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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, 1996.*
[ ] 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)
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DELAWARE 94-2264681
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
101 METRO DRIVE, SUITE 400, SAN JOSE, 95110
CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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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. [X]
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 29, 1996,
was approximately $636,778,000. 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 29, 1996 was 30,177,634.
* See Part II, Item 8 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 indicated:
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Proxy Statement for Annual Meeting of Stockholders to be held
on February 20, 1997........................................ Part III
Annual Report to Stockholders for fiscal year ended September
30, 1996.................................................... Parts II & IV
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PART I
ITEM 1. BUSINESS.
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 and set out in
the Annual Report incorporated by reference herein, 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.
Silicon Valley Group, Inc. (the "Company" or "SVG") 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. The Company has three principal product groups which focus primarily on
photolithography, photoresist processing, and deposition for oxidation/diffusion
and low pressure chemical vapor deposition ("LPCVD"). The Company's products
incorporate proprietary technologies and unique processes, and focus on
providing process and product technologies and productivity enhancements to its
customers. The Company supports its products through a network of worldwide
service and technical support organizations. The Company works closely with its
existing and potential customers. As evidence of the Company's commitment to its
customers, in February 1995 the Company entered into a business relationship
with Intel, Motorola and Texas Instruments (the "Investors") pursuant to which
such companies made an equity investment in the Company.
The Company manufactures and markets its photolithography exposure products
through its majority owned subsidiary, SVG Lithography Systems, Inc. ("SVGL"),
its photoresist processing products through its Track Systems Division ("Track")
and its oxidation/diffusion and LPCVD products through its Thermco Systems
Division ("Thermco").
INDUSTRY BACKGROUND
Continuous improvements in semiconductor process and design technologies
have led to the production of smaller, more complex and more reliable devices at
a lower cost per function. As performance has increased and size and cost have
decreased, the demand for semiconductors has expanded beyond the primary market
in computer systems to include applications in telecommunications systems,
automotive products, consumer goods and industrial automation and control
systems. Semiconductor content as a percentage of system cost has also
increased. In addition, the demand for electronic systems has expanded
geographically, particularly in the Pacific Rim. The Company believes that these
longterm 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, 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 between 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.
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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:
- Technological Innovation. The Company is committed to developing new
products, improving processes and enhancing existing products through
substantial investment in research and development. SVG designs and
manufactures sophisticated semiconductor manufacturing systems for
advanced fabrication facilities. Its 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 Collaboration. 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. SVG 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 itself
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.
- Continuous Improvement. The industry requires that equipment suppliers
provide cost effective products that are based on extendable technology.
Cost of ownership and the ability to satisfy customer delivery
requirements are critical ingredients in the selection process for
advanced equipment. SVG is responding by expanding its facilities and
deploying capital for manufacturing and test equipment to respond to the
requirements of the semiconductor industry. Additionally, the Company is
implementing programs to increase the effectiveness of its material
procurement, reduce manufacturing cycle times and improve production
methods and processes to gain additional efficiencies.
- Expanding Worldwide Customer Service and Support. The Company's
customers are concentrating their business with a smaller number of key
suppliers and demanding higher levels of support and service from these
suppliers as the semiconductor fabrication process becomes increasingly
complex. The Company has responded to this trend by making substantial
investments in its global service and support capabilities.
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 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 0.25 micron (approximately 10 millionths of
an inch) 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 its depth of
focus, numerical aperture (a measure of its light gathering characteristics) and
the wavelength of the light used in pattern projections. With the advancement of
photolithography technology has come a trend toward the reduction in wavelength
from G-line (436 nanometer) to I-line (365 nanometer) to Deep UV (248-193
nanometer) and the increase in numerical aperture from 0.2 to 0.6.
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Historically, there have been two major approaches to photolithography
exposure systems: full field scanners and conventional refractive systems. The
full field scanners project a full scale mask image onto full wafers while the
refractive systems (steppers) sequentially expose small sections 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.
Micrascan. The Company believes that its Micrascan photolithography
exposure system provides the greater resolution required for current advanced
logic and memory devices and for succeeding generations of complex, fine
geometry integrated circuits through its use of Deep UV lamp and laser light
sources and overcomes the throughput, yield and line-width limitations of
steppers 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 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. In addition, Micrascan continuously modifies the position
of the wafer surface during the scan to keep the wafer in the optimal focal
plane, thereby providing Micrascan a larger usable depth of focus field than
steppers. 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.*
The Company believes that SVGL has substantial technological expertise and
process knowledge in developing Deep UV 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 a higher
power optical projection system, 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 running 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 alignment of the wafer and the reticules prior to and during the
wafer exposure step. These alignment systems contribute to the Micrascan's
ability to scan the exposure field at speeds of 50mm per second or greater with
no significant loss of resolution, thereby increasing the throughput capability
of the machine.
The Company believes that many of the more complex semiconductor devices
currently under development, such as the most advanced microprocessors and
DRAMs, will benefit from the larger exposure field scanned by the Micrascan.* In
addition, these more complex devices feature increasingly narrow line widths,
which require greater resolution in exposing the photoresist. The Company
believes that as these larger and more complex logic and memory devices move
from development and pre-production to production, the technical advantages of
Deep UV step and scan systems over existing I-Line and Deep UV steppers will
provide a greater incentive to semiconductor manufacturers to purchase step and
scan systems rather than steppers in order to achieve more precise line-width
control, higher yields and faster throughput. Although certain companies are
currently using the Micrascan II in production, the Company believes that
manufacturers will not begin volume production of advanced devices which will
benefit most from the utilization of Deep UV step and scan technology until late
1997 or 1998. The Company believes the SVGL Micrascan II series of
photolithography systems, capable of printing .30 micron line widths, are
currently the most technically advanced step-and-scan machines shipping in
multiple quantities to global semiconductor manufacturers.* However, competitive
equipment capable of producing .25 micron line widths using step-and-scan
technology
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is currently available in limited quantities. The Micrascan II systems which the
Company is now shipping in volume sell for up to approximately $5,300,000,
depending upon configuration. The Micrascan systems capable of printing .25
micron line widths which the Company expects to begin shipping in the first half
of fiscal 1997 sell for up to approximately $7,200,000, depending upon
configuration.
Uncertain Development of Market for Micrascan Products. The development of
a market for the Company's Micrascan photolithography products will be highly
dependent on the continued trend towards finer line widths in integrated
circuits and the ability of lithography manufacturers to keep pace with this
trend through either enhanced technologies or improved processes. The market for
the Company's Micrascan photolithography products has developed more slowly than
the Company anticipated at the time the Company acquired SVGL in May 1990. From
its inception in fiscal 1990, through the end of fiscal 1996, SVGL sold an
aggregate of 83 Micrascan systems, of which 38 were shipped in fiscal 1996. At
September 30, 1996, SVGL had a sales order backlog of 38 Micrascan units for
shipment. In addition to the systems included in backlog, SVGL had orders for 18
systems which had scheduled delivery dates outside the twelve month backlog
window, including orders for seven advanced technology 193 nanometer Micrascan
systems currently under development. While such orders are encouraging, they are
not necessarily indicative of industry-wide acceptance of the Micrascan
technology. The Company and many industry observers initially believed that
I-Line steppers, the most advanced photolithography exposure equipment in
widespread production use at the time the Company acquired SVGL, could not be
modified to be capable of fabricating complex semiconductor devices with line
widths of less than 0.5 micron, such as 64 and 256 megabit dynamic random access
memories ("DRAMs"). Since 1990, however, stepper manufacturers have extended the
capability of their I-Line steppers to 0.5 micron or finer line widths and
customers can purchase Deep UV steppers to produce product at .25 micron line
widths. The Company believes that as a result of such enhancements,
manufacturers of complex devices continued to use steppers for fabricating such
devices. The Company believes that as devices increase in size and complexity
and require finer line widths, the technical advantages of Micrascan systems as
compared to steppers will enable semiconductor manufacturers to achieve finer
line widths, higher yields and increased throughput.* The Company believes that
advanced semiconductor manufacturers are beginning to require volume quantities
of production equipment as advanced as the current and pending versions of
Micrascans; however, it does not believe that substantial sales of such systems
will begin until late calendar 1997 or 1998.* If manufacturers of traditional
I-line or Deep UV steppers are able to further enhance existing technology to
achieve finer line widths sufficiently to erode Micrascan's competitive and
technological advantages, demand for the Micrascan technology may not develop as
the Company expects.* While the recent volume of orders for Micrascan systems
has been consistent and encouraging, they are not necessarily indicative of
industry-wide acceptance of the Micrascan technology. Although SVGL has been
profitable during fiscal 1996, the Company believes that with the costs
associated with the continued development of multiple generations of Micrascan
technology, the expansion of SVGL's manufacturing capacity, the additional
manpower requirements related to the expanded capacity and customer support and
the potential difficulties inherent in manufacturing initial quantities of the
.25 micron Micrascan systems, there can be no assurance that SVGL will be able
to operate profitably in the future.* Failure of SVGL to develop adequate
production capability to supply a substantial number of systems in response to
customer demand, or a delay in supplying such systems, could have a material
adverse effect on the Company's ability to continue to operate profitably.*
The Company believes that for SVGL to succeed in the long term, it must
sell its Micrascan products on a global basis. The Japanese market (including
fabrication plants operated outside Japan by Japanese semiconductor
manufacturers) 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 either of these markets. In April 1993, the
Company entered into a letter of intent with Canon, Inc. ("Canon"), a major
Japanese company, for the purpose of establishing a worldwide strategic alliance
based on SVGL's Micrascan technology. The Company and Canon were unable to reach
agreement and the letter of intent expired on November 30, 1994. Although Canon
is contractually prohibited until April 2003 from manufacturing a specifically
defined step and scan photolithography machine or disclosing related
information, Canon could introduce a product that includes certain step and scan
technology without violating this prohibition. As
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a result of the expiration of the letter of intent, the Company believes that
Canon has accelerated its previously suspended development of a step and scan
photolithography product which will compete with Micrascan.
The Company believes that its current customer base of semiconductor
manufacturers in the U.S. and Europe, and the Korean companies that have
purchased initial quantities of the product will order a sufficient number of
units to establish the Micrascan as a competitive technology.* It is also
possible that Japanese manufacturers may follow. In order for SVGL to become a
viable competitor in the Lithography business, it must be able to continue the
timely development, introduction and shipment of new technology systems into the
marketplace. To accomplish this, it must not only maintain its product
development effort, but it must also build an efficient manufacturing operation,
capable of supplying systems in quantities sufficient to meet the requirements
of multiple global customers. Additionally, it must develop a supplier
infrastructure capable of providing timely, cost effective and quality
components. In addition to the development and manufacturing of systems capable
of meeting customer requirements, the Company must have a qualified global
support and parts distribution function capable of servicing customers
worldwide. There can be no assurance that SVGL will be successful in these
endeavors.
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 projection. 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 $1,250,000.
TRACK SYSTEMS DIVISION (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, SVG has developed
increasingly advanced product lines for this market, which are capable of
handling integrated circuits with line widths as narrow as 0.25 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 of the 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. SVG
believes it is the only manufacturer to offer a cluster which integrates its
photolithography and photoresist products. In addition, the Track 90-S product
is designed to interface with all stepper products in the industry.
Track offers four product lines, each corresponding 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.
