessor, except that Lessor's approval shall not be required if the restoration work is based on the same plans and specifications as were originally used to construct the Property. To the extent that the funds in a Repair and Restoration Account include both Casualty and Condemnation Proceeds and other funds deposited by Lessee, the other funds deposited by Lessee shall be used first. Lessee acknowledges that the specific conditions described above are reasonable. (d) Prosecution of Claims for Casualty and Condemnation Proceeds. Lessee shall proceed promptly and diligently to prosecute in good faith the settlement or compromise of any and all claims for Casualty and Condemnation Proceeds; provided, however, that any settlement or compromise of any such claim shall, except as otherwise provided in clause (x) of Subparagraph 3.03(c), be subject to the written consent of Lessor and Required Participants, which consents shall not be unreasonably withheld. Lessor may participate in any proceedings relating to such claims, and, after the occurrence and during the continuance of any Event of Default, Lessor is hereby authorized, in its own name or in Lessee's name, to adjust any loss covered by insurance or any Casualty or Condemnation claim or cause of action, and to settle or compromise any claim or cause of action in connection therewith, and Lessee shall from time to time deliver to Lessor any and all further assignments and other instruments required to permit such participation. (e) Assignment of Casualty and Condemnation Proceeds. As security for the Lessee Obligations, Lessee hereby absolutely and irrevocably assigns to Lessor all Casualty and Condemnation Proceeds and all claims relating thereto. Except as otherwise provided in clause (x) of Subparagraph 3.03(c), Lessee agrees that all Casualty and Condemnation Proceeds are to be paid to Lessor and Lessee hereby authorizes and directs any insurer, Governmental Authority or other Person responsible for paying any Casualty and Condemnation Proceeds to make payment thereof directly to Lessor alone, and not to Lessor and Lessee jointly. If Lessee receives any Casualty and Condemnation Proceeds payable to Lessor hereunder, Lessee shall promptly pay over such Casualty and Condemnation Proceeds to Lessor. Lessee hereby covenants that until such Casualty and Condemnation Proceeds are so paid over to Lessor, Lessee shall hold such Casualty and Condemnation Proceeds in trust for the benefit of Lessor and shall not commingle such Casualty and Condemnation Proceeds with any other funds or assets of Lessee or any other Person. Except as otherwise provided in clause (x) of Subparagraph 3.03(c), Lessor may commence, appear in, defend or prosecute any assigned right, claim or action, and may adjust, compromise, settle and collect all rights, claims and actions assigned to Lessor, but shall not be responsible for any failure to collect any such right, claim or action, regardless of the cause of the failure. (f) Use of Casualty and Condemnation Proceeds. (i) If (A) no Event of Default has occurred and is continuing, (B) Lessee exercises the repair and restoration option pursuant to Subparagraphs 14 15 3.04(b) and 3.04(c) and (C) Lessee complies with any conditions imposed pursuant to Subparagraph 3.04(c); then Lessor shall (1) deposit all Casualty and Condemnation Proceeds it receives into a Repair and Restoration Account, (2) release to Lessee such Casualty and Condemnation Proceeds from the Repair and Restoration Account for repair and restoration of the Property and (3) if any proceeds remain in the Repair and Restoration Account after the completion of the repair and restoration of the Property in accordance with this Agreement and the other Operative Documents, released such proceeds to Lessee. (ii) If (A) an Event of Default has occurred and is continuing, (B) Lessee fails to or is unable to comply with any conditions imposed pursuant to Subparagraph 3.04(c) or (C) Lessee elects to exercise the Term Purchase Option and purchase the Property pursuant to the Purchase Agreement; then, at the absolute discretion of Lessor and the Required Participants, regardless of any impairment of security or lack of impairment of security, but subject to applicable Governmental Rules governing the use of Casualty and Condemnation Proceeds, if any, Lessor may (1) apply all or any of the Casualty and Condemnation Proceeds it receives to the expenses of Lessor Parties in obtaining such proceeds; (2) apply the balance to the payment of Rent and/or the reduction of the Outstanding Lease Amount, notwithstanding that such amounts are not then due and payable or that such amounts are otherwise adequately secured and/or (3) release all or any part of such proceeds to Lessee upon any conditions Lessor and the Required Participants may elect. (iii) Lessor shall apply any Casualty and Condemnation Proceeds which are to be used to reduce the Outstanding Lease Amount only on the last day of a Rental Period unless an Event of Default has occurred and is continuing. (iv) Application of all or any portion of the Casualty and Condemnation Proceeds, or the release thereof to Lessee, shall not cure or waive any Default or notice of default or invalidate any acts done pursuant to such notice. 3.05. Taxes. Subject to Paragraph 3.12 relating to permitted contests, Lessee shall promptly pay when due all Indemnified Taxes imposed on or payable by Lessee or any Lessor Party in connection with the Property, this Agreement or any of the other Operative Documents, or any of the transactions contemplated hereby or thereby. As promptly as possible after any Indemnified Taxes are payable by Lessee, Lessee shall send to Lessor for the account of the applicable Lessor Party a certified copy of an original official receipt received by Lessee showing payment thereof. If Lessee fails to pay any such Indemnified Taxes when due to the appropriate taxing authority or fails to remit to Lessor the required receipts or other required documentary evidence, Lessee shall indemnify the Lessor Parties for any incremental taxes, interest or penalties that may become payable by the Lessor Parties as a result of any such failure. The obligations of Lessee under this Paragraph 3.05 shall survive the payment and performance of the Lessee Obligations and the termination of this Agreement. 15 16 3.06. Environmental Matters. (a) Lessee's Covenants. Lessee shall not cause or, except as previously disclosed to the Lessor Parties in the Environmental Reports, permit Hazardous Materials to be used, generated, manufactured, stored, treated, disposed of, transported or present on or released or discharged from the Property in any manner that is reasonably likely to have a Material Adverse Effect. Lessee may use Hazardous Materials in connection with the operation of its business (or the business of permitted subtenants) so long as such use is consistent with the preceding sentence. Lessee shall immediately notify Lessor in writing of (i) the discovery of any Hazardous Materials on, under or about the Property not previously disclosed to Lessor Parties pursuant to the Environmental Reports; (ii) any knowledge by Lessee that the Property does not comply with any Environmental Laws not previously disclosed to Lessor Parties pursuant to the Environmental Reports; (iii) any claims against Lessee or the Property relating to Hazardous Materials or pursuant to Environmental Laws; (iv) to the extent not previously disclosed to Lessor Parties pursuant to the Environmental Reports, the discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Property that could cause the Property or any part thereof to be designated as "border zone property" under the provisions of California Health and Safety Code Sections 25220 et seq. or any regulation adopted in accordance therewith; and (v) any material dispute or potential material dispute among any of Lessee, Seller, Remediator or any other Person in connection with the remediation of the Property pursuant to the Fixed Price Remediation Agreement and the other Remediation Agreements (including, without limitation, disputes with insurers with respect to the insurance coverage to be maintained by Remediator pursuant to the Fixed Price Remediation Agreement). In response to the presence of any Hazardous Materials on, under or about the Property not previously disclosed to Lessor Parties pursuant to the Environmental Reports and which are not being remediated pursuant to the Fixed Price Remediation Agreement and the other Remediation Agreements, Lessee shall immediately take, at Lessee's sole expense, all remedial action required by any Environmental Laws or any judgment, consent decree, settlement or compromise in respect to any claim based thereon. (b) Inspection By Lessor. Upon reasonable prior notice to Lessee, Lessor, its employees and agents, may from time to time (whether before or after the commencement of a nonjudicial or judicial foreclosure proceeding), enter and inspect the Property (including, without limitation, the contents of any groundwater monitoring wells on the Property, which groundwater monitoring wells Lessee shall periodically sample as required by Environmental Laws) for the purpose of determining the existence, location, nature and magnitude of any past or present release or threatened release of any Hazardous Materials into, onto, beneath or from the Property. (c) Indemnity. Without in any way limiting any other indemnity contained in this Agreement or any other Operative Document, Lessee agrees to defend, indemnify and hold harmless the Lessor Parties and the other Indemnitees from and against any claim, loss, damage, cost, expense or liability directly or indirectly arising out of (i) the 16 17 use, generation, manufacture, storage, treatment, release, threatened release, discharge, disposal (including off-site disposal), transportation or presence of any Hazardous Materials which have not been previously disclosed to Lessor Parties pursuant to the Environmental Reports and which are not being remediated pursuant to the Fixed Price Remediation Agreement and the other Remediation Agreements and which are hereafter found in, on, under or about the Property or which are hereafter discovered off of the Property for which Lessee has an obligation to remediate, or (ii) the breach of any covenant, representation or warranty of Lessee relating to Hazardous Materials or Environmental Laws contained in this Agreement or any Operative Document, except to the extent such liability arises from any act or occurrence which first occurs after the Expiration Date and Lessee is no longer in possession of the Property. This indemnity shall include (A) the costs, whether foreseeable or unforeseeable, of any investigation, repair, cleanup or detoxification of the Property which is required by any Governmental Authority or is otherwise necessary to render the Property in compliance with all Environmental Laws; (B) all other direct or indirect consequential damages (including any third party claims, claims by any Governmental Authority, or any fines or penalties against the Indemnitees; and (C) all court costs and attorneys' fees (including expert witness fees and the cost of any consultants) paid or incurred by the Indemnitees. Lessee shall pay immediately upon Lessor's demand any amounts owing under this indemnity. Lessee shall use legal counsel reasonably acceptable to Lessor in any action or proceeding arising under this indemnity. Lessee further acknowledges and agrees that Lessor shall be entitled to the benefit of any and all indemnification and related rights that Lessee may have obtained from Seller (including, without limitation, the indemnification and related rights set forth in the Acquisition Agreement or any other document, instrument or agreement related thereto) with respect to pre-existing environmental matters (including, without limitation, such environmental matters as has been previously disclosed to Lessor Parties pursuant to the Environmental Reports and which are to be remediated pursuant to the Fixed Price Remediation Agreement and the other Remediation Agreements). The obligations of Lessee under this Subparagraph 3.06(c) shall survive the payment and performance of the Lessee Obligations and the termination of this Agreement. (d) Legal Effect of Section. Lessee and Lessor agree that (i) this Paragraph 3.06 and clause (vi) of Subparagraph 4.01(t) of the Participation Agreement are intended as Lessor's written request for information (and Lessee's response) concerning the environmental condition of the real property security as required by California Code of Civil Procedure Section 726.5 and (ii) each representation and warranty and covenant herein and therein (together with any indemnity applicable to a breach of any such representation and warranty) with respect to the environmental condition of the Property is intended by Lessor and Lessee to be an "environmental provision" for purposes of California Code of Civil Procedure Section 736. 3.07. Liens, Easements, Etc. 17 18 (a) Lessee's Covenants. Subject to Paragraph 3.12 relating to permitted contests, Lessee shall not create, incur, assume or permit to exist any Lien or easement on or with respect to any of the Property of any character, whether now owned or hereafter acquired, except for the following ("Permitted Property Liens"): (i) Liens in favor of a Lessor Party securing the Lessee Obligations and other Lessor Liens; (ii) Liens and easements in existence on the Commencement Date to the extent reflected in the title insurance policies delivered to Agent pursuant to Paragraph 3.01 of and Schedule 3.01 to the Participation Agreement and approved by Lessor; (iii) Liens for taxes or other Governmental Charges not at the time delinquent or thereafter payable without penalty; and (iv) Liens of carriers, warehousemen, mechanics, materialmen and vendors and other similar Liens imposed by law incurred in the ordinary course of business for sums not overdue. Subject to Paragraph 3.12 relating to permitted contests, Lessee shall promptly (A) pay all Indebtedness of Lessee and other obligations prior to the time the non-payment thereof would give rise to a Lien on the Property and (B) discharge, at its sole cost and expense, any Lien on the Property which is not a Permitted Property Lien. (b) No Consents. Nothing contained in this Agreement shall be construed as constituting the consent or request of any Lessor Party, express or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to the Property or any part thereof. NOTICE IS HEREBY GIVEN THAT NO LESSOR PARTY IS OR SHALL BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF ANY LESSOR PARTY IN AND TO THE PROPERTY. 3.08. Subletting. Lessee may, in the ordinary course of business, sublease the Property or any portion thereof to any Person, provided, that (a) Lessee remains directly and primarily liable for performing its obligations under this Agreement and all other Lessee Obligations; (b) each sublease is subject to and subordinated to this Agreement; (c) each sublease has a term which expires on or prior to the Scheduled Expiration Date (or, if longer, includes a provision that the sublease terminates on the Expiration Date if such Expiration Date occurs prior to the Scheduled Expiration Date unless Lessee purchases the Property on the Expiration Date pursuant to the Purchase Agreement); (d) each sublease prohibits the sublessee from engaging in any 18 19 activities on the Property other than those permitted by Paragraph 2.04; and (e) no sublease has a Material Adverse Effect. Any sublease which does not satisfy each of the requirements of the immediately preceding sentence shall be null and void as to the Lessor Parties and their successor and assigns. Except for such permitted subleases, Lessee shall not assign any of its rights or interests under this Agreement to any other Person. (No consolidation or merger by Lessee with any other Person or acquisition by Lessee of any other Person shall constitute an assignment by Lessee of its rights or interests under this Agreement unless such merger, consolidation or acquisition is prohibited by Subparagraph 5.02(d) of the Participation Agreement or constitutes a Change of Control.) 3.09. Utility Charges. Lessee shall pay all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other utilities and services to, on or in connection with the Property during the Term. 3.10. Removal of Property. (a) Lessor Improvements, Etc. Lessee shall not remove any Lessor Improvements from the Land or any Related Good or Modification from the Land or Lessor Improvements, except that, during the Term, if no Event of Default has occurred and is continuing: (i) Lessee may remove any Lessor Improvement, Modification or Related Good to make a Modification if such Modification is made in accordance with Subparagraph 3.01(b); and (ii) Lessee may remove any Modification or Related Good if: (A) Such Modification or Related Good (1) was not financed by an Acquisition Advance, (2) is not required for the remaining Property to comply with any applicable Governmental Rule or Insurance Requirement, and (3) is removed without impairing the condition or useful life of the remaining Property; and (B) The value of the remaining Property after such removal is not less than (1) the Expiration Date Appraisal of the Property and (2) the value of the Property prior to such removal. (b) Lessee Improvements, Etc. Lessee may remove any Lessee Improvement from the Land or any other property not constituting Property from the Land or Lessor Improvements at any time during the Term if such Lessee Improvement or other property (collectively, "Lessee Property") (i) was not financed by an Acquisition Advance, (ii) is not required for the Property to comply with any applicable Governmental Rule or Insurance Requirement, and (iii) is removed without impairing the condition, useful life or value of the Property. If Lessor shall so request, Lessee shall remove all Lessee Property (or any portion thereof specified by Lessor) from the Property not later than the Expiration Date. If Lessee fails to remove any such Lessee Property which Lessor has 19 20 requested Lessee to remove prior to the Expiration Date, Lessor may remove such Lessee Property or elect to treat such property as abandoned pursuant to Subparagraph 3.10(c). Lessee shall pay all costs incurred by Lessor in removing any such Lessee Property. (c) Title. All Lessor Improvements, Modifications and Related Goods removed by Lessee in accordance with this Paragraph 3.10 shall cease to be part of the Property, and Lessee shall be the owner thereof after such removal. Lessor acknowledges that Lessee is the owner of the Lessee Property, except that Lessor may (unless Lessee purchases the Property pursuant to the Purchase Agreement) treat any Lessee Property remaining on the Property after the Expiration Date as abandoned and part of the Property, without compensation to Lessee. Lessor and Lessee shall execute and deliver to each other such conveyancing and release documents and acknowledgements as the other party may reasonably request to evidence the rights and title of the parties in the Property and the Lessee Property. (d) Repair of Damage. Lessee shall, at its expense, promptly repair any damage to the remaining Property caused by its removal of Lessor Improvements, Modifications and Related Goods pursuant to Subparagraph 3.10(a) and any damage to the Property caused by its removal of Lessee Property pursuant to Subparagraph 3.10(b). 3.11. Compliance with Governmental Rules and Insurance Requirements. Lessee, at its sole cost and expense, shall, unless its failure is not reasonably likely to have a Material Adverse Effect, (a) comply, and cause its agents, sublessees, assignees, employees, invitees, licensees, contractors and tenants, and the Property to comply, with all Governmental Rules and Insurance Requirements relating to the Property (including the construction, use, operation, maintenance, repair and restoration thereof, whether or not compliance therewith shall require structural or extraordinary changes in the Lessor Improvements or interfere with the use and enjoyment of the Property), and (b) procure, maintain and comply with all licenses, permits, orders, approvals, consents and other authorizations required for the construction, use, maintenance and operation of the Property and for the use, operation, maintenance, repair and restoration of the Lessor Improvements. 3.12. Permitted Contests. Lessee, at its sole cost and expense, may contest any alleged Lien or easement on any of the Property or any alleged Governmental Charge, Indebtedness or other obligation which is payable by Lessee hereunder to Persons other than the Lessor Parties or which, if unpaid, would give rise to a Lien on any of the Property, provided that (a) each such contest is diligently pursued in good faith by appropriate proceedings; (b) the commencement and continuation of such proceedings suspends the enforcement of such Lien or easement or the collection of such Governmental Charge, Indebtedness or obligation; (c) Lessee has established adequate reserves for the discharge of such Lien or easement or the payment of such Governmental Charge, Indebtedness or obligation in accordance with GAAP and, if the failure to discharge such Lien or easement or the failure to pay such Governmental Charge, Indebtedness or obligation might result in any civil liability for any Lessor Party, Lessee has provided to such Lessor Party a bond or other security satisfactory to such Lessor Party; (d) the failure to discharge such Lien or easement or the failure to pay such Governmental Charge, Indebtedness 20 21 or obligation could not result in any criminal liability for any Lessor Party; (e) the failure to discharge such Lien or easement or the failure to pay such Governmental Charge, Indebtedness or obligation is not otherwise reasonably likely to have a Material Adverse Effect; and (f) unless Lessee currently is exercising either the Term Purchase Option or the Expiration Date Purchase Option, any such contest is completed and such Lien or easement is discharged (either pursuant to such proceedings or otherwise) or such Governmental Charge, Indebtedness or obligation is declared invalid, paid or otherwise satisfied not later than six (6) months prior to the Scheduled Expiration Date. 3.13. Lessor Obligations; Right to Perform Lessee Obligations. No Lessor Party shall have any obligation to (a) maintain, repair or make any improvements to the Property, (b) maintain any insurance on the Property, (c) perform any other obligation of Lessee under this Agreement or any other Lessee Obligation, (d) make any expenditure on account of the Property (except to make the Acquisition Advance as required by the Participation Agreement) or (e) take any other action in connection with the Property, this Agreement or any other Operative Document, except as expressly provided herein or in another Operative Document; provided however, that Lessor may, in its sole discretion and without any obligation to do so, perform any Lessee Obligation not performed by Lessee when required. Lessor may enter the Property or exercise any other right of Lessee under this Agreement or any other Operative Document to the extent Lessor determines in good faith that such entry or exercise is reasonably necessary for Lessor to perform any such Lessee Obligation not performed by Lessee when required. Lessee shall reimburse Lessor and the other Lessor Parties, within five (5) Business Days after demand, for all reasonable fees, costs and expenses incurred by them in performing any such obligation or curing any Default. 3.14. Inspection Rights. During the Term, Lessee shall permit any Person designated by Lessor, upon reasonable notice and during normal business hours, to visit and inspect any of the Property. 3.15. Cooperation of Lessor to Facilitate Operation, Etc. During the Term, Lessor shall take any action reasonably requested by Lessee to facilitate the operation, management, development or repair of the Property, including joining in or consenting to any of the following: (a) The grant of easements, licenses, rights of way, and other rights in the nature of easements encumbering the Property; (b) The release or termination of easements, licenses, rights of way or other rights in the nature of easements which are for the benefit of the Property or any portion thereof; (c) The dedication or transfer of portions of the Land not improved with a building, for road, highway or other public purposes; (d) Agreements for the use and maintenance of common areas, for reciprocal rights of parking, for ingress and egress and for amendments to any Related Agreements (including amendments to the Related Agreements that Lessee may reasonably request to 21 22 facilitate construction or development on land owned by it or its Affiliates other than the Land); (e) Instruments necessary or desirable for the exercise or enforcement of rights under the Related Agreements or any contract, permit, license, franchise or other right included within the term "Property"; (f) Permit applications or other documents reasonably required to accommodate the construction or alteration of Lessor Improvements otherwise permitted by this Agreement; (g) Confirmations of Lessee's rights under any particular provisions of this Agreement which Lessee may wish to provide to a third party; (h) The execution or filing of a tract or parcel map subdividing the Property into lots or parcels or reconfiguring existing parcels; or (i) Agreements providing development incentives or tax abatements with respect to the Property; Provided that (i) no Event of Default has occurred and is continuing at the time of any such action and (ii) neither such action alone nor such action cumulatively with any other actions is reasonably likely to have a Material Adverse Effect or materially increase the obligations or potential liability of any Lessor Party. 