200-APS. Introduced in July 1996, the 200-APS is designed for eight inch
advanced fabrication processes for integrated circuits with line widths down to
.18 micron, such as 256 megabit DRAMs. The system is smaller than the Company's
90-SE and potentially offers customers a lower cost-of-ownership through
improvements in productivity such as a lower floorspace requirement, direct
module-to-module robotic wafer-transfer, and reduced photoresist consumption.
The 200-APS has improved process capabilities including improved wafer coating
uniformities, highly precise wafer transport timing controls and proprietary
photoresist dispense technologies. The Company expects to ship production units
of the 200-APS during the second quarter of fiscal 1997.* Prices of the 200-APS
will range from approximately $1,000,000 to $2,100,000.
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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, features substantially improved contamination control
specifications as compared to the Company's earlier products 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 $1,500,000.
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. Prices of the 8800 Series range from approximately
$350,000 to $750,000.
8600 Series. The 8600 Series is a belt-based wafer transport system
capable of processing wafers with diameters of three to six inches and of
supporting the needs of photoresist processing down to 1.0 micron line widths.
The 8600 Series is typically purchased for expansion of current fabrication
capacity. Prices of the 8600 Series range from approximately $200,000 to
$400,000.
THERMCO SYSTEMS DIVISION (THERMCO)
Thermco designs, manufactures, markets and services large batch thermal
products which address the oxidation/diffusion and LPCVD steps of the
semiconductor fabrication process. Thermco 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. Thermco's products incorporate proprietary technology the Company
has developed in the areas of thermal control, gas handling, particle control
and automated wafer handling.
There are two major configurations of thermal 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.
Series 9000 Rapid Vertical Processor ("RVP"). Thermco's most recent
vertical furnace, the RVP was introduced in 1996. It is based on the AVP
platform, processes both eight inch and six inch wafers and meets sub-.50 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 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 $1,100,000 to $1,500,000, 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
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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 $700,000
to $1,000,000, depending on process configuration.
Vertical Thermal Reactor ("VTR"). Thermco'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 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 $500,000 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.* 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.
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, SVG is able to identify new product development
opportunities. The Company's major customers during fiscal 1996 included the
following:
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Advanced Micro Devices IBM Phillips Semiconductor
Atmel Intel SGS-Thomson
Cirrus Logic LSI Logic Samsung
Hewlett-Packard Motorola Siemens
Hyundai Newport Wafer Fab Submicron Technology
</TABLE>
The Company relies on a limited number of customers for a substantial
percentage of its sales. For fiscal 1995 Motorola, Intel, and SGS-Thomson
represented 18%, 17% and 12%, respectively, of sales and the Company's largest
five customers represented 60% of sales. In fiscal 1996, Intel, Motorola and IBM
represented 31%, 10% and 7%, respectively, of sales and the Company's largest
five customers represented 60% of sales. In fiscal 1995 and 1996, Intel
represented 36% and 47%, respectively, of Track sales. Track operations were
responsible for a substantial portion of the Company's profits in both periods.
Further, in both fiscal 1995 and 1996, Intel was the largest customer for SVGL's
Micrascan photolithography systems and represented 21% and 46%, respectively, of
SVGL sales. The loss of a significant customer (and in particular the loss of
Intel as a Track or SVGL customer), 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, could adversely affect the Company's business and
results of operations.
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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 in Europe, Israel and the Far East.
The following table sets forth the Company's revenues by geographic area as a
percentage of net sales for the last three fiscal years ended September 1996:
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<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
United States........................................... 58% 68% 65%
Western Europe.......................................... 32 24 25
Far East................................................ 8 8 10
Other................................................... 2 -- --
</TABLE>
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 factor 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, SVG continues to expand its field service
organization, increase its technical and process support personnel, enhance its
training programs and increase spare part inventories deployed 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, 1996 and 1995, the Company had backlog of approximately
$395,000,000 and $391,000,000, 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 Company's backlog as of any
particular date may not be representative of actual sales for any succeeding
period. During fiscal 1996, the Company experienced both customer initiated
equipment delivery date delays and, to a lesser degree, customer purchase order
cancellations, both of which had an adverse effect on operating results during
the second half of the fiscal year and potentially may adversely effect
operating results during the first half of fiscal 1997.*
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, in part, upon its ability to
successfully 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.
8
<PAGE> 10
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. The
agreements which are currently in effect are discussed in detail below.
In September 1994, the Company and SEMATECH entered into a series of
agreements whereby the Company sold SEMATECH warrants to purchase the Company's
Common Stock and SEMATECH agreed, based upon the Company achieving certain
performance milestones, to provide, through 1997, $22,000,000 of funding for the
development of the Micrascan technology and to increase SVGL's manufacturing
capability and capacity. As of September 30, 1996, the Company had recognized
$17,250,000 of such SEMATECH funding. Additionally, under the agreements with
SEMATECH, the Company was obligated to provide certain funds from its own
resources. The Company has funded sufficient qualifying expenditures to fulfill
its contractual obligations under its agreement with SEMATECH.
In February 1995, the Company entered into an agreement with Intel
Corporation, Motorola Inc., and Texas Instruments Incorporated (the
"Investors"), under which the Investors made a $30,000,000 equity investment in
the Company and received certain rights to purchase future generations of the
Company's Micrascan products. The Company agreed to utilize the proceeds of the
transaction for research and development related to its Micrascan technology and
the expansion of its manufacturing capacity as well as working capital for its
Micrascan products. The agreement with the Investors also obligated the Company
to fund from its own resources not less than $25,000,000, including amounts it
funded under the agreement with SEMATECH. The Company has fulfilled its funding
obligation under the agreement with the Investors.
During fiscal 1996, the Company entered into agreements with certain
customers (the "Participants") whereby each Participant 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
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. At September 30, 1996, the Company had received
$5,000,000 in initial funding from four Participants and had received single
unit orders for systems from two other customers. There can be no assurances
that the Participants will remain in the program.* In the event that the Company
did not receive the funding anticipated under the agreements, it would be
required to replace the shortfall from its own funds or other sources. 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. The agreements with the Participants stipulate that if the
Company receives funding for the development program in excess of $25,000,000,
it will issue, ratably to the Participants, credits totaling such excess in the
form of a cash discount which can be applied to the purchase of additional
systems by each Participant.
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 an adverse
effect on the Company's results of operations.
9
<PAGE> 11
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 and agreed to make future payments to IBM based on the
ongoing operating results of SVGL. As part of a subsequent agreement with the
Investors, IBM was also granted certain rights to purchase initial quantities of
future generations of the Company's Micrascan products.
The Company has historically devoted a significant portion of its personnel
and financial resources to research and development programs. For fiscal years
1996, 1995, and 1994, total research and development expenditures were
approximately $72,000,000, $53,000,000, and $32,000,000, respectively, of which
approximately $5,000,000, $12,750,000, and $1,500,000, respectively, was funded
by outside parties, primarily SEMATECH, and offset against research and
development expenses.
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 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 product performance, price and reliability,
familiarity with particular manufacturers' products, established relationships
between suppliers and customers, particulate contamination control and product
availability. While the Company believes that outside Japan and the Pacific Rim
it competes favorably with respect to most of these factors,* it has
occasionally been subject to 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.
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. In addition, 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 Thermco
equipment to many of these customers, it has not previously sold meaningful
quantities of Micrascan photolithography equipment to them. Accordingly, the
recent shipment by Nikon of initial quantities of its .25 micron step and scan
system or announced competitive product introductions by either ASM Lithography,
Canon or some other supplier, may cause customers to delay purchases from the
Company until such new products have been evaluated.
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. There
can be no assurance that the Company will be able to compete effectively in the
future. The Company faces substantial foreign and domestic competition,
including that from Tokyo Electron, Ltd. ("TEL") and DaiNippon Screen Mfg. Co.,
Ltd. in photoresist processing equipment and TEL and Kokusai Electric Co., Ltd.
in oxidation/diffusion and LPCVD equipment. SVGL competes with other suppliers
of photolithography exposure equipment, including manufacturers of steppers and
projection aligners. SVGL's Micralign products are generally not competitive
with steppers for fabrication of semiconductor devices with line widths smaller
than 1.25 micron. In marketing Micrascan systems, SVGL faces competition from
suppliers employing other technologies, principally I-Line and Deep UV steppers,
including Nikon Corp., Canon and ASM Lithography. Certain stepper manufacturers
have utilized techniques, such as the use of off-axis illumination and phase
shift mask technology, to extend the capabilities of steppers beyond their
previously estimated limits. Although the Company believes that its step and
scan system will compete favorably with steppers employing these techniques,*
the status of the development of such techniques is uncertain and the Company
has experienced intense competition from such stepper manufacturers. The Company
also anticipates the introduction of competing photolithography systems which
utilize step and scan technology. Nikon has shipped initial quantities of a .25
micron step and scan photolithography system which utilizes a Deep UV light
source, and ASM Lithography and Canon have announced similar products. Nikon,
and to a lesser extent Canon, have long-established relationships as suppliers
of photolithography equipment to
10
<PAGE> 12
most of the semiconductor manufacturers. While the Company has supplied Track
and Thermco equipment to many of these customers, it has not previously sold
meaningful quantities of Micrascan photolithography equipment to them.
The Japanese and Pacific Rim markets (including fabrication facilities
operated outside these areas by Japanese and Pacific Rim semiconductor
manufacturers) represent a substantial portion of the overall market for
semiconductor equipment. To date, the Company has not been successful in
securing a significant share of these markets. 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 which are engaged in such collaborative efforts
with Japanese and Pacific Rim semiconductor manufacturers. In order to expand
its market share in the Pacific Rim, the Company has begun investing in the
staffing and facilities necessary to sell, service and support customers in the
area through entities in Korea, Singapore and Thailand. There can be no
assurance that the Company will be able to compete successfully in the future in
Japan, the Pacific Rim or elsewhere in the world or that competitive pressures
will not adversely affect the Company's results of operations.
Further, certain of the Company's major customers are involved in joint
ventures and alliances with companies from Japan and Europe. In some cases the
non-U. S. portion of the collaboration is the deciding factor in the selection
of equipment for the joint ventures. In those situations the Company may be at a
competitive disadvantage, which could lead to a loss of market share in those
geographic areas. A decision by any such major customers not to utilize the
Micrascan would have an adverse effect on the Company.
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. Thermco
manufactures most of its products in Orange, California and has a limited
manufacturing facility in Billingshurst, West Sussex, England. SVGL
photolithography exposure products are manufactured in Wilton and Ridgefield,
Connecticut.
During fiscal 1996, the Company introduced new products in all three of its
product groups for shipment in fiscal 1997. From time-to-time, the Company has
experienced difficulty in ramping up production or effecting transitions to new
products. There can be no assurance that the Company will not experience
manufacturing problems as a result of capacity constraints or as a result of
upgrading or expanding existing operations in an effort to increase production
capacity. These issues could result in product delivery delays and a subsequent
loss of future sales. The Company believes that protracted delays in delivering
initial quantities of newly developed products to multiple customers could
result in semiconductor manufacturers electing to install competitive equipment
in their fabrication facilities. The inability to produce such products or any
failure to achieve market acceptance could have a material adverse effect on the
Company's business and results of operations.
The Company believes that its ability to supply systems in volume will be a
major factor in customer decisions to commit to SVGL'S Micrascan technology.*
Based upon its forecast of continued high growth for photolithography equipment
and potential future demand for advanced lithography products, the Company has
implemented plans to increase SVGL'S production capacity under an extremely
aggressive expansion schedule. During the first half of fiscal 1996, SVGL
commenced certain facility and capital improvements and, on August 2, 1996, the
Company, for approximately $21,200,000, purchased from The Perkin-Elmer
Corporation a 248,000 square foot facility occupied by SVGL in Wilton,
Connecticut and an additional 201,000 square foot building, which SVGL will also
occupy, in Ridgefield, Connecticut. During fiscal 1997, it is the Company's
intent to invest in significant further capital improvements related to the
buildings purchased and the equipment required to expand the production
capabilities of SVGL.* Successful execution of this expansion will require the
timely construction and equipping of facilities, the recruitment, training and
11
<PAGE> 13
retention of a high quality workforce, and the achievement of satisfactory
manufacturing results on a scale greater than it has attempted in the past.
There can be no assurance the Company can manage these efforts successfully,
which could result in product delivery delays and a subsequent loss of future
revenues. In particular, the Company believes that protracted delays in
delivering initial quantities of 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. 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 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 and SVGL's projected demand will
require that supplier to expand its capacity. In exchange for investing the
resources to expand its capacity, the supplier may first require the Company to
enter into a long-term, non-cancelable purchase commitment. Additionally, the
Company's Micrascan III photolithography system utilizes a laser manufactured by
Cymer Laser and not currently available from alternative sources. While the
Company does not currently foresee supply difficulties, Cymer is also supplying
laser light sources for competitors who have introduced or are developing step
and scan deep UV photolithography systems.
PATENTS AND LICENSES
The Company owns several domestic and foreign patents relating to the
businesses of Track, Thermco and SVGL. 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. At least one of the Company's customers has put the Company on
notice that it has 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 customer has put the Company on notice 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. Although the
Company has not received any recent communications on this subject, it 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.
ENVIRONMENTAL REGULATION
To date, the Company has not encountered significant issues regarding the
discharge of material into the environment or otherwise relating to the
protection of the environment and therefore has not been required to spend
significant amounts for capital or non-capital expenditures in order to comply
with laws and regulations pertaining thereto.
In August 1996, the Company purchased from The Perkin-Elmer Corporation
("Perkin-Elmer"), approximately 50 acres of land and a 201,000 square foot
building thereon (the "Property"). At the time the Company purchased the
Property, it was aware that certain groundwater and soil contamination was
present
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<PAGE> 14
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 1997.*
EMPLOYEES
At September 30, 1996, the Company had 2,875 full-time employees and 197
part-time employees and contract personnel, including 587 in research and
development, 1,357 in manufacturing, 974 in marketing, sales and customer
service and support and 154 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 is dependent upon its ability to attract and
retain qualified management, technical, sales and support personnel for its
operations. In particular, SVGL's 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 competition for such personnel is
intense. Some key positions in the Company are held by persons who have only
recently been appointed to such positions. The Company's growth has increased
its dependence on key management personnel. The loss of certain key people, the
failure of key persons to perform in their current positions or the Company's
inability to attract and retain new key employees could materially adversely
affect the Company's performance.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE
--------------------------------------- ---
<S> <C> <C>
Papken S. Der Torossian................ 57 Chairman of the Board and Chief
Executive Officer
Russell G. Weinstock................... 53 Vice President, Finance and Chief
Financial Officer
Edward A. Dohring...................... 63 Vice President, President, SVG
Lithography Systems, Inc.
Steven L. Jensen....................... 47 Vice President, Worldwide Sales and
Service
Jeffrey M. Kowalski.................... 43 Vice President, President, Thermco
Systems Division
Boris Lipkin........................... 49 Vice President, Corporate
John W. Mathews........................ 48 Vice President, Worldwide Service
Robert J. Richardson................... 50 Vice President, New Business
Development and Corporate Marketing
Edmond R. Ward......................... 56 Vice President, Corporate Technology
Larry W. Sonsini....................... 55 Secretary
</TABLE>
Mr. Der Torossian became Chairman of the Board and Chief Executive Officer
in July 1991. From February 1986 to July 1991 he was President and Chief
Executive Officer, and has been a director of the Company since October 1984.
Mr. Weinstock has been Vice President of Finance and Chief Financial
Officer of the Company and Vice President of Finance and Chief Financial Officer
of SVGL since July 1990. From April 1985 to July 1990, he was Corporate
Controller and was promoted to Vice President in February 1990.
Mr. Dohring became a Vice President of the Company in July 1992. He became
President of SVG Lithography Systems, Inc. in October 1994. From June 1992 to
October 1994, he was President of Track.
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<PAGE> 15
From April 1989 to June 1992, he was President of Rochester Instrument Systems,
Inc., a manufacturer of measurement instruments for utilities and the
semiconductor industry.
Mr. Jensen became a Vice President of the Company in July 1992 and Vice
President, Worldwide Sales in April 1992. From April 1991 to April 1992 he was
Vice President, Marketing for Genus, Inc., a manufacturer of semiconductor
equipment. From October 1990 to April 1991, Mr. Jensen was a Senior Vice
President of Sales and Marketing for the Athens Corporation, a manufacturer of
chemical reprocessing systems.
Mr. Kowalski became a Vice President of the Company and President of
Thermco in January 1995. From November 1992 to January 1995 he was the Vice
President of Marketing of Thermco, as well as its Vice President of Technology
from November 1993. Mr. Kowalski joined the Company in 1987 and prior to
November 1992 held various management positions in its engineering organization.
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. From 1978 to August 1992,
Mr. Lipkin served in various management and engineering positions with
International Business Machines.
Mr. Mathews joined the Company in September 1993 and became a Vice
President in October 1993. From November 1994 he has been Vice President,
Worldwide Service. From September 1993 to November 1994 he was Vice President,
Corporate Operations. From October 1992 to September 1993, Mr. Mathews was Vice
President and General Manager of Acume Technologies, Inc. From November 1979 to
October 1992 Mr. Mathews held various positions with KLA Instruments Corporation
including Vice President and General Manager of its Technology Division from
November 1989 to October 1992.
Mr. Richardson became a Vice President of the Company in July 1992. He
became Vice President, New Business Development and Corporate Marketing in March
1996. From October 1994 to March 1996 Mr. Richardson was Vice President,
Corporate Marketing and President of Track. From June 1992 to October 1994 he
was President of SVG Lithography Systems, Inc. From October 1988 to June 1992,
he was President and General Manager of the Santa Cruz Division of Plantronics,
Inc.
Mr. Ward became a Vice President of the Company in July 1992, President of
Thermco in April 1992 and Vice President, Corporate Technology in October 1993.
From June 1990 to April 1992, he was Director of Thin Film Manufacturing for
Alcoa Electronics Packaging, a division of Alcoa Corporation.
Mr. Sonsini has been Secretary since November 1988. He has been a member of
the Board of Directors of the Company since 1991. Mr. Sonsini is a member of the
law firm of Wilson Sonsini Goodrich & Rosati, P.C., 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., PIXAR,
and Pure Atria Corporation.
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 $60,000 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 $90,000 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 $79,000 under a
lease expiring in 1998.
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.
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<PAGE> 16
The Thermco Systems Division has two facilities in Orange, California. The
first facility consists of approximately 92,000 square feet with a base monthly
rent expense of approximately $49,000 under a lease expiring in 1999. The second
facility consists of approximately 77,000 square feet with a base monthly rental
expense of approximately $43,500 under a lease expiring in 1999.
SVGL owns two facilities in Fairfield County, Connecticut. The first
consists of approximately 29 acres of land and buildings totaling approximately
248,000 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 also leases storage and warehouse space near its headquarters
in San Jose, office space near its Thermco facilities in Orange, sales and
service offices in key locations throughout the United States, Western Europe
and the Pacific Basin, and space for a limited manufacturing operation in the
United Kingdom.
ITEM 3. LEGAL PROCEEDINGS.
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, 1996.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this Item is set forth in Registrant's Annual
Report to Stockholders for the fiscal year ended September 30, 1996, at page 28
under the caption "Common Stock Prices", which information is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth in Registrant's Annual
Report to Stockholders for the fiscal year ended September 30, 1996, at page 28
under the caption "Five-Year Selected Financial Data", which information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this Item is set forth in Registrant's Annual
Report to Stockholders for the fiscal year ended September 30, 1996, at pages 29
to 36 under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations", which information is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is set forth in Registrant's Annual
Report to Stockholders for the fiscal year ended September 30, 1996, at pages 12
to 27, which information is incorporated herein by reference.
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 September 30, 1994, September 29, 1995, and September 27, 1996. For
convenience, this Report and the Company's Consolidated Financial Statements
refer to all such fiscal years as ending at September 30. Fiscal 1994, 1995, and
1996 each included 52 weeks.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable.
- ---------------
With the exception of the information expressly incorporated by reference
from the Annual Report to Stockholders into Parts II and IV of this Form 10-K,
the Company's Annual Report to Stockholders is not to be deemed filed as part of
this report.
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<PAGE> 18
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 20, 1997, 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.
(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.
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<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company included in
the Company's Annual Report to Stockholders for the fiscal year ended September
30, 1996, are incorporated by reference:
Independent Auditors' Report.
Consolidated Balance Sheets at September 30, 1996 and 1995.
Consolidated Statements of Income for the Years Ended September 30,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
2. SUPPLEMENTAL SCHEDULE.
Independent Auditors' Report.
Schedule II -- Valuation and Qualifying Accounts.
Financial Statement Schedules, other than the schedule listed above, have
been omitted because the required information is contained in the Consolidated
Financial Statements and the Notes thereto, or because such schedules are not
required or applicable.
18
<PAGE> 20
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<C> <S>
3.1(1) Certificate of Incorporation, as amended to date.
3.2(11) Bylaws.
3.3(10) Certificate of Designation of Series A Convertible, Redeemable Preferred
Stock of Silicon Valley Group, Inc. dated July 31, 1992.
4.1(1) Article IV of the Certificate of Incorporation of the Registrant.
10.1(2) Lease Agreement, dated January 31, 1990, between Registrant and Orchard
Investment Company Number 703 for premises located at 541 East Trimble Road,
San Jose, California.
10.2(3) Lease Agreement, dated February 7, 1985, between Thermco Systems, Inc. and
The Klokke Corporation, for premises located at 1482 N. Batavia Street,
Orange, California.
10.3(2) Amendment to Lease Agreement, dated November 14, 1989 between Thermco
Systems, Inc. and The Klokke Corporation for premises located at 1482 N.
Batavia Street, Orange, California.
10.4(4) Lease Agreement, dated December 21, 1984, between Anicon, Inc. and Holvick de
Regt Koering for premises located at 2240 Ringwood Avenue, San Jose,
California.
10.5(4) Amendment to Lease Agreement, dated January 31, 1987, between Anicon, Inc.
and ARSJ Properties for premises located at 2240 Ringwood Avenue, San Jose,
California.
10.6(2) Fourth Amendment to Lease Agreement dated March 23, 1990 between Thermco
Systems, Inc. and ARSJ Properties for premises located at 2240 Ringwood
Avenue, San Jose, California.
10.7(3) Lease Agreement, dated July 1, 1985, between Thermco Systems, Inc. and LST
Investments, for premises located at 1465 N. Batavia Street, Orange,
California.
10.8(2) Amendment to Lease Agreement dated February 1, 1990, between Thermco Systems,
Inc. and LST Investments for premises located at 1465 N. Batavia Street,
Orange, California.
10.10(5)** 1982 Employee Stock Option Plan.
10.11(5)** 1984 Stock Option Plan.
10.12(5)** 1987 Stock Option Plan.