3.16. Survey and Title Matters . Lessee, at its sole cost and expense, shall promptly take steps to diligently pursue in good faith and by appropriate proceedings to address the following survey and title matters as disclosed by that certain ALTA/ACSM survey prepared by Dunbar and Craig, Job No. 99166, dated June 1999: (a) recordation of an access and easement agreement and consent to encroachment from the City of Scotts Valley to provide access from Bluebonnet Lane and Kings Village Road to the Property as contemplated by that certain Agreement dated August 1, 1967, by and among the City of Scotts Valley, the City of Santa Cruz, and Watkins-Johnson Company; (b) recordation of an easement agreement for a sanitary sewer easement from the City of Scotts Valley along the route described in the unrecorded easement prepared by George Dunbar, LS 3666, in 1987; (c) recordation of an easement agreement or consent to encroachment as to the existing route of the overhead electric line running along the access road described in clause (a) above; and (d) recordation of an agreement from the Scotts Valley Water District to relocate a water line around the building located on Parcel 2 as contemplated by that certain unrecorded water line easement by and between Watkins-Johnson Company and Scotts Valley Water District dated June 26, 1989. SECTION 4. EXPIRATION DATE. 4.01. Termination by Lessee Prior to Scheduled Expiration Date. Subject to the terms and conditions of the Purchase Agreement, Lessee may, at any time prior to the Scheduled Expiration Date, terminate this Agreement and purchase the Property pursuant to Section 2 of the 22 23 Purchase Agreement. Lessee shall notify Lessor of Lessee's election so to terminate this Agreement and purchase the Property by delivering to Agent a Notice of Term Purchase Option Exercise pursuant to and in accordance with the provisions of Paragraph 2.02 of the Purchase Agreement. 4.02. Return of Property. (a) Upon the expiration or earlier termination of this Agreement (unless Lessee, a Designated Purchase or an Assignee Purchaser has purchased the Property on or prior to the Expiration Date pursuant to the Purchase Agreement), Lessee shall vacate, surrender and deliver possession of the Property to Lessor in broom clean condition and in the condition required pursuant to Paragraph 3.01 hereof. Lessee shall remove from the Property on or prior to the expiration or earlier termination of this Agreement, all Lessee Modifications (other than those which Lessor has agreed in writing will be surrendered) and all of Lessee's personal property, furniture and fixtures situated thereon which is not the property of Lessor under the terms of this Lease Agreement, and shall repair any damages caused by such removal. Property not so removed shall become the property of Lessor, and Lessor may cause such property to be removed from the Property and disposed of, and Lessee shall pay the reasonable cost of any such removal and disposition and of repairing any damage caused by such removal. (b) Except for surrender upon the expiration or earlier termination of the Term, no surrender to Lessor of this Lease Agreement shall be valid or effective unless agreed to and accepted in writing by Lessor or any assignee of Lessor. (c) Without limiting the generality of the foregoing, upon the surrender and return of the Property to Lessor pursuant to this Paragraph 4.02 (unless Lessee, a Designated Purchase or an Assignee Purchaser has purchased the Property on or prior to the Expiration Date pursuant to the Purchase Agreement), the Property shall (i) be returned in a condition suitable for redevelopment and capable of being immediately utilized by a third-party purchaser or third-party lessee without further inspection, construction, repair, replacement, alterations or improvements, licenses, permits, or approvals, except for any of the foregoing required solely by virtue of the change in ownership (other than to Lessor or an assignee of Lessor), use or occupancy of the Property, (ii) be in accordance and compliance with all Requirements of Law and Environmental Laws including, without limitation, any of the foregoing required by virtue of a change in ownership, use or occupancy of the Property other than to Lessee, (iii) be free and clear of all Liens, other than any Lessor Liens and Permitted Property Liens. (d) On or prior to the date of such surrender and return of the Property (unless Lessee, a Designated Purchase or an Assignee Purchaser has purchased the Property on or prior to the Expiration Date pursuant to the Purchase Agreement), Lessor shall have received from Lessee, at Lessee's expense, evidence satisfactory to Lessor, of compliance with the provisions of this Paragraph 4.02, including without limitation, an environmental 23 24 assessment for the Property addressed in form and substance satisfactory to Lessor and each assignee of Lessor or, in lieu of addressing to such parties directly, accompanied by a letter permitting Lessor and each assignee of Lessor to rely thereon, performed by an independent, licensed professional engineer satisfactory to Lessor and each assignee of Lessor, and which assessment (i) shall be sufficient in scope to determine compliance with Environmental Laws, (ii) shall reveal no actual or potential environmental liabilities which cannot be remediated by Lessee as provided in the following clause (iii), and (iii) if such environmental assessment reveals the need for additional review, Lessee shall have provided such additional information or environmental assessments as are required by Lessor and each assignee of Lessor and, subject to Subparagraph 3.06 hereof, any remediation recommended therein to be performed shall have been performed, and evidence of compliance with clause (ii) of Subparagraph 4.02(c). (e) Upon such return of the Property to Lessor or any assignee of Lessor, Lessee shall deliver to Lessor a then current title insurance policy or a binding commitment to issue a title insurance policy written by a title insurance company reasonably acceptable to Lessor, insuring good and marketable title in the Property in an amount equal to the Outstanding Lease Amount as determined as of the Expiration Date, unencumbered except for Lessor Liens or Permitted Liens. Upon the request of Lessor, Lessee shall continue to maintain its insurance policies for the Property required under Subparagraph 3.03 hereof if able to do so on a commercially reasonable basis, provided that Lessor shall pay or reimburses Lessee for its pro rata costs thereof. (f) The provisions of this Paragraph 4.02 are of the essence of this Lease Agreement, and any breach thereof shall be deemed an Event of Default hereunder, and upon application to any court of equity having jurisdiction in the premises, Lessor shall be entitled to a decree against Lessee requiring specific performance of the covenants of Lessee set forth in this Paragraph 4.02. 4.03. Holding Over. If (a) Lessee does not purchase the Property on the Expiration Date pursuant to the Purchase Agreement but continues in possession of any portion of the Property after the Expiration Date or (b) Lessee has failed to return the Property to Lessor in the condition required pursuant to Paragraph 4.02 hereof, Lessee shall pay rent for each day it so continues in possession, payable upon demand of Lessor, at a per annum rate equal to the Alternate Rental Rate plus two percent (2.0%) and shall pay and perform all of its other Lessee Obligations under this Agreement and the other Operative Documents in the same manner as though the Term had not ended; provided, however, that this Paragraph 4.03 shall not be interpreted to permit such holding over or to limit any right or remedy of Lessor for such holding over. 24 25 SECTION 5. DEFAULT. 5.01. Events of Default. The occurrence or existence of any one or more of the following shall constitute an "Event of Default" hereunder: (a) Non-Payment. Lessee shall (i) fail to pay on the Expiration Date any amount payable by Lessee under this Agreement or any other Operative Document on such date, (ii) fail to pay within five (5) Business Days after the same becomes due, any Base Rent, or (iii) fail to pay within five (5) Business Days after delivery to Lessee of written demand therefor, any Supplemental Rent or other amount required under the terms of this Agreement or any other Operative Document (other than any such amount payable on the Expiration Date); or (b) Specific Defaults. Lessee or any of its Subsidiaries shall fail to observe or perform any covenant, obligation, condition or agreement set forth in Paragraph 3.03 hereof or in clause (ii) of Subparagraph 2.11(a), Paragraph 5.02 (other than Subparagraph 5.02(i)) or Paragraph 5.03 of the Participation Agreement; or (c) Other Defaults. Lessee or any of its Subsidiaries shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Agreement or any other Operative Document and such failure shall continue until the earliest of (i) thirty (30) days after Lessee's written acknowledgement of such failure, (ii) thirty (30) days after any Lessor Party's written notice to Lessee of such failure and (iii) thirty (30) days prior to the Expiration Date, provided, however, that, in the event that any such failure cannot reasonably be cured within a thirty (30) day period, such failure shall not constitute an Event of Default hereunder if (A) such failure can reasonably be cured within one hundred, eighty (180) days, (B) Lessee promptly commences and diligently proceeds to cure such failure and (C) Lessee completes such cure not later than the earliest of (1) one hundred, eighty days (180) days after Lessee's written acknowledgement of such failure, (2) one hundred, eighty days (180) days after any Lessor Party's written notice to Lessee of such failure and (3) thirty (30) days prior to the Expiration Date; or (d) Representations and Warranties. Any representation, warranty, certificate, information or other statement (financial or otherwise) made or furnished by or on behalf of Lessee or any of its Subsidiaries to any Lessor Party in or in connection with this Agreement or any other Operative Document, or as an inducement to any Lessor Party to enter into this Agreement or any other Operative Document, shall be false, incorrect, incomplete or misleading in any material respect when made or furnished and Lessee shall not have cured the facts or circumstances causing such representation, warranty, certificate or other statement to be false, incorrect, incomplete or misleading not later than the earliest of (i) thirty (30) days after Lessee's written acknowledgement thereof to Lessor, (ii) thirty (30) days after any Lessor Party's written notice to Lessee thereof, and (iii) thirty (30) days prior to the Expiration Date; or 25 26 (e) Cross-Default. (i) Lessee or any of its Subsidiaries shall fail to make any payment on account of any Indebtedness of such Person (other than the Lessee Obligations) when due (whether at scheduled maturity, by required prepayment, upon acceleration or otherwise) and such failure shall continue beyond any period of grace provided with respect thereto, if the amount of such Indebtedness exceeds $2,000,000 or the effect of such failure is to cause, or permit the holder or holders thereof to cause, Indebtedness of Lessee and its Subsidiaries (other than the Lessee Obligations) in an aggregate amount exceeding $2,000,000 to become due or payable (whether at scheduled maturity, by required prepayment or redemption, upon acceleration or otherwise) and/or to be secured by cash collateral or (ii) Lessee or any of its Subsidiaries shall otherwise fail to observe or perform any agreement, term or condition contained in any agreement or instrument relating to any Indebtedness of such Person (other than the Lessee Obligations), or any other event shall occur or condition shall exist, if the effect of such failure, event or condition is to cause, or permit the holder or holders thereof to cause, Indebtedness of Lessee and its Subsidiaries (other than the Lessee Obligations) in an aggregate amount exceeding $2,000,000 to become due or payable (whether at scheduled maturity, by required prepayment or redemption, upon acceleration or otherwise) and/or to be secured by cash collateral; or (f) Insolvency, Voluntary Proceedings. Lessee or any of its Subsidiaries shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vi) take any action for the purpose of effecting any of the foregoing; or (g) Involuntary Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of Lessee or any of its Subsidiaries or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to Lessee or any of its Subsidiaries or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within sixty (60) days of commencement; or (h) Judgments. (i) One or more judgments, orders, decrees or arbitration awards requiring Lessee and/or its Subsidiaries to pay an aggregate amount of $2,000,000 or more (exclusive of amounts covered by insurance issued by an insurer not an Affiliate of Lessee and otherwise satisfying the requirements set