10.13(5)** Employee Stock Purchase Plan.
10.14(12)** Employment Agreement between Registrant and Papken Der Torossian, dated
August 1, 1994.
10.15(12)** Employment Agreement between Registrant and Russell G. Weinstock, dated
October 3, 1994.
10.16(6)** Silicon Valley Group, Inc. Cash or Deferred Profit Sharing Plan and Trust.
10.17(4) Letter Agreement, dated January 30, 1987, between Morgan Stanley Research
Ventures and Registrant relating to epitaxial products.
10.18(4) Form of Indemnification Agreement.
10.19(4)** Standard form Stock Option Agreements.
10.20(7) Lease Agreement, dated December 21, 1987, between Registrant and D.J. and
Virginia L. Brown dba Orchard Investment Company No. 306 for premises located
at 2065 Junction Avenue, San Jose, California, and Supplemental Agreement
thereto dated January 19, 1988.
10.21(7)** Forms of Option Acceleration Agreement.
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<S> <C>
10.22(7) Purchase Agreement, dated November 9, 1988, between Registrant, Anicon, Inc.,
SVG Europe, Ltd., SVG Halbleiter Anlagen GmbH, and SVG International Service,
Inc.; and Sunbeam Holdings, Inc., Sunbeam Electric (Holdings) Ltd., Thermco
Systems, Inc., and Gryphon Products, Inc.
*10.23(8) Development Agreement between IBM and SVGL dated May 15, 1990.
*10.24(8) Agreement dated as of May 15, 1990 between International Business Machines
Corporation ("IBM") and SVGL relating to the purchase and sale of Micrascan
Systems, as modified by IBM and SVGL on June 18, 1992 and June 19, 1992.
*10.25(8) Development Agreement between SEMATECH, Inc. and SVGL dated May 15, 1990.
*10.26(8) Chemical Supply and Technology Transfer Agreement between IBM and SVGL dated
as of June 11, 1990.
*10.27(8) Stockholders' Agreement dated May 15, 1990 among Registrant, SVGL, IBM and
The Perkin-Elmer Corporation ("Perkin-Elmer").
*10.28(9) Asset Transfer and Common Stock Purchase Agreement dated as of May 15, 1990
among Registrant, IBM, Perkin-Elmer and SVGL.
10.29(8) Lease Agreement dated May 15, 1990 between SVGL and Perkin-Elmer for premises
located at 77 Danbury Road, Wilton, Connecticut.
10.30(10) Series AA Convertible, Redeemable Preferred Stock Purchase Agreement dated
July 31, 1992 between the Company and The Perkin-Elmer Corporation.
10.31(12) Credit Agreement by and among Registrant, SVG Lithography Systems, Inc.,
certain banks named therein and ABN AMRO Bank, N.V., as agent, dated October
7, 1994.
*10.32(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography
Systems, Inc. dated September 30, 1994.
10.33(12) Warrants to Purchase Common Stock of Registrant issued to SEMATECH, Inc.,
dated as of September 30, 1994.
*10.34(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography
Systems, Inc. dated as of October 24, 1994.
*10.35(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography
Systems, Inc. dated as of October 24, 1994.
*10.36(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography
Systems, Inc. dated as of December 22, 1994.
*10.37(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography
Systems, Inc. dated as of December 22, 1994.
10.38(13) Business Agreement dated as of February 21, 1995, among the Company, SVG
Lithography Systems, Inc., Intel Corporation, Motorola Inc. and Texas
Instruments Incorporated.
10.39(13) Series B Convertible Redeemable Preferred Stock Purchase Agreement dated as
of February 21, 1995, among the Company, Intel Corporation, Motorola, Inc.
and Texas Instruments Incorporated.
10.40(13) Registration Rights Agreement dated as of February 21, 1995, among the
Company, Intel Corporation, Motorola Inc. and Texas Instruments Incorporated.
10.41 Credit Agreement dated as of December 7, 1995 among Silicon Valley Group,
Inc., SVG Lithography Systems, Inc. and the Banks named therein and ABN AMRO
Bank, N.V., as Agent.
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<S> <C>
13.1 Selected data from Annual Report to Stockholders for fiscal year
ended September 30, 1996.
21.1 Registrant's wholly-owned subsidiaries are (i) Silicon Valley
Group, K.K., a Japanese corporation, (ii) SVG International
Service, a California corporation ("SVG International"), (iii)
Silicon Valley Group FSC Incorporated, a Barbados corporation,
(iv) SVG Israel, Inc., a Delaware corporation and (v) SVG
Thailand, Inc., a Delaware corporation. SVG Europe Limited, a
United Kingdom corporation ("SVG Europe"), SVG France, S.A.R.L.,
a French corporation, Silicon Valley Group Deutschland GmbH, a
German corporation, SVG Systems (Asia) Pte. Ltd., 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, is wholly-owned by SVG Europe.
The Registrant owns 94% of SVG Lithography Systems, Inc., a
Delaware corporation ("SVGL"). SVGL's wholly-owned subsidiaries
are (i) SVG Lithography Japan Co., Ltd., a Japanese Corporation,
(ii) SVG Lithography (Europe) B.V., a Netherlands Corporation,
(iii) SVG Lithography Systems Korea, Inc., a Delaware
corporation, (iv) SVG France S.A.R.L., a French corporation, and
(v) SVG Lithography Systems FSC, Inc., a Barbados corporation.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
24.1 Power of Attorney (see page 39).
27 Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment granted as to a portion of this exhibit.
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
(1) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1988.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1990.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1989.
(4) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1987.
(5) Incorporated by reference to Registrant's registration statement filed under
the Securities Act of 1933 on Form S-8 and Form S-3, file no. 33-31298.
(6) Incorporated by references to Registrant's quarterly report on Form 10-K for
the fiscal year ended September 30, 1986.
(7) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1988.
(8) Incorporated by reference to Registrant's quarterly report on Form 10-Q
dated June 30, 1990.
(9) Incorporated by reference to Registrant's report on Form 8-K dated May 15,
1990.
(10) Incorporated by reference to Registrant's quarterly report on Form 10-Q for
the quarter ended June 30, 1992.
(11) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1993.
21
<PAGE> 23
(12) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1994.
(13) Incorporated by reference to Registrant's quarterly report on Form 10-Q for
the quarter ended March 31, 1995.
(b) REPORTS ON FORM 8-K. None
(c) EXHIBITS. See (a) above.
(d) FINANCIAL STATEMENT SCHEDULES. See (a) above.
22
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Silicon Valley Group, Inc.
San Jose, California
We have audited the consolidated financial statements of Silicon Valley
Group, Inc. as of September 30, 1996 and 1995, and for each of the three years
in the period ended September 30, 1996, and have issued our report thereon dated
October 24, 1996; such consolidated financial statements and report are included
in your 1996 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of Silicon
Valley Group, Inc., listed in Item 14(a)2. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such 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.
DELOITTE & TOUCHE LLP
San Jose, California
October 24, 1996
23
<PAGE> 25
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.
SILICON VALLEY GROUP, INC.
December 26, 1996
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------- ------------------
<S> <C> <C>
/s/ PAPKEN S. DER TOROSSIAN Chairman of the Board, December 26, 1996
- ------------------------------------- Chief Executive Officer and
Papken S. Der Torossian Director (Principal
Executive Officer)
/s/ RUSSELL G. WEINSTOCK Vice President, Finance and December 26, 1996
- ------------------------------------- Chief Financial Officer
Russell G. Weinstock (Principal Financial and
Accounting Officer)
/s/ WILLIAM A. HIGHTOWER Director December 26, 1996
- -------------------------------------
William A. Hightower
/s/ WILLIAM L. MARTIN Director December 26, 1996
- -------------------------------------
William L. Martin
/s/ NAM P. SUH Director December 26, 1996
- -------------------------------------
Nam P. Suh
/s/ LAWRENCE TOMLINSON Director December 26, 1996
- -------------------------------------
Lawrence Tomlinson
/s/ LARRY W. SONSINI Secretary and Director December 26, 1996
- -------------------------------------
Larry W. Sonsini
</TABLE>
24
<PAGE> 26
SILICON VALLEY GROUP, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS(1) OF PERIOD
- ------------------------------------------ ---------- ---------- ----- ------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED 9/30/94:
Allowance for Doubtful Accounts......... $ 1,401 $ 1,528 $-- $ (299) $ 2,630
Product Warranty Reserves............... 14,986 18,663 -- (15,324) 18,325
YEAR ENDED 9/30/95:
Allowance for Doubtful Accounts......... 2,630 2,026 -- (549) 4,107
Product Warranty Reserves............... 18,325 35,830 -- (21,552) 32,603
YEAR ENDED 9/30/96:
Allowance for Doubtful Accounts......... 4,107 2,018 -- (122) 6,003
Product Warranty Reserves............... 32,603 64,068 -- (53,772) 42,899
</TABLE>
- ---------------
(1) Write-offs of uncollectible accounts and costs incurred for warranty
repairs.
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ----------------------------------------------------------------------------------
<S> <C>
13.1 Selected data from Annual Report to Stockholders for fiscal year ended September
30, 1996.
23.1 Consent of Deloitte & Touche, independent auditors.
27 Financial Data Schedule.
</TABLE>
<PAGE> 28
[LOGO]
<PAGE> 1
Exhibit 13.1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Consolidated Balance Sheets 12
Consolidated Statements of Income 13
Consolidated Statements of
Stockholders' Equity 14
Consolidated Statements of
Cash Flows 15
Notes to Consolidated
Financial Statements 16
Independent Auditors' Report 27
Financial Information 28
Management's Discussion
and Analysis of
Financial Condition and
Results of Operations 29
</TABLE>
ELEVEN
SVG
<PAGE> 2
CONSOLIDATED
. . . . . . . . . . . . .
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1995 1996
- -----------------------------------------------------------------------------------------------------
(in thousands, except share and per share amounts)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $166,790 $218,841
Temporary investments 13,733 43,220
Accounts receivable (net of allowance for doubtful accounts
of $4,107 and $6,003, respectively) 122,849 151,011
Inventories 153,973 213,229
Prepaid expenses and other assets 7,389 7,227
Deferred taxes 3,455 9,295
-------- --------
Total current assets 468,189 642,823
PROPERTY AND EQUIPMENT, NET 27,619 81,577
DEPOSITS AND OTHER ASSETS 2,097 2,312
INTANGIBLE ASSETS, NET 2,820 2,665
-------- --------
TOTAL $500,725 $729,377
======== ========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 885 $ 437
Accounts payable 40,219 35,556
Accrued liabilities 99,427 137,526
Income taxes payable 2,177 5,649
-------- --------
Total current liabilities 142,708 179,168
CAPITAL LEASE OBLIGATIONS 654 217
DEFERRED LIABILITIES 3,140 3,338
COMMITMENTS (See Notes 6, 9, 13 and 14) -- --
MINORITY INTEREST 3,976 4,705
STOCKHOLDERS' EQUITY:
Convertible Redeemable Preferred Stock -- $0.01 par value,
shares authorized: 1,000,000; none outstanding -- --
Common Stock -- $0.01 par value, shares authorized: 100,000,000;
shares outstanding: 1995: 25,233,170; 1996: 30,175,794 249,552 378,033
Retained earnings 100,695 163,916
-------- --------
Stockholders' equity 350,247 541,949
-------- --------
TOTAL $500,725 $729,377
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
Silicon Valley Group, Inc. TWELVE
<PAGE> 3
CONSOLIDATED STATEMENTS
. . . . . . . . . . . .