forth in Subparagraph 3.03(b)) 26 27 shall be rendered against Lessee and/or any of its Subsidiaries in connection with any single or related series of transactions, incidents or circumstances and the same shall not be satisfied, vacated or stayed for a period of forty (40) consecutive days after issue or levy; (ii) any judgment, writ, assessment, warrant of attachment, tax lien or execution or similar process shall be issued or levied against a substantial part of the property of Lessee or any of its Subsidiaries and the same shall not be released, stayed, vacated or otherwise dismissed within fifteen (15) days after issue or levy; or (iii) any other judgments, orders, decrees, arbitration awards, writs, assessments, warrants of attachment, tax liens or executions or similar processes which, alone or in the aggregate, are reasonably likely to have a Material Adverse Effect are rendered, issued or levied; or (i) Operative Documents. Any Operative Document or any material term thereof shall cease to be, or be asserted by Lessee or any of its Subsidiaries not to be, a legal, valid and binding obligation of Lessee or any of its Subsidiaries enforceable in accordance with its terms in a manner which could result in a Material Adverse Effect; or (j) ERISA. Any Reportable Event which constitutes grounds for the termination of any Employee Benefit Plan by the PBGC or for the appointment of a trustee by the PBGC to administer any Employee Benefit Plan shall occur, or any Employee Benefit Plan shall be terminated within the meaning of Title IV of ERISA or a trustee shall be appointed by the PBGC to administer any Employee Benefit Plan; or (k) Change of Control. Any Change of Control shall occur; or (l) Major Casualty or Condemnation. Any Major Casualty or Major Condemnation affecting the Property shall occur and Lessee shall not purchase the Property pursuant to the Term Purchase Option in the Purchase Agreement within two (2) months after the occurrence thereof; or (m) Material Adverse Effect. Any event(s) or condition(s) which is (are) reasonably likely to have a Material Adverse Effect shall occur or exist. 5.02. General Remedies. In all cases, upon the occurrence or existence of any Event of Default and at any time thereafter unless such Event of Default is waived, Lessor may, with the consent of the Required Participants, or shall, upon instructions from the Required Participants, exercise any one or more of the following rights and remedies (except that the remedy set forth in the first sentence of Subparagraph 5.02(a) shall be automatic): (a) Termination of Commitments. If such Event of Default is an Event of Default of the type described in Subparagraph 5.01(f) or Subparagraph 5.01(g) affecting Lessee, immediately and without notice the obligation of Lessor to make the Acquisition Advance and the obligations of the Participants to fund the Acquisition Advance shall automatically terminate. If such Event of Default is any other Event of Default, Lessor may by written notice to Lessee, terminate the obligation of Lessor to make the Acquisition Advance and the obligations of the Participants to fund the Acquisition Advance. 27 28 (b) Appointment of a Receiver. Lessor may apply to any court of competent jurisdiction for, and obtain appointment of, a receiver for the Property. (c) Specific Performance. Lessor may bring an action in any court of competent jurisdiction to obtain specific enforcement of any of the covenants or agreements of Lessee in this Agreement or any of the other Operative Documents. (d) Collection of Issues and Profits. Lessor may collect Issues and Profits as provided in Subparagraph 2.07(c) and apply the proceeds to pay Lessee Obligations. (e) Protection of Property. Lessor may enter, manage and operate all or any part of the Property or take any other actions which it reasonably determines are necessary to protect the Property and the rights and remedies of the Lessor Parties under this Agreement and the other Operative Documents, including (i) taking and possessing all of Lessee's books and records relating to the Property; (ii) entering into or enforcing subleases on such terms and conditions as Lessor may consider proper; (iii) obtaining and evicting tenants; (iv) entering into agreements with subtenants to fix or modify sublease rents; (v) collecting and receiving any payment of money owing to Lessee with respect to the Property; (vi) completing any unfinished Lessor Improvements; and/or (vii) contracting for and making needed repairs and alterations to the Property. (f) Other Rights and Remedies. In addition to the specific rights and remedies set forth above in this Paragraph 5.02 and in Paragraph 5.03 and Paragraph 5.04, Lessor may exercise any other right, power or remedy permitted to it by any applicable Governmental Rule, either by suit in equity or by action at law, or both. 5.03. Lease Remedies. If a court of competent jurisdiction determines that the transaction evidenced by this Agreement and the other Operative Documents is a lease, upon the occurrence or existence of any Event of Default and at any time thereafter unless such Event of Default is waived, Lessor may, with the consent of the Required Participants, or shall, upon instructions from the Required Participants, exercise any one or more of the following rights and remedies in addition to those rights and remedies set forth in Paragraph 5.02: (a) Termination of Lease. Lessor may, by written notice to Lessee, terminate this Agreement on a Termination Date which is prior to the Scheduled Expiration Date and take possession of the Property. Such Termination Date shall be the last day of a Rental Period unless Required Participants shall otherwise direct. On such Termination Date (which shall then be the Expiration Date), subject to the limitations set forth in the Purchase Agreement, Lessee shall pay all unpaid Base Rent accrued through such date and all Supplemental Rent due and payable on or prior to such date and all other amounts payable by Lessee on the Expiration Date pursuant to this Agreement and the other Operative Documents, together with the worth at the time of such payment of the amount by which the unpaid Base Rent through the Scheduled Expiration Date exceeds the amount of such rental loss for the same period that Lessee proves could reasonably be avoided. 28 29 (b) Continuation of Lease. Lessor may exercise the rights and remedies provided by California Civil Code Section 1951.4, including the right to continue this Agreement in effect after Lessee's breach and abandonment and recover Rent as it becomes due. Acts of maintenance or preservation, efforts to relet the Property, the appointment of a receiver upon Lessor's initiative to protect its interest under this Agreement or withholding consent to or terminating a sublease shall not of themselves constitute a termination of Lessee's right to possession. (c) Removal and Storage of Property. Lessor may enter the Property and remove therefrom all Persons and property, store such property in a public warehouse or elsewhere at the cost of and for the account of Lessee and sell such property and apply the proceeds therefrom pursuant to applicable California law. (d) Marketing. Notwithstanding the termination of Lessee's tenancy hereunder, Lessor is subject to the duties and obligations to Lessee set forth in Subparagraph 3.03(b) of the Purchase Agreement. 5.04. Loan Remedies. Unless a court of competent jurisdiction determines that the transaction evidenced by this Agreement and the other Operative Documents is a lease, upon the occurrence or existence of any Event of Default and at any time thereafter unless such Event of Default is waived, Lessor may, with the consent of the Required Participants, or shall, upon instructions from the Required Participants, exercise any one or more of the following rights and remedies in addition to those rights and remedies set forth in Paragraph 5.02: (a) Acceleration of Lessee Obligations. Lessor may, by written notice to Lessee, declare all unpaid Lessee Obligations due and payable on a Termination Date prior to the Scheduled Expiration Date. Such Termination Date shall be the last day of a Rental Period unless Required Participants shall otherwise direct. On such Termination Date (which shall then be the Expiration Date), subject to the limitations set forth in the Purchase Agreement, Lessee shall pay all unpaid Base Rent accrued through such date, all Supplemental Rent due and payable on or prior to such date and all other amounts payable by Lessee on the Expiration Date pursuant to this Agreement and the other Operative Documents. (b) Uniform Commercial Code Remedies. Lessor may exercise any or all of the remedies granted to a secured party under the California Uniform Commercial Code. (c) Judicial Foreclosure. Lessor may bring an action in any court of competent jurisdiction to foreclose the security interest in the Property granted to Lessor by this Agreement or any of the other Operative Documents. (d) Power of Sale. Lessor may cause some or all of the Property, including any Personal Property Collateral, to be sold under a power of sale or otherwise disposed of in any combination and in any manner permitted by applicable Governmental Rules. 29 30 (i) Sales of Personal Property. Lessor may dispose of any Personal Property Collateral separately from the sale of Real Property Collateral, in any manner permitted by Division 9 of the California Uniform Commercial Code, including any public or private sale, or in any manner permitted by any other applicable Governmental Rule. Any proceeds of any such disposition shall not cure any Event of Default or reinstate any Lessee Obligation for purposes of Section 2924c of the California Civil Code. In connection with any such sale or other disposition of Personal Property Collateral, Lessee agrees that the following procedures constitute a commercially reasonable sale: (A) Lessor shall mail written notice of the sale to Lessee not later than thirty (30) days prior to such sale. (B) Once per week during the three (3) weeks immediately preceding such sale, Lessor will publish notice of the sale in a local daily newspaper of general circulation. (C) Upon receipt of any written request, Lessor will make the Property available to any bona fide prospective purchaser for inspection during reasonable business hours. (D) Notwithstanding, Lessor shall be under no obligation to consummate a sale if, in its judgment, none of the offers received by it equals the fair value of the Property offered for sale. (E) If Lessor so requests, Lessee shall assemble all of the Personal Property Collateral and make it available to Lessor at the site of the Land. Regardless of any provision of this Agreement or any other Operative Document, Lessor shall not be considered to have accepted any property other than cash or immediately available funds in satisfaction of any Lessee Obligation, unless Lessor has given express written notice of its election of that remedy in accordance with California Uniform Commercial Code Section 9505. The foregoing procedures do not constitute the only procedures that may be commercially reasonable. (ii) Lessor's Sales of Real Property or Mixed Collateral. Lessor may choose to dispose of some or all of the Property which consists solely of Real Property Collateral in any manner then permitted by applicable Governmental Rules, including without limitation a nonjudicial trustee's sale pursuant to California Civil Code Sections 2924 et seq. In its discretion, Lessor may also or alternatively choose to dispose of some or all of the Property, in any combination consisting of both Real Property Collateral and Personal Property Collateral, together in one sale to be held in accordance with the law and procedures applicable to real property, as permitted by Section 9501(4) of the California 30 31 Uniform Commercial Code. Lessee agrees that such a sale of Personal Property Collateral together with Real Property Collateral constitutes a commercially reasonable sale of the Personal Property Collateral. (For purposes of this power of sale, either a sale of Real Property Collateral alone, or a sale of both Real Property Collateral and Personal Property Collateral together in accordance with California Uniform Commercial Code Section 9501(4), will sometimes be referred to as a "Lessor's Sale.") (A) Before any Lessor's Sale, Lessor shall give such notice of default and election to sell as may then be required by applicable Governmental Rules. (B) When all time periods then legally mandated have expired, and after such notice of sale as may then be legally required has been given, Lessor shall sell the property being sold at a public auction to be held at the time and place specified in the notice of sale. (C) Neither Lessor nor Agent shall have any obligation to make demand on Lessee before any Lessor's Sale. (D) From time to time in accordance with then applicable law, Lessor may postpone any Lessor's Sale by public announcement at the time and place noticed