OF INCOME
<TABLE>
<CAPTION>
Years Ended September 30, 1994 1995 1996
- -----------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
NET SALES $ 319,922 $ 462,032 $ 639,928
COST OF SALES 195,511 278,553 371,636
--------- --------- ---------
GROSS PROFIT 124,411 183,479 268,292
OPERATING EXPENSES:
Research, development and related engineering 30,443 40,231 66,974
Marketing, general and administrative 67,517 90,859 115,827
--------- --------- ---------
OPERATING INCOME 26,451 52,389 85,491
INTEREST AND OTHER INCOME 1,090 9,465 13,330
INTEREST EXPENSE (721) (620) (437)
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 26,820 61,234 98,384
PROVISION FOR INCOME TAXES 10,191 22,045 34,437
MINORITY INTEREST (135) 194 726
--------- --------- ---------
NET INCOME $ 16,764 $ 38,995 $ 63,221
========= ========= =========
Preferred Stock dividend $ 1,190 $ 537 $ --
========= ========= =========
NET INCOME PER SHARE $ 0.84 $ 1.57 $ 2.07
========= ========= =========
Shares used in per share computations 18,538 24,850 30,554
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
THIRTEEN
SVG
<PAGE> 4
CONSOLIDATED STATEMENTS
. . . . . . . . . . . . .
OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Note Retained
Shares Amount Shares Amount Receivable Earnings Total
- -------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1993 10,000 $17,000 15,142,875 $ 63,577 $(526) $ 46,946 $126,997
------- ------- ---------- -------- ----- -------- --------
Sale of Common Stock,
net of issuance costs 3,379,000 30,646 30,646
Sale of common stock warrants -- 8,204 8,204
Stock options exercised 240,334 1,597 1,597
Employee stock purchase plan 148,169 725 725
Preferred Stock dividend 106,898 1,190 (1,190) --
Repurchase of Common Stock
in exchange for reduction
of note receivable (50,000) (243) 526 (283) --
Tax benefit of stock option
transactions 282 282
Net income 16,764 16,764
------- ------- ---------- -------- ----- -------- --------
BALANCES, SEPTEMBER 30, 1994 10,000 17,000 18,967,276 105,978 -- 62,237 185,215
Sale of Series B Preferred Stock,
net of issuance costs 14,943 29,800 29,800
Sale of Common Stock,
net of issuance costs 3,192,606 87,636 87,636
Conversion of Series A
Preferred Stock to
Common Stock (10,000) (17,000) 1,000,000 17,000 --
Conversion of Series B
Preferred Stock to
Common Stock (14,943) (29,800) 1,494,300 29,800 --
Stock options exercised 520,256 4,454 4,454
Employee stock purchase plan 31,040 167 167
Preferred Stock dividend 27,692 592 (537) 55
Tax benefit of stock option
transactions 3,925 3,925
Net income 38,995 38,995
------- ------- ---------- -------- ----- -------- --------
BALANCES, SEPTEMBER 30, 1995 -- -- 25,233,170 249,552 -- 100,695 350,247
Sale of Common Stock,
net of issuance costs 4,025,000 126,196 126,196
Warrants exercised, net 701,923 --
Stock options exercised 103,523 835 835
Employee stock purchase plan 112,178 954 954
Tax benefit of stock option
transactions 496 496
Net income 63,221 63,221
------- ------- ---------- -------- ----- -------- --------
BALANCES, SEPTEMBER 30, 1996 -- $ -- 30,175,794 $378,033 $ -- $163,916 $541,949
======= ======= ========== ======== ===== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
Silicon Valley Group, Inc. FOURTEEN
<PAGE> 5
CONSOLIDATED STATEMENTS
. . . . . . . . . . . .
OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30, 1994 1995 1996
- -----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,764 $ 38,995 $ 63,221
Reconciliation to net cash provided by
(used for) operating activities:
Depreciation and amortization 9,553 9,216 13,075
Amortization of intangibles 773 285 155
Deferred income taxes 1,681 (831) (5,562)
Minority interest (135) 194 726
Changes in assets and liabilities:
Accounts receivable 6,108 (56,040) (28,162)
Inventories 3,517 (69,256) (59,256)
Prepaid expenses 1,617 (3,757) 162
Deposits and other assets (446) (313) (215)
Accounts payable (2,857) 19,965 (4,663)
Accrued and deferred liabilities 15,745 45,748 38,199
Income taxes payable 3,298 (3,266) 3,968
-------- -------- --------
Net cash provided by (used for) operating activities 55,618 (19,060) 21,648
-------- -------- --------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of temporary investments, held to maturity -- (13,733) (88,647)
Purchases of temporary investments, available for sale -- -- (43,220)
Maturities of temporary investments, held to maturity -- -- 102,380
Purchases of property and equipment (3,777) (21,410) (67,033)
-------- -------- --------
Net cash used for investing activities (3,777) (35,143) (96,520)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock 33,250 96,182 127,985
Sale of Preferred Stock -- 29,800 --
Collection of receivable from sale of
common stock warrants -- 8,204 --
Borrowing under credit agreement 8,000 -- --
Repayment of debt (22,971) (799) (885)
-------- -------- --------
Net cash provided by financing activities 18,279 133,387 127,100
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 92 (223) (177)
-------- -------- --------
Increase in cash and equivalents 70,212 78,961 52,051
Cash and equivalents:
Beginning of year 17,617 87,829 166,790
-------- -------- --------
End of year $ 87,829 $166,790 $ 218,841
======== ======== =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Subscription of common stock warrants $ 8,204 $ -- $ --
======== ======== =========
Repurchase of Common Stock in exchange
for reduction of note receivable $ 526 $ -- $ --
======== ======== =========
Preferred Stock dividend paid in Common Stock $ 1,190 $ 592 $ --
======== ======== =========
Preferred Stock Series A converted to Common Stock $ -- $ 17,000 $ --
======== ======== =========
Preferred Stock Series B converted to Common Stock $ -- $ 29,800 $ --
======== ======== =========
Tax benefit of stock option transactions $ 282 $ 3,925 $ 496
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
FIFTEEN
SVG
<PAGE> 6
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Line of Business
The Company designs, manufactures, and markets semiconductor wafer processing
equipment used in the electronics industry.
Certain Risks and Uncertainties
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 temporary 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
write-off of uncollectible amounts has historically been insignificant.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries, after elimination of
intercompany transactions and balances. Foreign exchange gains and losses are
included in net income and were not significant in any of the periods presented.
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 market value.
Temporary Investments
Temporary investments in debt and equity securities are classified as either
available for sale or held to maturity. At September 30, 1995, all temporary
investments were classified as held to maturity and were measured at amortized
cost. At September 30, 1996, all temporary investments were classified as
available for sale and measured at fair value. Net unrealized gains and losses,
on investments available for sale, net of tax, are recorded as a separate
component of stockholders' equity until realized. There were no significant
differences between amortized cost and fair market value for investments,
individually or in the aggregate, at either September 30, 1995 or 1996. Any
gains or losses on sales of investments are computed by specific identification.
No investments were sold in 1995 or 1996.
Silicon Valley Group, Inc. SIXTEEN
<PAGE> 7
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
For financial reporting purposes, depreciation is computed on the straight-line
method over the estimated useful lives of the assets. Estimated useful lives are
as follows:
<TABLE>
<CAPTION>
Years
<S> <C>
Land improvement 15
Buildings 40
Machinery and equipment 3 to 10
Furniture and fixtures 3 to 10
Leasehold improvements Lease term
</TABLE>
Effective October 1, 1996, the Company will adopt Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Adoption of SFAS
No. 121 is not expected to have a material effect on the Company's 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
Sales are generally recognized upon shipment. Product warranty 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 certain development funding agreements are recorded as a
reduction to such expenses as earned. 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. (See Note 14.)
Reclassifications
Reclassifications have been made to the prior years' Consolidated Financial
Statements to conform to the fiscal 1996 presentation.
Net Income Per Share
Net income per share is computed by dividing net income attributable to common
stockholders by the weighted average number of common and common equivalent
shares outstanding. Common equivalent shares reflect the dilutive effect of
outstanding stock options, common stock warrants, and convertible Preferred
Stock. Net income per share for 1994 was computed after deducting $1,190,000 of
Series A Preferred Stock dividends from net income. There was no such deduction
for 1995 as the effect was antidilutive. In March 1995, the Series A Preferred
Stock was converted into Common Stock. There was no Preferred Stock outstanding
in 1996.
SEVENTEEN
SVG
<PAGE> 8
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
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 years 1994, 1995, and 1996 each included 52 weeks.
2. TEMPORARY INVESTMENTS
Temporary investments at September 30 are comprised of the following:
<TABLE>
<CAPTION>
1995 1996
Held to Maturity Available for Sale
- -------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Municipal bonds $ 9,733 $10,272
Commercial paper -- 22,953
Certificates of deposit -- 9,995
Bankers acceptances 4,000 --
------- -------
Total $13,733 $43,220
======= =======
</TABLE>
Of the Company's temporary investments at September 30, 1996, $42,154,000 mature
within one year and $1,066,000 mature within two years.
3. INVENTORIES
<TABLE>
<CAPTION>
September 30, 1995 1996
- -------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Inventories consist of:
Raw materials $ 63,803 $103,993
Work-in-process 87,060 101,293
Finished goods 3,110 7,943
-------- --------
Total $153,973 $213,229
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, 1995 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Property and equipment consist of:
Land and improvements $ -- $ 6,348
Buildings -- 16,561
Machinery and equipment 56,963 86,559
Furniture and fixtures 13,944 19,185
Leasehold improvements 13,702 21,477
--------- ---------
Total 84,609 150,130
Accumulated depreciation and amortization (56,990) (68,553)
Property and equipment, net $ 27,619 $ 81,577
========= =========
</TABLE>
Silicon Valley Group, Inc. EIGHTEEN
<PAGE> 9
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
September 30, 1995 1996
- -----------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Intangible assets consist of:
Goodwill $ 4,186 $ 4,186
Purchased technology 3,700 3,700
------- -------
7,886 7,886
Accumulated amortization (5,066) (5,221)
------- -------
Total $ 2,820 $ 2,665
======= =======
</TABLE>
6. SVG LITHOGRAPHY SYSTEMS, INC.
The Company owns 94% of SVG Lithography Systems, Inc. (SVGL) and International
Business Machines, Inc. (IBM) owns the remaining 6%. The minority interest
reflected on the Consolidated Balance Sheets represents IBM's interest in the
net assets of SVGL.
At the time of its initial investment in SVGL, the Company committed to purchase
up to an additional $23,200,000 of SVGL securities at a specified price at any
time through May 15, 1997, based on certain financial needs of SVGL (the SVGL
Calls). To the extent the SVGL Calls are not exercised, the Company has the
option to purchase up to $15,000,000 of SVGL Common Stock under similar terms.
7. BANK LINE OF CREDIT AND CAPITAL LEASE OBLIGATIONS
In December 1995, the Company entered into a three-year unsecured $75,000,000
bank revolving line of credit agreement. Advances under the line of credit bear
interest at either the U.S. prime rate or the LIBOR rate plus 1%. The agreement
includes covenants regarding working capital, profitability, leverage, coverage
of certain charges, minimum net worth, capital expenditures, and prohibition of
cash dividends.
At September 30, 1996, the Company had capital lease obligations of $654,000
with principal payments of $437,000 and $217,000 due in 1997 and 1998,
respectively.