for that sale. (E) At any Lessor's Sale, Lessor shall sell to the highest bidder at public auction for cash in lawful money of the United States. (F) Lessor shall execute and deliver to the purchaser(s) a deed or deeds conveying the Property being sold without any covenant or warranty whatsoever, express or implied. The recitals in any such deed of any matters or facts, including any facts bearing upon the regularity or validity of any Lessor's Sale, shall be conclusive proof of their truthfulness. Any such deed shall be conclusive against all Persons as to the facts recited in it. (e) Foreclosure Sales. (i) Single or Multiple. If the Property consists of more than one lot, parcel or item of property, Lessor may: (A) Designate the order in which the lots, parcels and/or items shall be sold or disposed of or offered for sale or disposition; and (B) Elect to dispose of the lots, parcels and/or items through a single consolidated sale or disposition to be held or made under the power of sale granted in Subparagraph 5.04(d), or in connection with judicial 31 32 proceedings, or by virtue of a judgment and decree of foreclosure and sale; or through two or more such sales or dispositions; or in any other manner Lessor may deem to be in its best interests (any such sale or disposition, a "Foreclosure Sale;" any two or more, "Foreclosure Sales"). If Lessor chooses to have more than one Foreclosure Sale, Lessor at its option may cause the Foreclosure Sales to be held simultaneously or successively, on the same day, or on such different days and at such different times and in such order as it may deem to be in its best interests. No Foreclosure Sale shall terminate or affect the security interests granted to Lessor in the Property by this Agreement on any part of the Property which has not been sold, until all of the Lessee Obligations have been paid in full. (ii) Credit Bids. At any Foreclosure Sale, any Person, including any Lessor Party, may bid for and acquire the Property or any part of it to the extent permitted by then applicable Governmental Rules. Instead of paying cash for the Property, Lessor may settle for the purchase price by crediting the sales price of the Property against the Lessee Obligations in any order and proportions as Lessor in its sole discretion may choose. (f) Marketing. Notwithstanding the termination of Lessee's tenancy hereunder, Lessor is subject to the duties and obligations to Lessee set forth in Subparagraph 3.03(b) of the Purchase Agreement. 5.05. Remedies Cumulative. The rights and remedies of Lessor under this Agreement and the other Operative Documents are cumulative and may be exercised singularly, successively, or together. 5.06. No Cure or Waiver. Neither the performance by Lessor of any of Lessee's obligations pursuant to Paragraph 3.13 nor the exercise by Lessor of any of its other rights and remedies under this Agreement or any other Operative Document (including the collection of Issues and Profits and the application thereof to the Lessee Obligations) shall constitute a cure or waiver of any Default or nullify the effect of any notice of default or sale, unless and until all Lessee Obligations are paid in full. 5.07. Exercise of Rights and Remedies. The rights and remedies provided to Lessor under this Agreement may be exercised by Lessor itself, by Agent pursuant to Subparagraph 2.02(c) of the Participation Agreement, by a court-appointed receiver or by any other Person appointed by any of the foregoing to act on its behalf. All of the benefits afforded to Lessor under this Agreement and the other Operative Documents shall accrue to the benefit of Agent to the extent provided in Subparagraph 2.02(c) of the Participation Agreement. SECTION 6. MISCELLANEOUS. 32 33 6.01. Notices. Except as otherwise specified herein, all notices, requests, demands, consents, instructions or other communications to or upon Lessee or Lessor under this Agreement shall be given as provided in Subparagraph 2.02(c) and Paragraph 7.01 of the Participation Agreement. 6.02. Waivers; Amendments. Any term, covenant, agreement or condition of this Agreement may be amended or waived only as provided in the Participation Agreement. No failure or delay by any Lessor Party in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. Unless otherwise specified in any such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. 6.03. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Lessor Parties and Lessee and their permitted successors and assigns; provided, however, that the Lessor Parties and Lessee shall not sell, assign or delegate their respective rights and obligations hereunder except as provided in the Participation Agreement. 6.04. No Third Party Rights. Nothing expressed in or to be implied from this Agreement is intended to give, or shall be construed to give, any Person, other than the Lessor Parties and Lessee and their permitted successors and assigns, any benefit or legal or equitable right, remedy or claim under or by virtue of this Agreement or under or by virtue of any provision herein. 6.05. Partial Invalidity. If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 6.06. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. 6.07. Counterparts. This Agreement may be executed in any number of identical counterparts, any set of which signed by all the parties hereto shall be deemed to constitute a complete, executed original for all purposes. 6.08. Nature of Lessee's Obligations. (a) Independent Obligation. Except as otherwise provided in Section 2 of the Purchase Agreement, the obligation of Lessee to pay the amounts payable by Lessee under this Agreement and the other Operative Documents and to perform the other Lessee Obligation are absolute, unconditional and irrevocable obligations which are separate and independent of the obligations of the Lessor Parties under this Agreement and the other Operative Documents and all other events and circumstances, including the events and circumstances set forth in Subparagraph 6.08(c). 33 34 (b) No Termination or Abatement. This Agreement and the other Operative Documents and Lessee's obligation to pay Rent and to pay and perform all other Lessee Obligations shall continue in full force and effect without abatement notwithstanding the occurrence or existence of any event or circumstance, including any event or circumstance set forth in Subparagraph 6.08(c). (c) Full Payment and Performance. Lessee shall make all payments under this Agreement and the other Operative Documents in the full amounts and at the times required by the terms of this Agreement and the other Operative Documents without setoff, deduction or reduction of any kind and shall perform all other Lessee Obligations as and when required, without regard to any event or circumstances whatsoever, including (i) the condition of the Property (including any Lessor Improvements to the Property made prior to the Commencement Date or during the Term); (ii) title to the Property (including possession of the Property by any Person or the existence of any Lien or any other right, title or interest in or to any of the Property in favor of any Person); (iii) the value, habitability, usability, design, operation or fitness for use of the Property; (iv) the availability or adequacy of utilities and other services to the Property; (v) any latent, hidden or patent defect in the Property; (vi) the zoning or status of the Property or any other restrictions on the use of the Property; (g) the economics of the Property; (vii) any Casualty or Condemnation; (viii) the compliance of the Property with any applicable Governmental Rule or Insurance Requirement; (ix) any failure by any Lessor Party to perform any of its obligations under this Agreement or any other Operative Document; or (x) the exercise by any Lessor Party of any of its remedies under this Agreement or any other Operative Document; provided, however, that this Paragraph 6.08 shall not abrogate any right which Lessee may have to recover damages from any Lessor Party for any material breach by such Lessor Party of its obligations under this Agreement or any other Operative Document to the extent permitted hereunder or thereunder. [The signature page follows.] 34 35 IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be executed as of the day and year first above written. LESSEE: SILICON VALLEY GROUP, INC. By: --------------------------------- Name: ---------------------------- Title: --------------------------- LESSOR: SELCO SERVICE CORPORATION By: --------------------------------- Name: ---------------------------- Title: --------------------------- 35 36 STATE OF CALIFORNIA ) ) ss COUNTY OF _____________________) On _____________, 1999, before me, ___________________ a Notary Public in and for the State of California, personally appeared _______________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity on behalf of which the person(s) acted, executed the instrument. Witness my hand and official seal. [SEAL] _____________________________ 37 STATE OF CALIFORNIA ) ) ss COUNTY OF _____________________) On _____________, 1999, before me, ___________________ a Notary Public in and for the State of California, personally appeared _______________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity on behalf of which the person(s) acted, executed the instrument. Witness my hand and official seal. [SEAL] _____________________________ 38 SCHEDULE 3.03 INSURANCE REQUIREMENTS (i) At all times during the Term, commercial general liability insurance, umbrella insurance and excess liability insurance, each written on an "occurrence basis", including products and completed operation hazards, covering claims for bodily injury, personal injury or death sustained by persons or damage to property, in an amount of not less than $5,000,000 per occurrence and $10,000,000 annual aggregate; (ii) At all times during the Term, workers' compensation insurance for statutory limits and employer's liability insurance covering injury, death or disease sustained by employees, in an amount not less than $1,000,000 for disease and $1,000,000 for bodily injury or death by accident; and (iii) At all times during the Term, "all risk" property insurance covering (A) loss or damage by flood in an amount not less than the lesser of (1) the replacement cost of the Lessor Improvements and (2) the then current Outstanding Lease Amount if any portion of the Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable Governmental Authority, (B) loss or damage by fire in an amount not less than the lesser of (1) the replacement cost of the Lessor Improvements and (2) the then current Outstanding Lease Amount, and (C) loss or damage by earthquake in an amount not less than $3,500,000. 39 EXHIBIT A LAND A-1 40 EXHIBIT B RELATED GOODS None B-1 41 EXHIBIT C NOTICE OF RENTAL PERIOD SELECTION [Date] KeyBank National Association, as Agent 431 E. Park Center Boulevard Boise, ID 83706 Attn: Vicky Heineck or Margaret Herring 1. Reference is made to (A) that certain Participation Agreement, dated as of June 30, 1999 (the "Participation Agreement"), among Silicon Valley Group, Inc. ("Lessee"), SELCO Service Corporation ("Lessor"), the financial institutions listed in Schedule I to the Participation Agreement (the "Participants") and KeyBank National Association, as agent for the Participants (in such capacity, "Agent"); and (b) that certain Lease Agreement, dated as of June 30, 1999 (the "Lease Agreement") between Lessee and Lessor. Unless otherwise indicated, all terms defined in the Participation Agreement have the same respective meanings when used herein. 2. [Insert one of the following as appropriate] [Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee hereby irrevocably selects a new Rental Period for a Portion of the Outstanding Lease Amount as follows: (a) The Portion for which a new Rental Period is to be selected is the Portion in the amount of $__________ with a current Rental Period which began on ________, ____ and ends on __________, ____; and (b) The next Rental Period for such Portion shall be __________ month[s].] [Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee hereby irrevocably elects to divide a Portion of the Outstanding Lease Amount into further Portions as follows: (a) The Portion which is to be divided is the Portion in the amount of $__________ with a current Rental Period which began on ________, ____ and ends on __________, ____; and B-1 42 (b) On the last day of the current Rental Period for such Portion, such Portion is to be divided into the following Portions with the following initial Rental Periods: Portion Rental Period ------------ ----------------- $ month[s] ----------- ------- $ month[s] ----------- ------- $ month[s] ----------- ------- $ month[s]] ----------- ------- [Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee hereby irrevocably elects to combine into a single Portion certain Portions of the Outstanding Lease Amount as follows: (a) The Portions which are to be combined are the Portions in the amounts of $__________, $_________ and $_______, each with a current Rental Period which ends on __________, ____; and (b) The initial Rental Period for such newly created Portion shall be __________ month[s].] 3. Lessee hereby certifies to the Lessor Parties that, on the date of this Notice of Rental Period Selection and after giving effect to the selection[s] as described above: (a) The representations and warranties of Lessee set forth in Paragraph 4.01 of the Participation Agreement and in the other Operative Documents are true and correct in all material respects as if made on such date (except for representations and warranties expressly made as of a specified date, which shall be true as of such date); (b) No Default has occurred and is continuing; and (c) All of the Operative Documents are in full force and effect on such date. IN WITNESS WHEREOF, Lessee has executed this Notice of Rental Period Selection on the date set forth above. SILICON VALLEY GROUP, INC. By: -------------------------------- Name: -------------------------- Title: ------------------------- B-2 43 Recording requested by and EXECUTION VERSION when recorded return to: Dolph M. Hellman, Esq. Orrick, Herrington & Sutcliffe Old Federal Reserve Bank Building 400 Sansome Street San Francisco, California 94111 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LEASE AGREEMENT, DEED OF TRUST WITH ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING BETWEEN SILICON VALLEY GROUP, INC. AND SELCO SERVICE CORPORATION JUNE 30, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS LEASE IS NOT INTENDED TO CONSTITUTE A TRUE LEASE FOR INCOME TAX PURPOSES (SEE PARAGRAPH 2.06) 44 TABLE OF CONTENTS