The capital lease obligations bear interest at rates ranging from 7-1/2% to 10%
and are secured by equipment with an aggregate cost and accumulated depreciation
of $3,347,000 and $3,231,000, respectively, at September 30, 1996 ($3,682,000
and $3,147,000, respectively, at September 30, 1995).
Interest payments were $542,000 in 1994, $439,000 in 1995, and $410,000 in 1996.
NINETEEN
SVG
<PAGE> 10
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
8. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
September 30, 1995 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Accrued liabilities consist of:
Compensation $ 20,030 $ 23,179
Product warranty 32,603 42,899
Customer deposits and advances 33,368 58,020
Other 13,426 13,428
-------- --------
Total $ 99,427 $137,526
======== ========
</TABLE>
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 $1,793,000 in 1994, $3,557,000 in 1995, and $7,235,000 in 1996.
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 $1,549,000 in 1994, $2,059,000 in 1995, and $2,999,000 in
1996.
At September 30, 1996, two 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, 1996, the aggregate potential payments under
these agreements would have been approximately $2,700,000.
10. INCOME TAXES
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30, 1994 1995 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 4,112 $ 17,857 $ 32,239
State 2,723 3,723 6,039
Foreign 1,675 1,296 1,721
-------- -------- --------
Total current 8,510 22,876 39,999
-------- -------- --------
Deferred:
Federal 1,970 (758) (4,928)
State (289) (73) (634)
-------- -------- --------
Total deferred 1,681 (831) (5,562)
-------- -------- --------
$ 10,191 $ 22,045 $ 34,437
======== ======== ========
</TABLE>
Silicon Valley Group, Inc. TWENTY
<PAGE> 11
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
Domestic and foreign income before income taxes and minority interest are as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30, 1994 1995 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $22,482 $53,731 $93,761
Foreign 4,338 7,503 4,623
------- ------- -------
$26,820 $61,234 $98,384
======= ======= =======
</TABLE>
The effective tax rate differs from the Federal statutory rate as follows:
<TABLE>
<CAPTION>
Years Ended September 30, 1994 1995 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State taxes, net of Federal effect 4.0 3.0 3.3
Foreign taxes at differing rates 0.6 (2.3) 0.2
Nondeductible goodwill amortization 0.2 0.1 --
FSC commission -- (1.5) (2.2)
Change in valuation allowance -- -- (2.7)
Other (1.8) 1.7 1.4
---- ---- ----
Total 38.0% 36.0% 35.0%
==== ==== ====
</TABLE>
The items giving rise to deferred taxes were as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1995 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserves not recognized for tax purposes $ 9,622 $ 15,462
Net operating loss carryforwards of acquired companies 5,780 3,130
-------- --------
Total deferred tax assets 15,402 18,592
Deferred tax liabilities, accelerated depreciation (2,455) (2,733)
Valuation allowance (11,947) (9,297)
-------- --------
Total $ 1,000 $ 6,562
======== ========
</TABLE>
At September 30, 1996, 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 1994, 1995 and 1996, the Company made income tax payments of $4,753,000,
$22,423,000, and $36,059,000, respectively.
11. STOCKHOLDERS' EQUITY
Series A Convertible Redeemable Preferred Stock
The Series A Convertible Redeemable Preferred Stock (Series A Preferred), all of
which was owned by The Perkin-Elmer Corporation (Perkin-Elmer), had certain
conversion and redemption provisions and bore mandatory quarterly dividends at a
rate of 7% per annum, payable in either cash or shares of the Company's Common
Stock. In satisfaction of the quarterly dividends, the Company issued 106,898
and 27,692 shares of Common Stock in 1994 and 1995, respectively.
In March 1995, the Series A Preferred was converted into 1,000,000 shares of the
Company's Common Stock.
TWENTY ONE
SVG
<PAGE> 12
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
Series B Convertible Redeemable Preferred Stock
In February 1995, the Company entered into a business agreement with Intel
Corporation, Motorola Inc., and Texas Instruments Incorporated (the Investors)
related to the Company's Micrascan photolithography products. As part of this
agreement, the Investors purchased, in equal amounts, an aggregate of
approximately $30,000,000 of the Company's newly issued Series B Convertible
Preferred Stock (Series B Preferred). (See Note 14.) In accordance with the
terms of its issuance, the Series B Preferred automatically converted into
1,494,300 shares of Common Stock as the result of a registration statement that
was effective concurrent with a public offering of the Company's Common Stock in
March 1995.
Common Stock Warrants
On September 30, 1994, as part of a series of agreements with SEMATECH, the
Company sold warrants for $8,204,000 under which SEMATECH had the right to
purchase, through September 30, 1998, 1,750,000 shares of Common Stock at
$13.625 per share (see Note 14). The warrants were subject to a net exercise
provision that permitted the holder to make a cashless exercise of the warrants
based on the closing price of the Common Stock. In April 1996, SEMATECH
exercised the warrants through the net issuance provision resulting in the
issuance of 701,923 shares of Common Stock with no cash proceeds to the Company.
Common Stock
In fiscal 1994, the Company sold 3,379,000 shares of its Common Stock through an
underwritten public offering.
The net proceeds from the offering were $30,646,000, of which approximately
$19,000,000 was used to repay debt outstanding under the Company's revolving
line of credit.
In March 1995, the Company sold 3,192,606 shares of its Common Stock through an
underwritten public offering. The net proceeds from the offering were
$87,636,000. As part of the same public offering, Perkin-Elmer sold 1,807,394
shares of Common Stock, which represented its entire investment in the Company
and included 1,000,000 shares from the conversion of the Series A Preferred.
In October 1995, the Company sold 4,025,000 shares of its Common Stock through
an underwritten public offering. The net proceeds from the offering were
approximately $126,200,000.
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 acquiror for one share of the Company's Common Stock.
Silicon Valley Group, Inc. TWENTY-TWO
<PAGE> 13
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
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 for 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 become exercisable generally over a
period of four to five years.
The Company accounts for stock options in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." In accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company intends to continue to
apply the provisions of APB No. 25 for purposes of determining net income and to
adopt the pro forma disclosure requirements of SFAS No. 123 upon implementation
in fiscal 1997.
Activity under the plans is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Shares
Under
Option Exercise Price Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, September 30, 1993 1,176 $ 4.63 - $11.12 $ 8,175
Granted 567 10.63 - 12.63 6,219
Exercised (240) 4.63 - 10.50 (1,597)
Canceled (62) 4.63 - 12.44 (510)
------ ---------------- -------
Balances, September 30, 1994 1,441 4.63 - 12.63 12,287
Granted 737 19.56 - 44.50 19,496
Exercised (520) 4.63 - 22.63 (4,454)
Canceled (126) 4.63 - 26.88 (1,558)
------ ---------------- -------
Balances, September 30, 1995 1,532 4.63 - 44.50 25,771
Granted 1,520 16.13 - 35.44 29,191
Exercised (104) 5.63 - 22.63 (835)
Canceled (1,043) 5.63 - 44.50 (28,039)
------ ---------------- -------
Balances, September 30, 1996 1,905 $ 4.63 - $26.88 $26,088
====== ================ =======
</TABLE>
At September 30, 1996, options to purchase 428,068 shares were exercisable and
options to purchase 155,660 shares of Common Stock were available for grant.
In July 1996, the Company repriced 940,114 employee options to purchase shares
with exercise prices between $19.63 and $44.25 to a new exercise price of
$16.13. In September 1996, the Company repriced 30,000 director options to
purchase shares with exercise prices between $19.56 and $44.50 to an exercise
price of $18.06. Vesting periods, for all such options, recommenced at the date
of repricing.
Under the Company's Employee Stock Purchase Plan, 1,200,000 shares of Common
Stock were reserved for issuance, of which 1,013,448 had been issued at
September 30, 1996. The plan permits virtually all 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. One
plan concludes its final two-year offering period March 31, 1997. The remaining
plan has offering periods of twelve months, with a new twelve-month period
beginning each April 1 and October 1.
TWENTY-THREE
SVG
<PAGE> 14
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
During 1989, an officer of the Company exercised options to purchase shares of
Common Stock in exchange for a ten-year, full-recourse note receivable. In May
1994, the Company repurchased 50,000 shares of Common Stock at $10.50 per share,
the fair market value at the date of repurchase. The officer applied the
proceeds of such repurchase to repay the $526,000 outstanding under such note.
13. COMMITMENTS
At September 30, 1996, future minimum lease payments for operating leases
(primarily facilities) are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1997 $ 5,899
1998 5,201
1999 3,554
2000 1,796
2001 1,625
Thereafter through 2010 4,428
--------
Total $ 22,503
========
</TABLE>
Rent expense was $7,730,000, $7,907,000, and $8,801,000 in 1994, 1995, and 1996,
respectively, including $2,378,000 and $2,219,000 paid in 1994 and 1995,
respectively, to Perkin-Elmer, an investor in the Company through March 1995.
14. RESEARCH AND DEVELOPMENT AGREEMENTS
The Company, primarily through SVGL, has obtained research and development
funding agreements with outside parties under which the Company receives
payments based on meeting specified product development milestones. 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 $3,129,000 in 1994, $13,877,000 in 1995, and
$30,288,000 in 1996 relating to such product development and recognized
$1,473,000, $12,767,000, and $4,994,000, respectively, in related funding.
Under one research and development agreement, SVGL is obligated to pay IBM
royalties of 15% of its operating income, subject to certain limitations.
Royalty payments during 1995 and 1996 were approximately $354,000 and
$2,370,000, respectively. No significant payments were required in 1994.
On September 30, 1994, SEMATECH entered the first of a series of agreements with
the Company to both assist in funding the Micrascan technology and to increase
SVGL's manufacturing capability and capacity. The agreements with SEMATECH
included the sale of warrants for $8,204,000 to purchase shares of the Company's
Common Stock (see Note 11) and established certain milestones on which the
funding is based. The proceeds from the sale of the warrants, received in
October 1994, were utilized to increase SVGL's manufacturing capability and
capacity to satisfy anticipated demand for the current and future versions of
the Micrascan product. Additionally, over a three-year period, SEMATECH agreed
to fund, upon SVGL's completion of certain milestones, approximately $22,000,000
for the future development of Micrascan technology and to increase capacity to
build the Micrascan product. Through
Silicon Valley Group, Inc. TWENTY-FOUR
<PAGE> 15
NOTES TO CONSOLIDATED
. . . . . . . . . . . . .
FINANCIAL STATEMENTS
September 30, 1996, the Company had recognized $17,250,000 of funding under the
agreements. Under the agreements, the Company was obligated to fund from its own
resources certain amounts to further the development of Micrascan technology,
increase manufacturing capability and capacity for Micrascan products, and to
fund related inventory costs. The Company has fulfilled these funding
obligations.
In February 1995, the Company entered into agreements with Intel Corporation,
Motorola Inc., and Texas Instruments Incorporated (the Investors) related to the
Company's Micrascan photolithography products under which the Investors
purchased an aggregate of $30,000,000 of the Company's newly issued Series B
Preferred (see Note 11) and received certain rights to purchase future
generations of the Company's Micrascan products. In turn, the Company agreed to
utilize the proceeds of the transaction for research and development related to
its Micrascan technology and the expansion of its manufacturing capacity, as
well as working capital for its Micrascan products. The agreement with the
Investors also obligated the Company to fund, at any time over a five-year
period, an amount such that the total it funded under the agreements with both
SEMATECH and the Investors was not less than $25,000,000. The Company has
fulfilled its contractual obligations under such agreements.
As part of the agreement with the Investors, IBM was also granted certain rights
to purchase initial quantities of future generations of the Company's Micrascan
products.
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. At September 30, 1996, the Company had received
$5,000,000 in initial funding from four participants. The amount of such funding
recognized as an offset of development spending in fiscal 1996 was
insignificant.
15. GEOGRAPHIC SEGMENTS
The Company's products are manufactured in the United States and are sold
worldwide. The Company markets internationally through both its foreign-based
sales and service operations and through outside distributors and sales
representatives.
One customer accounted for 31% of sales in 1996, 17% of sales in 1995, and 20%
of sales in 1994, a second customer accounted for 10% of sales in 1996, 18% of
sales in 1995, and 19% of sales in 1994, and a third customer was not
significant in 1996, however, accounted for 12% of sales in 1995 and 11% of
sales in 1994.
The following table presents a summary of operations by geographic region.
Inter-region transfers and eliminations represent transfers between domestic
operations and international subsidiaries. Transfers and commission arrangements
between geographic areas are at prices sufficient to recover a reasonable
profit. Research, development and related engineering expenses and general
corporate expenses are included in operating income from North American
operations.
TWENTY-FIVE
SVG
<PAGE> 16
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1994 1995 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Net Sales:
North America:
Unaffiliated customers:
North America $ 186,093 $ 312,613 $ 417,021
Europe 73,808 68,536 129,947
Far East 24,395 24,259 49,175
Other 250 1,932 132
Inter-region transfers 21,214 35,407 29,004
Europe 28,082 41,519 27,629
Far East 7,294 13,173 16,024
Eliminations (21,214) (35,407) (29,004)
--------- --------- ---------
Consolidated net sales $ 319,922 $ 462,032 $ 639,928
========= ========= =========
Operating Income:
North America $ 21,884 $ 45,938 $ 81,371
Europe 4,326 7,027 3,964
Far East 545 822 1,241
Eliminations (304) (1,398) (1,085)
--------- --------- ---------
Consolidated operating income $ 26,451 $ 52,389 $ 85,491
========= ========= =========
Identifiable Assets:
North America $ 250,705 $ 469,436 $ 692,143
Europe 21,026 31,864 37,934
Far East 7,894 10,041 8,351
Eliminations (7,951) (10,616) (9,051)
--------- --------- ---------
Consolidated assets $ 271,674 $ 500,725 $ 729,377
========= ========= =========
</TABLE>
16. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
1996
Net sales $158,280 $170,668 $167,858 $143,122
Gross profit 65,401 70,414 71,336 61,141
Income before income taxes
and minority interest 25,520 27,356 27,542 17,966
Net income 16,481 17,653 17,596 11,491
Net income per share 0.54 0.58 0.58 0.38
1995
Net sales $ 85,971 $109,380 $127,722 $138,959
Gross profit 33,202 41,531 52,163 56,583
Income before income taxes
and minority interest 8,355 11,623 18,904 22,352
Net income 5,330 7,487 12,044 14,134
Net income per share 0.25 0.33 0.45 0.52
</TABLE>
TWENTY-SIX
SILICON VALLEY GROUP, INC.
<PAGE> 17
INDEPENDENT AUDITORS'
REPORT
TO THE 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, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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, 1995 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP [DELOITTE & TOUCHE LLP LOGO]
- ----------------------------
San Jose, California
October 24, 1996
TWENTY-SEVEN
SVG
<PAGE> 18
FINANCIAL
INFORMATION
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended September 30, 1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
Income Statement Data:
Net sales $ 192,457 $ 240,633 $ 319,922 $ 462,032 $ 639,928
Income before income taxes
and minority interest 1,564 6,920 26,820 61,234 98,384
Net income (loss) (292) 4,485 16,764 38,995 63,221
Preferred Stock dividend 209 1,190 1,190 537 --
Net income (loss) per share (0.03) 0.22 0.84 1.57 2.07
Shares used in per share computations 14,754 15,277 18,538 24,850 30,554
Balance Sheet Data:
Working capital $ 91,148 $ 107,975 $ 171,191 $ 325,481 $ 463,655
Total assets 180,777 212,284 271,674 500,725 729,377
Long-term debt and capital leases 1,652 2,338 1,510 654 217
Stockholders' equity 121,116 126,997 185,215 350,247 541,949
</TABLE>
COMMON STOCK PRICES
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 1995 and 1996
as reported by Nasdaq-NMS.
<TABLE>
<CAPTION>
1995 1996
High Low High Low
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $21 1/4 $14 $38 1/2 $23
Second Quarter 30 3/4 18 3/8 30 5/8 18 1/4
Third Quarter 37 1/8 24 7/8 27 17 7/32
Fourth Quarter 49 3/8 32 5/8 19 3/8 15 3/8
</TABLE>
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 29, 1996, there were 764 holders of record of the Common Stock.
TWENTY-EIGHT
SILICON VALLEY GROUP, INC.
<PAGE> 19
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 that 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 designs, 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). The
Company manufactures and markets its photolithography exposure products through
its majority-owned subsidiary, SVG Lithography Systems, Inc. (SVGL); its
photoresist processing products through its Track Systems Division (Track); and
its oxidation/diffusion and LPCVD products through its Thermco Systems Division
(Thermco).
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. During the first quarter of calendar 1996 (the Company's
second fiscal quarter), the growth rate of the worldwide semiconductor industry,
measured in terms of its book-to-bill ratio, declined. In the second half of
fiscal 1996, the Company experienced lower customer order bookings (bookings),
customer deferrals of scheduled equipment delivery dates, and to a lesser
extent, customer order cancellations. The Company recorded bookings of
$264,285,000 during the last six months of fiscal 1996, down from bookings of
$378,793,000 in the first six months of fiscal 1996. As a result of such lower
bookings, the Company believes that at least through the first half of fiscal
1997 shipments will be below second-half fiscal 1996 levels.* In addition, there
can be no assurance that the Company will not experience further customer
delivery deferrals, additional order cancellations, or a prolonged period of
customers orders at reduced levels, any or a combination of which would further
decrease earnings.*
Prior downturns in the worldwide semiconductor industry have resulted in
significant reductions in the Company's net sales, gross margin, and net income.
Moreover, the Company expects that its operations as a whole will continue to be
dependent on the current and anticipated demand for integrated circuits and
products utilizing integrated circuits.* Any prolonged weakness in demand in the
semiconductor industry is likely to have an adverse effect on the Company's
business and results of operations.* Further, the Company believes, due in part
to a large percentage of its customer base consisting of manufacturers of logic
devices, that it will continue to rely on a limited number of major customers
for a substantial percentage of its net sales.* During fiscal 1996, the
Company's two largest customers accounted for 41% of the Company's net sales,
the largest representing 31% of the total, compared to fiscal 1995 when three
such customers accounted for 47%, with the largest customer representing
approximately 18% of the total net sales during the period. The loss of a
significant customer, further delays in shipments due to customer rescheduling,
any additional reductions in orders by a significant customer, or any reduction
or rescheduling activity of significance, including reductions in orders due to
market, economic, or competitive conditions in the semiconductor industry, will
adversely affect the Company's business and results of operations.*
TWENTY-NINE
SVG
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
During fiscal 1996, the Company's net sales of $639,928,000 were 39% higher than
fiscal 1995 net sales of $462,032,000. Each of the Company's product groups,
SVGL, Track, and Thermco, experienced sales increases over the preceding fiscal
year, with the most significant increases resulting from increased shipments of
SVGL's Micrascan photolithography systems and Track's photoresist processing
systems.
During fiscal 1996, the Company had bookings of $643,078,000 (which represented
a book-to-bill ratio of 1.00 to 1), approximately level with fiscal 1995
bookings of $644,352,000 (which represented a book-to-bill ratio of 1.39 to 1).
At September 30, 1996, the Company had a backlog of $394,589,000 compared to
$391,439,000 at September 30, 1995. The Company includes in backlog only those
orders to which a purchase order number has been assigned by the customer, with
all terms and conditions agreed upon and for which delivery has been specified
within twelve months. At September 30, 1996, the backlog included orders for 38
Micrascan photolithography systems. In addition to the systems included in
backlog, SVGL had orders for 18 systems that had scheduled delivery dates
outside the twelve-month backlog window, including orders for seven
advanced-technology 193-nanometer Micrascan systems currently under development.
(See SVGL.)
During fiscal 1996, the Company's gross margins were 42% compared to gross
margins of 40% in fiscal 1995. The increased gross margins were primarily the
result of increased manufacturing volumes and efficiencies related to SVGL's
Micrascan photolithography systems and a higher percentage of the Company's
sales consisting of Track systems, which are typically the Company's highest
gross margin products.
Research, development and related engineering is net of funding received from
outside parties under development agreements. Such funding is typically payable
upon the attainment of one or more development milestones that are specified in
the agreement. Neither the spending nor the recognition of the funding related
to the development milestones is ratable over the term of the agreements. The
majority of development funding has been received by SVGL from SEMATECH. (See
"Fluctuations in Quarterly Results and Dependence on New Product Development.")
Research, development and related engineering (R&D) was $66,974,000 (11% of net
sales) during fiscal 1996, significantly above fiscal 1995 R&D of $40,231,000
(9% of net sales). During fiscal 1996 and fiscal 1995, development funding of
$4,994,000 and $12,767,000, respectively, was recognized and offset against R&D.
The increased fiscal 1996 R&D was primarily the result of new product
development, particularly at SVGL, and additional costs incurred to support the
increased level of shipments. SVGL's development costs increased significantly
as expenditures associated with new Micrascan products increased and less
outside development funding was recognized.
During fiscal 1996, marketing, general and administrative expenses (MG&A) were
$115,827,000 (18% of net sales), versus $90,859,000 (20% of net sales) during
fiscal 1995. The year-to-year increase was primarily due to costs related to the
higher level of shipments. Compared to the year-earlier period, the decrease in
MG&A as a percentage of sales was due to the significant year-to-year sales
growth.
During fiscal 1996, operating income was $85,491,000 compared to operating
income of $52,389,000 during fiscal 1995. The increase in operating income over
the preceding fiscal year was the result of improved gross margins on higher
sales offset in part by increased operating expenses.
THIRTY
SILICON VALLEY GROUP, INC.
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest and other income was $13,330,000 during fiscal 1996, significantly
above the fiscal 1995 total of $9,465,000, principally due to interest earned on
higher fiscal 1996 average cash balances, the result of the proceeds from
underwritten public offerings of the Company's Common Stock in October and March
1995 being available for investment during all of fiscal 1996. The increase was
offset in part by royalty income recorded in fiscal 1996 that was lower than the
initial income recognized for the fourth quarter of fiscal 1995, upon the grant
of the technology license.
Interest expense was not significant during either fiscal 1996 or fiscal 1995.
During fiscal 1996, the Company recorded a 35% provision for income taxes
compared to a 36% provision for fiscal 1995. Variations in the Company's
effective tax rate relate primarily to changes in the geographic distribution of
its pretax income. (See Note 10 to the Consolidated Financial Statements.)
The minority interest represents that share of SVGL's operating results
attributable to its minority stockholder. During fiscal 1996 and fiscal 1995,
the reductions for minority interest were $726,000 and $194,000, respectively.
In comparison to the preceding fiscal year, the increased reduction for minority
interest reflects the year-to-year improvement in SVGL's profitability.