PAGE SECTION 1. INTERPRETATION.............................................................................1 1.01. Definitions................................................................................1 1.02. Rules of Interpretation....................................................................2 SECTION 2. BASIC PROVISIONS...........................................................................2 2.01. Lease of the Property......................................................................2 2.02. Term.......................................................................................2 2.03. Rent.......................................................................................3 2.04. Use........................................................................................4 2.05. "As Is" Lease..............................................................................4 2.06. Nature of Transaction......................................................................5 2.07. Security, Etc..............................................................................5 SECTION 3. OTHER LESSEE AND LESSOR RIGHTS AND OBLIGATIONS.............................................7 3.01. Maintenance, Repair, Etc...................................................................7 3.02. Risk of Loss...............................................................................8 3.03. Insurance..................................................................................8 3.04. Casualty and Condemnation.................................................................11 3.05. Taxes.....................................................................................15 3.06. Environmental Matters.....................................................................15 3.07. Liens, Easements, Etc.....................................................................17 3.08. Subletting................................................................................18 3.09. Utility Charges...........................................................................18 3.10. Removal of Property.......................................................................18 3.11. Compliance with Governmental Rules and Insurance Requirements.............................19 3.12. Permitted Contests........................................................................19 3.13. Lessor Obligations; Right to Perform Lessee Obligations...................................20 3.14. Inspection Rights.........................................................................20 3.15. Cooperation of Lessor to Facilitate Operation, Etc........................................20 3.16. Survey and Title Matters..................................................................21 SECTION 4. EXPIRATION DATE...........................................................................22 4.01. Termination by Lessee Prior to Scheduled Expiration Date..................................22
- i - 45 TABLE OF CONTENTS (CONTINUED)
PAGE 4.02. Return of Property........................................................................22 4.03. Holding Over..............................................................................23 SECTION 5. DEFAULT...................................................................................23 5.01. Events of Default.........................................................................23 5.02. General Remedies..........................................................................26 5.03. Lease Remedies............................................................................27 5.04. Loan Remedies.............................................................................28 5.05. Remedies Cumulative.......................................................................31 5.06. No Cure or Waiver.........................................................................31 5.07. Exercise of Rights and Remedies...........................................................31 SECTION 6. MISCELLANEOUS.............................................................................31 6.01. Notices...................................................................................31 6.02. Waivers; Amendments.......................................................................31 6.03. Successors and Assigns....................................................................31 6.04. No Third Party Rights.....................................................................32 6.05. Partial Invalidity........................................................................32 6.06. Governing Law.............................................................................32 6.07. Counterparts..............................................................................32 6.08. Nature of Lessee's Obligations............................................................32 SCHEDULE 3.03 Insurance Requirements EXHIBITS A Land (2.01(a)) B Related Goods (2.01(d)) C Notice of Rental Period Selection (2.03(a))
- ii - EX-10.57 9 EX-10.57 1 EXHIBIT 10.57 (Translation) Loan Agreement Deed Dated: February 9, 1996 To: The Bank of Yokohama, Ltd. Borrower: Watkins-Johnson International Japan K.K. D-842, 2-1, Sakado 3-chrome Takatsu-ku, Kawasaki (stamp signature and seal) Stephen E. Chelberg Representative Director Article 1. The borrower hereby agrees to perform in accordance with the terms and conditions set forth in the Agreement of Bank Transactions separately executed and delivered to the Bank of Yokohama, Ltd. (hereinafter referred to as the "Bank"). The borrower hereby confirms that, in accordance with the Summary of Loans hereinafter provided, the Bank has lent the Borrower the funds described below, and the Borrower has received such funds. Article 2. (1) With regard to any and all obligations which the Borrower may owe to the Bank under this Agreement, the Guarantor shall be jointly and severally liable with the Borrower for the performance of such obligations, and the Guarantor hereby agrees to abide by the terms and conditions of this Agreement in addition to those of the 2 Agreement of Bank Transactions separately executed and delivered to the Bank by the Borrower with regard to the performance of any and all such obligations. (2) Even if the Bank, at its discretion, modifies or releases either the security or other guarantees it has received, the Guarantor shall not claim exemption from any of its obligations. (3) The Guarantor shall not set off its obligations by using either the Borrower's deposits and/or other credits against the Bank. (4) If and when the Guarantor performs any of its obligations under the Guarantee, the Guarantor shall then not exercise any rights obtained from the Bank by subrogation without the prior approval of the Bank as long as transactions between the Borrower and the Bank continue. Upon the Bank's demand, the Guarantor shall assign such rights and priority to the Bank without compensation. (5) If the Guarantor has already executed and delivered other guarantees for the Borrower's transactions with the Bank, such other guarantees shall in no way be modified by this Guarantee.
SUMMARY OF LOANS Amount One Billion Yen (Y1,000,000,000) Maturity Date January 20, 2011 Purpose of Borrowing Plant and equipment fund (for land purchases)
3 Interest Rate Fixed rate of two point five percent (2.5%) per annum. Repayment The Borrower shall repay the Loan in installments, and each of the installments other than the final installment shall be of an amount equal to Five Million Nine Hundred Twenty Thousand Yen (Y5,920,000), which are scheduled to be paid on the twentieth (20th) day of each month commencing on January 20, 1997, and the final installment, of an amount equal to Five Million Four Hundred Forty Thousand Yen (Y5,440,000), shall be payable on the Maturity Date. Payment of Interest The first payment of interest, which shall consist of the amount accrued between the date of this Agreement and March 20, 1997, shall be made upon March 20, 1997. Thereafter, payment of interest accrued between each payment date shall be made on the twentieth (20th) day of
4 each month in arrears. Interest shall be computed per diem on the basis of 365-days per year. If any payment of the principal of, or interest on, the Loan falls due on a non-business day of the Bank, such payment shall be made on the next succeeding business day. 5 AGREEMENT OF GUARANTEE To: The Bank of Yokohama, Ltd. In regard to any and all obligations of Watkins-Johnson International Japan, K.K. (hereinafter referred to as "the Principle") may owe the Bank of Yokohama Ltd. (hereinafter referred to as "your Bank") as a result of the Loan of which amount is 1,000,000,000 yen made on the 9th day of February 1996: Silicon valley Group, Inc. (hereinafter referred to as "the Guarantor") does hereby agree to the terms and conditions set forth in Agreement of Bank Transactions and the Agreement of the Loans on Deed separately executed and delivered to your Bank by the Principle, shall be jointly and severally liable with the Principle, and shall not cause any trouble or inconvenience to your Bank. The Guarantee Period shall commence on the date hereof and continue in force until the expiration of the above mentioned agreements between the Bank and the Principle. Dated this 6th day of July, Nineteen Hundred and Ninety Nine. Revenue Stamp BY: SILICON VALLEY GROUP, INC. Signature: /s/ RUSSELL G. WEINSTOCK Signature: /s/ BORIS LIPKIN ------------------------ ----------------------- Name: Russell G. Weinstock Name: Boris Lipkin ----------------------------- ---------------------------- Title: VP of Finance & CFO Title: CORPORATE V.P. ----------------------------- ---------------------------- (All questions that may arise within or without courts of law in regard to the meaning of the words, provisions and stipulations of this Agreement shall be decided in accordance with the Japanese text) EX-10.58 10 EX-10.58 1 EXHIBIT 10.58 (Translation) Loan Agreement Deed This document certifies that the Japan Development Bank (hereinafter referred to as the "Bank") has loaned the funds set forth in the following summary of loans (hereinafter referred to as the "Summary") to Watkins-Johnson International Japan K.K. (hereinafter referred to as the "Borrower"), and that the Borrower has acknowledged both the Summary and the terms and conditions set forth in the Annex (hereinafter referred to as the "Conditions"), and that the Borrower has received such funds. The execution, validity, interpretation and performance of this Agreement shall be governed by the laws of Japan. IN WITNESS WHEREOF, the parties hereto have executed one original of this Agreement in Japanese, and the Bank shall keep the original and the Borrower shall keep a copy thereof respectively. Dated: June 12, 1996 A: The Japan Development Bank 9-1, Otemachi 1-chrome Chiyoda-ku, Tokyo (stamp signature and seal) -------------------------- Yoshihiko Yoshino Governor B: Watkins-Johnson International Japan K.K. D-842, 2-1, Sakado 3-chrome Takatsu-ku, Kawasaki, Kanagawa (stamp signature and seal) -------------------------- Stephen E. Chelberg Representative Director 2 Summary of Loans Principal: One Billion Three Hundred Fifty Million Yen (Y1,350,000,000) Name of and expenses for the project for which the loan is required (hereinafter referred to as the "Project"): Construction of Technology Center for Semiconductor-Manufacturing Equipment Two Billion Seven Hundred Million Yen (Y2,700,000,000) Repayment of the principal: The full repayment shall be made on the 28th day of November, 2006. Interest rate: Three point one percent (3.1%) per annum (subject to per diem calculation on the basis of 365 days per year). Method of payment of interest: The first payment shall be made on the 28th day of November, 1996, and thereafter payment shall be made on the 28th day of May and November of each year. Interest accrued between each payment date shall be paid at the end of the accrual period. 3 ANNEX Terms and Conditions (Purpose of the Borrowed Funds) Article 1. The Borrower shall perform the Project in accordance with the Project plan as it exists as of the date of this Agreement and shall use the borrowed money under this Agreement only for such Project. (Installment Schedule for Payment of the Borrowed Funds) Article 2. The Borrower shall initially keep the borrowed funds under this Agreement on deposit with the Bank and the Bank shall deliver such deposited funds (hereinafter referred to as the "Deposited Funds") to the Borrower in installments based upon the progress of the Project, the payment of expenses for the Project and related matter. 2. When the Borrower withdraws the Deposited Funds from the Bank, the Borrower shall, in advance, notify the Bank of such payment of expenses for the Project and other related matters in a form prescribed by the Bank and shall obtain the Bank's consent to such withdrawal. 3. The Bank shall pay no interest on the Deposited Funds to the Borrower, and the Borrower shall pay no interest on the borrowed money up to the amount of the Deposited Funds in the Bank. 4. The Borrower shall not assign or create a pledge on 4 the right to deliver the Deposited Funds to a third party. (Delivery of the Deposited Funds by Bank Transfer) Article 3. If the Bank delivers the Deposited Funds under this Agreement by transfer to the Borrower's bank account, then the delivery of the Deposited Funds to the Borrower shall be deemed to be fulfilled upon completion of the Bank's procedure requesting the transfer of the Deposited Funds to the Borrower's bank account. Even if the Borrower thereafter suffers a loss for reasons including but not limited to accidents or procedural delays which occur after completion of the Bank's procedure and for which the Bank is not responsible, the Borrower shall not then demand compensation from or make other claims on the Bank. (Repayment of the Obligations by Bank Transfer) Article 4. If the Borrower repays its obligations by transfer to the Bank's account with checks, notes or other securities (hereinafter collectively referred to as "Securities"), the Borrower shall then ensure that the Securities are paid in full by the due dates of the Borrower's obligations. (Repayment of the Obligations by Delivering Securities) Article 5. If the Borrower repays its obligations by delivering the Securities to the Bank, such Securities shall be negotiable 5 for settlement through the clearing house consented to by the Bank and the Borrower shall ensure that the Securities are paid in full by the due dates of the Borrower's obligations. 2. If any of the Securities in the preceding paragraph is dishonored and returned to the Borrower by the Bank, then the Borrower agrees that the Bank is not responsible for taking any steps to preserve any rights relating to such Securities. (Prepayment) Article 6. If the expenses for the Project decrease to less than those set forth in the Summary (hereinafter referred to as the "Summary Amount") because of a change in the Project plan or other reasons, and the Bank so requests, the Borrower shall then, notwithstanding the maturity date of the loan set forth in the Summary, prepay the borrowed money under this Agreement in proportion equal to the percentage of the reduction of the Summary Amount. 2. If the Bank finds that the fulfillment of the Project's aim is rendered impracticable because the decreased amount referred to in the preceding paragraph amounts to a substantial percentage of the Summary Amount, and the Bank so requests, the Borrower shall then prepay the borrowed money received under this Agreement in full. 3. If (i) the Borrower does not perform the Project without a justifiable reason, despite the Bank's instructions, even after a reasonable period which the Bank has deemed 6 necessary for performance of the Project, or (ii) if the Borrower does not apply the money delivered under paragraph 1 of Article 2 to satisfy the payments due for the expenses of the Project, or (iii) if the Bank finds that the purpose of the Project will not be completed on the ground that the Borrower has assigned or leased an object which the Borrower obtained as a result of the Project to a third party immediately after the Borrower obtained it or for other reasons and the Bank so requests, the Borrower shall then, notwithstanding the maturity date set forth in the Summary, prepay the borrowed money received under this Agreement to the Bank either in whole or in part. 4. The Borrower may prepay the borrowed money under this Agreement in whole or in part with the Bank's prior consent. 5. In addition to the preceding paragraph, the Borrower may prepay the borrowed money under this Agreement in whole or in part by giving the Bank written notice of prepayment at least ninety (90) days prior to the date of prepayment. 6. In case the preceding paragraph applies, the Borrower may not cancel the prepayment without the Bank's consent after the Bank's receipt of such prepayment notice. Article 7. When the Borrower prepays the borrowed money, the Borrower shall pay the amounts sets forth in each of the following upon such prepayment: (1) Interest on the prepaid amount accrued up until the 7 date of such prepayment. (2) In case of the prepayment arising under paragraph 5 of the preceding Article, if the interest rate under this Agreement (hereinafter referred to as the "Agreed Interest Rate") exceeds the Bank's standard interest rate as of the date of such prepayment (hereinafter referred to as the "Standard Interest Rate"), in addition to the preceding item, the difference between (i) the amount equal to interest which is calculated on the basis of the Agreed Interest Rate on the prepaid amount for the period during the date of such prepayment and the maturity date set forth in the Summary and (ii) the amount equal to interest which is calculated on the basis of the Standard Interest Rate for the same period (with the method of such calculation to be determined by the Bank). Article 8. The Bank may set off the Deposited Funds against any funds, including interest thereon and any other obligation pertaining to such funds, which the Borrower should prepay. (Appropriation of Repayment) Article 9. (i) If the Borrower prepays the borrowed money under this Agreement to the Bank in part, or (ii) if the Bank sets off the Deposited Funds against the funds which the Borrower should prepay under this Agreement, or (iii) if the amount of the repayment of obligations under this Agreement or under other loan agreements between the Bank and the Borrower is 8 less than the amount which the Borrower should repay under such agreements, then the Bank may appropriate the amount due in such manner as decided upon by the Bank. (Inspection of Books, Etc.) Article 10. The Bank may at any time inspect the status of the Project as well as the Borrower's assets, documents, books and other materials as the Bank deems necessary based on reasonable grounds, such as to confirm the use of the loaned funds under this Agreement or for the preservation of the Bank's rights. 2. The Borrower shall offer assistance as needed to the Bank for the inspection set forth in the preceding paragraph. (Matters to be Filed) Article 11. If the Borrower changes its name, corporate name, address, representative, filed seal or other matters filed with the Bank, the Borrower shall then notify the Bank thereof in writing forthwith. (Matters to be Reported) Article 12. The Borrower shall report to the Bank, in accordance with the method as instructed by the Bank, the matters mentioned in (1) and (2) below upon the Bank's request and the matter mentioned in (3) below without delay upon the occurrence of 9 such event. (1) Progress status of the Project and payment status of the expenses of the Project. (2) Each settlement of account (including mid-year settlements if the company/companies which choose(s) yearly settlement make(s) such a mid-year settlement) and decisions as to dividends (including interim dividends) of the Borrower and Watkins Johnson Company (hereinafter referred to as the "Guarantor"). (3) Other important events concerning management, finance or business. (Acceleration of Payment) Article 13. If any one of the following events should occur and be continuing, and the Bank so requests, the Borrower's obligations to the Bank shall then immediately become due and payable and the Borrower shall forthwith pay the entire amount of its obligations under this Agreement. (1) When the Borrower does not perform the Project and uses the borrowed money under this Agreement for a purpose other than that of the Project; (2) When the Borrower fails to perform any of its obligations under Articles 11 or 12 and continues not to perform such obligations despite the Bank's request, or when the Borrower makes a false statement or report thereunder; (3) When the Borrower fails to pay any part of the principal or interest under this Agreement; 10 (4) When the Borrower fails to perform any of its obligations under this Agreement other than those set forth in each of the preceding items, or fails to perform any of its obligations to the Bank under any other agreements; (5) When the Borrower dishonors any note or check; (6) When an order or notice of provisional attachment, preservative attachment or attachment with respect to the Deposited Funds is issued or given to the Borrower; (7) When attachment with respect to assets which the Borrower furnishes or agrees to furnish to the Bank as security is made; (8) When the Borrower or the Guarantor stops payment or an application is filed by or against the Borrower or the Guarantor for bankruptcy, composition, corporate reorganization or corporate arrangement; (9) When the Borrower or the Guarantor is dissolved or its business is closed; (10) When any event reasonably requiring the preservation of the Bank's rights other than those set forth in each of the preceding items occurs to the Borrower; (11) When the Guarantor fails to perform any of its obligations under the guaranty agreement with the Bank dated June 12, 1996 (hereinafter referred to as the "Guaranty Agreement" in this Article) and, if the Bank reasonably determines that such failure can be cured, such failure to perform such obligation continues unremedied for a period of thirty (30) days; or (12) When any event of default occurs under or in 11 connection with any obligation of the Guarantor to the Bank other than those incurred under the Guaranty Agreement. (Security) ARTICLE 14. The Borrower shall, upon a request by the Bank based on reasonable and probable cause to preserve the Bank's rights under this Agreement, furnish the Bank with security or additional security as may be approved by the Bank, whether or not there is any security or a guarantor under this Agreement or any other agreements. (Execution of Notarial Deed) ARTICLE 15. The Borrower shall, at any time upon the Bank's request (with the Guarantor, if the Bank so instructs), commission a notary public in Japan and take all necessary actions to execute a notarial deed containing an acknowledgement of the obligations under this Agreement and a statement of acceptance of enforcement thereof. (Burden of Expenses) ARTICLE 16. The Borrower shall bear any expenses for preparation of this Agreement, registration, and all other expenses in connection with the performance of this Agreement. 12 (Post Default Interest) ARTICLE 17. The Borrower shall pay post default interest equivalent to 14.5% per annum (subject to per diem calculation on the basis of 365 days per year) on the principal, interest and any other amounts payable in the event of default of any payment obligation, or on advance money the Bank paid for the expenses under the preceding Article. (Court Jurisdiction) ARTICLE 18. In the event of any litigation or controversies in connection with this Agreement, the Borrower hereby submits and consents to the non-exclusive jurisdiction of the Tokyo District Court. 13 GUARANTY AGREEMENT July 6, 1999 To: Mr. Masami Kogayu, Governor The Japan Development Bank The undersigned (hereinafter referred to as the "Guarantor"), after having accepted the following terms and conditions, hereby guarantees all the obligations of Watkins-Johnson International Japan K.K. (hereinafter referred to as the "Debtor") to the Japan Development Bank (hereinafter referred to as the "Bank") arising out of those certain agreements made by and between the Bank and the Debtor dated June 12, 1996 and December 26, 1997 (hereinafter referred to as the "Original Agreements"), certain basic provisions of which are more fully described in Attachment A. ARTICLE 1. The Guarantor hereby confirms the obligations of the Debtor under the Original Agreements, and agrees to each article and paragraph of the Original Agreements. ARTICLE 2. 1. The Guarantor, as primary obligor and not as surety only, shall be jointly and severally responsible with the Debtor (this Guaranty being Rentalhosho under the laws of Japan) for the full and prompt payment to the Bank of the entire amount of the Debtor's obligations under, and in accordance with the terms of, the Original Agreements. Even if any change or amendment is made to either of the Original Agreements, the Guarantor shall perform its guaranty obligations in accordance with the Debtor's obligations as changed thereby. 2. The Guarantor shall not claim any exemption from its obligations hereunder even if there occurs any increase, decrease, replacement, release of, or any other change with respect to the security or the guaranty described in the Original Agreements. ARTICLE 3. In the event the Guarantor performs its guaranty obligations, any rights it acquires from the Bank by virtue of subrogation shall not be exercised without the Bank's consent until the Debtor has paid in full all of its obligations to the Bank under the Original Agreements, as it may be amended from time to time. Further, upon the Bank's request, such rights or ranking thereof shall be assigned to the Bank free of charge and all the procedures required therefor shall be taken. 14 Article 4. On or prior to the date of the execution of this Guaranty Agreement, the Bank shall have confirmed that the Guarantor is able to provide the documents listed in Attachment B and has executed those documents to which it is a party; and all such documents shall be dated the date of the execution of this Guaranty Agreement and shall otherwise be in form and substance satisfactory to the Bank. In any event, the Bank shall have received the originals of such documents at its Tokyo head office by a date to be designated by the Bank. Article 5. If any change occurs in the name, the authorized signatories (including the specimen signature(s) thereof), the address, or any other reported matters of the Guarantor, notification thereof shall immediately be given to the Bank in writing, and such change shall become effective upon receipt thereof by the Bank. Article 6. All expenses incurred in the preparation of this Guaranty Agreement and all other expenses otherwise incurred in connection with this Guaranty Agreement shall be borne by the Guarantor. Article 7. 1. This Guaranty Agreement shall be deemed to be a contractual obligation under, and shall be governed by and construed and interpreted in accordance with, the laws of Japan. 2. In the event of any litigation pertaining to this Guaranty Agreement, the Guarantor hereby submits and consents to the non-exclusive jurisdiction of the Tokyo District Court. The Guarantor hereby irrevocably appoints Watkins-Johnson International Japan K.K., 12-7-2, Kuriki, Asao-ku, Kawasaki-shi, Japan as its agent to receive service of process in Japan in connection with any suit, action or proceeding relating to this Guaranty Agreement. In the event that agent ceases to be able to act as agent of the Guarantor hereunder or ceases to have an office in Tokyo, Japan and the Guarantor fails to appoint a successor agent acceptable to the Bank, the Guarantor agrees that the Bank shall automatically serve as its agent to receive service of process in Japan. Article 8. The Guarantor agrees that this Guaranty Agreement shall be binding upon it and its successors and assigns and may not be assigned without the prior written consent of the Bank. Article 9. This Guaranty Agreement shall be prepared in English. -2- 15 SILICON VALLEY GROUP, INC. By: /s/ RUSSELL G. WEINSTOCK ----------------------------------- Name: Russell G. Weinstock -------------------------------- Title: V.P. of Finance & CFO ------------------------------- Address: 101 Metro Drive, Suite 400 ----------------------------- San Jose, CA 95110 ----------------------------- -3- 16 ATTACHMENT A DESCRIPTION OF THE ORIGINAL AGREEMENTS AND SUMMARY OF BORROWING CONDITIONS The Original Agreement dated June 12, 1996 Parties: The Japan Development Bank and Watkins-Johnson International Japan K.K. Summary of the Borrowing Conditions thereof 1) Principal: Yen 1,350,000,000 2) Project for which the loan is required: Construction of Technology Center for Semiconductor Manufacturing Equipment 3) Repayment schedule of principal: The repayment shall be made in full on the 28th day of November 2006 4) Interest rate: 3.1% per annum (subject to per diem calculation on the basis of 365 days a year.) 5) Method of payment of interest: The first payment shall be made on the 28th day of November 1996 and thereafter payment shall be made on the 28th day of May and November of every year. Interest accrued between each payment day shall be paid at the end of the accrual period. 17 ATTACHMENT B Documents Required Under Article 4. 1. Copies, certified by a duly authorized officer of the Guarantor, of the Guarantor's articles of incorporation and by-laws. 2. Copies, certified by a duly authorized officer of the Guarantor, of a resolution of the board of directors of the Guarantor approving and authorizing the execution, delivery, and performance of the Guaranty Agreement by the Guarantor and authorizing specified officer(s) and/or other representative(s) of the Guarantor to execute and deliver the Guaranty Agreement on behalf of the Guarantor. 3. A certificate signed by a duly authorized officer of the Guarantor as to the incumbency of those officers or other representatives of the Guarantor authorized to sign the Guaranty Agreement and certifying the specimen signatures of such persons. 18 June 25, 1999 Watkins-Johnson Company 3333 Hillview Avenue Palo Alto, California 94304-1223 Silicon Valley Group, Inc. 101 Metro Drive, Suite 400 San Jose, California 95110 Ladies and Gentlemen: This letter is in reference to the letter (the "Letter") dated June 25, 1999 from Silicon Valley Group, Inc. ("SVG") and Watkins-Johnson Company ("WJ Company"). We understand that the cancellation of the guaranty agreements with WJ Company listed in the Letter (the "Old Guaranty Agreement") and the release of all WJ Company's obligations thereunder are conditions precedent to the closing (the "Closing") of the Acquisition set forth in the Letter. We hereby confirm and agree that the guaranty agreement between THE JAPAN DEVELOPMENT BANK ("JDB") and SVG (the "New Guaranty Agreement"), which has been executed by JDB and SVG, will come into effect upon the completion of the Closing and, if the Closing fails to occur on or prior to July 15, 1999 (the "Termination Date"), will be automatically cancelled and will then never come into effect. Based upon the foregoing understanding, JDB hereby irrevocably agrees to issue and deliver the release letter in the same form as attached hereto to WJ Company immediately following the completion of the Closing. JDB's agreement to issue and deliver the release letter will become null and void if the Closing fails to occur on or prior to the Termination Date. THE JAPAN DEVELOPMENT BANK By /s/ YASUGHI NISHIMURA ----------------------- Name: Yasughi Nishimura ----------------------- Title: Director of the Japan Development Bank --------------------------------------------- 19 Acknowledged and agreed: Watkins-Johnson Company By /s/ W. KEITH KENNEDY JR ----------------------- Name: W. Keith Kennedy Jr. -------------------- Title: President -------------------- Date: -------------------- Silicon Valley Group, Inc. By --------------------------- Name: ---------------------- Title: ---------------------- Date: ---------------------- 20 Acknowledged and agreed: Watkins-Johnson Company By --------------------------------- Name: ---------------------------- Title: --------------------------- Date: --------------------------- Silicon Valley Group, Inc. By /s/ RUSSELL G. WEINSTOCK --------------------------------- Name: Russell G. Weinstock ---------------------------- Title: VP of Finance & CFO --------------------------- Date: 7/1/99 --------------------------- EX-10.59 11 EX-10.59 1 EXHIBIT 10.59 SVG August 31, 1999 STRICTLY CONFIDENTIAL Mr. Jeffrey M. Kowalski 20 Barneburg Dove Canyon, CA 92679 Dear Jeff: I am very pleased that you, as President, will be taking on the challenge of managing the newly integrated Thermal Systems, LLC at Scotts Valley, CA. Your current remuneration and perquisites will continue. Based on the current business plan, the Orange, CA facility expects closure by the end of March, 2000. Between now and March, 2000, SVG will reimburse you for temporary living and reasonable meal expenses while you are at the Scotts Valley location and your family is resident in Orange. In consideration for relocating your family from Dove Canyon, CA to the Scotts Valley, CA area, SVG agrees to provide you with Category III of SVG's Relocation Guideline (attached). This relocation assistance is in effect April 1, 2000 and good for a 6 month period. In addition, to assist you with the purchase of a new residence, SVG agrees to provide you with a loan in the amount of $250,000, forgivable monthly over a sixty (60) month period provided you are in good standing with the company. In the event that you voluntarily leave the employ of the company within this 60 month period, you will be required to pay back on a pro-rata basis, any remaining balance, plus interest at the federal applicable rate for August, 1999 of 7.2%. So that you will be tax neutral, any taxable reimbursed expenses associated with your relocation will be grossed-up. Since the federal and California tax laws may differ on the treatment of certain reimbursements, I strongly recommend you consult your tax advisor. Jeff, I look forward to your contributions in this new opportunity and have confidence that it will be a successful journey. Please sign this letter where indicated to confirm your understanding of the above terms. Sincerely, - ------------------------------ ------------------------------- Papken S. Der Torossian Jeffrey M. Kowalski Chairman and President, Thermal Systems LLC Chief Executive Officer EX-21.1 12 EX-21.1 1 EXHIBIT 21.1 (i) SVG Lithography Systems, Inc., a Delaware corporation (SVGL), (ii) Tinsley Laboratories, Inc., a California corporation ("TLI"), (iii) Silicon Valley Group, Japan Ltd., a Japanese corporation, (iv) SVG International Service, a California corporation ("SVG International"), (v) Silicon Valley Group FSC Incorporated, a Barbados corporation, (vi) SVG Israel, Inc., a Delaware corporation, (vii) SVG Thailand, Inc., a Delaware corporation, (viii) Silicon Valley Group Korea, Inc., (SVG Korea) a Korean corporation, (ix) SVG Taiwan, Inc., a Delaware corporation, (x) Silicon Valley Group, Thermal Systems LLC, a Delaware company and (xi) Watkins-Johnson International Taiwan, a Taiwan corporation. SVG Lithography Japan Co., Ltd., a Japanese corporation, Silicon Valley Group B.V., a Netherlands corporation, SVG France S.A.R.L., a French corporation, and SVG Lithography Systems FSC, Inc., a Barbados corporation are wholly-owned by SVGL. Century Precision Industries, Inc., a California corporation and Tinsley International FSC, a Barbados corporation are wholly-owned by TLI. SVG Europe Limited, a United Kingdom corporation (SVG Europe), Silicon Valley Group Deutschland GmbH, a German corporation, SVG Systems (Asia) Pte. Ltd (SVG Singapore), a Singapore corporation and Thermco Systems (Far East) Limited, a Hong Kong corporation are wholly-owned by SVG International. UK Systems Limited, an English corporation, and Watkins-Johnson Europe Limited, an English corporation are wholly-owned by SVG Europe. Watkins-Johnson International Singapore Pte. Ltd., is wholly owned by SVG Singapore. Watkins-Johnson International Korea, Ltd., is wholly owned by SVG Korea. EX-23.1 13 EX-23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements Nos. 33-31298, 33-85020, 333-39499 and 333-80079 of Silicon Valley Group, Inc. on Forms S-8 of our report dated October 25, 1999 appearing in this Annual Report on Form 10-K of Silicon Valley Group, Inc. for the year ended September 30, 1999. /s/ DELOITTE & TOUCHE LLP - ------------------------------------ Deloitte & Touche LLP San Jose, California December 20, 1999 EX-27 14 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FOR FISCAL 1999 AS FILED IN THE COMPANY'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999. 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 98,278 43,968 159,019 5,038 200,769 544,811 371,105 172,702 754,773 162,656 0 0 14,976 410,068 132,493 754,773 473,690 473,690 312,319 312,319 0 0 1,305 (37,436) (11,980) (25,456) 0 0 0 (25,456) (0.77) (0.77)
-----END PRIVACY-ENHANCED MESSAGE-----