The Company's fiscal 1996 net income was $63,221,000 ($2.07 per share) compared
to fiscal 1995 net income of $38,995,000 ($1.57 per share). The weighted average
number of common and common equivalent shares outstanding used in the per share
computations for fiscal years 1996 and 1995 were 30,554,000 and 24,850,000,
respectively. The significant increase in the average outstanding shares was
primarily due to the sale of 4,025,000 shares of Common Stock in an underwritten
public offering in October 1995 and the effect of significant Common Stock
issuances during the second quarter of fiscal 1995. (See "Fiscal 1995 Compared
to Fiscal 1994" and Note 11 to the Consolidated Financial Statements.)
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales during fiscal 1995 were $462,032,000, a 44% increase over net sales of
$319,922,000 during fiscal 1994. SVGL, Track and Thermco each recorded higher
net sales in fiscal 1995. The most significant increase resulted from shipments
of Thermco's vertical reactors. The strong demand for semiconductor capital
equipment was reflected in the Company's fiscal 1995 product bookings of
$644,352,000, up 68% from fiscal 1994 bookings of $383,216,000. At September 30,
1995, the Company had backlog of $391,439,000, up from backlog of $209,119,000
at September 30, 1994. The fiscal 1995 ending backlog included orders for 34
Micrascan photolithography systems.
Gross margins were 40% in fiscal 1995 compared to 39% during fiscal 1994. The
increased gross margins were primarily due to higher volumes in all of the
operating groups and improvements related to Thermco's vertical reactors and
SVGL's Micrascan II photolithography systems, offset in part by lower margins on
Track's earlier technology and after-market products.
Research, development and related engineering (R&D) was $40,231,000 (9% of net
sales) during fiscal 1995 compared to $30,443,000 (10% of net sales) during
fiscal 1994. The fiscal 1995 and 1994 R&D expenditures were net of funding
received from outside parties under joint development agreements of $12,767,000
and $1,473,000, respectively. The majority of such funding was provided to SVGL
by SEMATECH. The year-to-year increase in R&D was primarily due to new product
development, costs incurred to support increased product shipments, and design
improvements on the Series 8000 Advanced Vertical Processor (AVP) incurred by
Thermco during the first half of fiscal 1995.
THIRTY-ONE
SVG
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Marketing, general and administrative expenses (MG&A) were $90,859,000 (20% of
net sales) during fiscal 1995 compared to $67,517,000 (21% of net sales) during
fiscal 1994. In comparison to the preceding year, the increase in MG&A was
primarily related to the level of shipments and, to a lesser degree, additional
administrative costs incurred in supporting the Company's operations. The
decrease in MG&A as a percentage of net sales reflects the significant
year-to-year increase in net sales.
Fiscal 1995 operating income was $52,389,000 compared to $26,451,000 for fiscal
1994. The increase in operating income resulted from the higher fiscal 1995 net
sales and gross profits, offset in part by increased R&D and MG&A costs.
During fiscal 1995, interest and other income was $9,465,000 compared to
$1,090,000 for fiscal 1994. The increase was primarily the result of interest
earned on significantly higher cash balances. Additionally, the fourth quarter
of fiscal 1995 included $1,500,000 in initial royalty fees from a nonexclusive
license granted to a third party for the use of certain cleaning technology
owned by the Company.
Interest expense was $620,000 during fiscal 1995 compared to $721,000 during
fiscal 1994. The year-earlier period included interest expense related to
borrowings outstanding under the Company's bank line of credit during the first
several months of fiscal 1994.
The Company recorded a 36% provision for income taxes for fiscal 1995 compared
to a 38% provision for fiscal 1994. As discussed above, variations in the
Company's effective tax rate related primarily to changes in the geographic
distribution of its pretax income.
During fiscal 1995, minority interest represented a reduction from net income of
$194,000 compared to an addition to net income of $135,000 during fiscal 1994.
The Company had net income of $38,995,000 ($1.57 per share) in fiscal 1995
compared to net income of $16,764,000 ($0.84 per share) for fiscal 1994. The
number of shares used in the per share computations was 24,850,000 and
18,538,000 for fiscal 1995 and 1994, respectively. The significant increase in
such shares was primarily the result of the issuance of Series B Convertible
Preferred Stock (which was subsequently converted to Common Stock along with the
Series A Preferred Stock) and the sale of 3,192,606 shares of Common Stock in an
underwritten public offering in March 1995. (See Note 11 to the Consolidated
Financial Statements.)
FLUCTUATIONS IN QUARTERLY RESULTS AND DEPENDENCE ON NEW PRODUCT DEVELOPMENT
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 cancellation, 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, delays in shipments near the end of a quarter 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 a material 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
THIRTY-TWO
SILICON VALLEY GROUP, INC.
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
domestic and international sales, activities of competitors, acquisitions,
international events, and problems obtaining materials or components on a timely
basis.* In light of these factors and the effect of the current uncertainty in
the global semiconductor market on demand for the Company's wafer fabrication
systems, the Company is likely to again experience variability in quarterly
operating results.*
Semiconductor manufacturing equipment and processes are subject to rapid
technological change. The Company believes that its future success will depend
in part 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
semiconductors more efficiently.* Additionally, the Company believes that it
will have to develop products capable of processing 300-mm wafers as advanced
semiconductor manufacturers progress from the current 200-mm wafer standard.
Failure to successfully introduce new products in a timely manner could result
in the loss of competitive position and reduced 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.*
During fiscal 1996, the Company introduced new products in all three of its
product groups for shipment in fiscal 1997. From time to time, the Company has
experienced difficulty in ramping up production or effecting transitions to new
products and, consequently, has suffered delays in product deliveries. There can
be no assurance that the Company will not experience manufacturing problems as a
result of either capacity constraints or upgrading or expanding existing
operations in an effort to increase production capability.* These issues could
result in product delivery delays and a subsequent loss of future sales.* The
Company believes that protracted delays in delivering initial quantities of
newly developed products to multiple customers could result in semiconductor
manufacturers electing to install competitive equipment in their fabrication
facilities and could preclude industry acceptance of its products.* The
inability to produce such products or any failure 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 that will increase profitability.*
Further, the potential unfavorable effect of newly introduced products on
profitability can be exacerbated when there is intense price competition in the
market place.*
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 that are operated by Japanese and Pacific
Rim semiconductor manufacturers) represent a substantial portion of the overall
market for semiconductor manufacturing equipment and, to date, the Company has
not been successful in obtaining a substantial share of these markets. The
Company believes that it must expand globally if it is to compete as an industry
leader.* Further, in many instances, Japanese and Pacific Rim semiconductor
manufacturers fabricate devices such as 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 market share available to the Company
and may increase the Company's vulnerability to industry or geographic
downturns.*
THIRTY-THREE
SVG
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In order to expand its market share in the Pacific Rim, the Company has begun
investing in the staffing and facilities necessary to sell, service, and support
customers in the area through entities in Korea, Singapore, and Thailand.
Throughout the Pacific Rim, the Company will be competing with established
equipment suppliers with significant market share and anticipates that it will
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 the region.*
SVG LITHOGRAPHY SYSTEMS, INC. (SVGL)
The Company believes that the photolithography exposure equipment market is one
of the largest segments of the semiconductor processing equipment industry and
that the SVGL Micrascan II series of photolithography systems are currently the
most technically advanced step-and-scan machine shipping in multiple quantities
to global semiconductor manufacturers.* The Company believes that advanced
semiconductor manufacturers are beginning to require volume quantities of
production equipment as advanced as the current and pending versions of
Micrascans, however, it does not believe that substantial sales of such systems
will begin until late calendar 1997 or 1998.* Currently, customers can purchase
DUV steppers to produce product at 0.25-micron line widths. If manufacturers of
traditional I-line or DUV steppers are able to further enhance existing
technology to achieve finer line widths sufficiently to erode Micrascan's
competitive and technological advantages, demand for the Micrascan technology
may not develop as the Company expects.* Additionally, competitive equipment
capable of producing 0.25-micron line widths using step-and-scan technology is
currently available in limited quantities.
The Company believes that advanced logic devices and DRAMs will require
increasingly finer line widths.* The ability to maintain technological
leadership is critical to SVGL's success and it must continue to develop
advanced technology equipment capable of meeting manufacturers' requirements.*
In particular, the Company believes that it must, in the first half of fiscal
1997, begin shipping both its lamp-based (Micrascan QML) and laser-based
(Micrascan III) systems capable of printing 0.25-micron line widths, as well as
progressing on its development of a system capable of printing line widths finer
than 0.25 micron.*
The Company believes that its ability to supply systems in volume will be a
major factor in customer decisions to commit to the Micrascan technology.* The
Company is currently expanding the manufacturing capacity of SVGL to meet
potential future demand for its advanced photolithography systems.* During the
first half of fiscal 1996, SVGL commenced certain facility and capital
improvements and, on August 2, 1996, the Company, for approximately $21,200,000,
purchased from The Perkin-Elmer Corporation a 248,000-square- foot facility
occupied by SVGL in Wilton, Connecticut and an additional 201,000-square-foot
building, which SVGL will also occupy, in Ridgefield, Connecticut. During fiscal
1997, it is the Company's intent to invest in significant further capital
improvements related to the buildings purchased and the equipment required to
expand the production capabilities of SVGL.*
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.*
As a result, SVGL will require additional trained personnel and raw materials
and components, as well as improved manufacturing and testing techniques to both
facilitate volume and shorten manufacturing cycle time.* To that end, SVGL is
continuing to increase staffing levels, develop its vendor supply
infrastructure, and implement manufacturing improvements to meet expected 1997
and 1998 shipment volumes. Additionally, the Company must increase its 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
THIRTY-FOUR
SILICON VALLEY GROUP, INC.
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
attempt to increase production and upgrade or expand existing operations.* In
particular, the Company believes that protracted delays in delivering initial
quantities of Micrascan products to multiple customers could result in
semiconductor manufacturers electing to install competitive equipment in their
advanced fabrication facilities, which 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.*
Historically, the Company has depended on external funding to assist in the high
cost of development in its photolithography operation. The agreements that are
currently in effect are discussed in detail below.
In September 1994, the Company and SEMATECH entered into a series of agreements
whereby the Company sold SEMATECH warrants to purchase the Company's Common
Stock and SEMATECH agreed, based upon the Company achieving certain performance
milestones, to provide, through 1997, $22,000,000 of funding for the development
of the Micrascan technology and to increase SVGL's manufacturing capability and
capacity. As of September 30, 1996, the Company had recognized $17,250,000 of
such SEMATECH funding. Additionally, under the agreements with SEMATECH, the
Company was obligated to provide certain funds from its own resources. The
Company has funded sufficient qualifying expenditures to fulfill its contractual
obligation.
In February 1995, the Company entered into an agreement with Intel Corporation,
Motorola Inc., and Texas Instruments Incorporated (the "Investors") under which
the Investors made a $30,000,000 equity investment in the Company and received
certain rights to purchase future generations of the Company's Micrascan
products. The Company agreed to utilize the proceeds of the transaction for
research and development related to its Micrascan technology and the expansion
of its manufacturing capacity, as well as working capital for its Micrascan
products. The agreement with the Investors also obligated the Company to fund
from its own resources not less than $25,000,000, including amounts it funded
under the agreements with SEMATECH. The Company has fulfilled its funding
obligation under the agreement with the Investors.
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 preferential rights to future equipment
are forfeited. At September 30, 1996, the Company had received $5,000,000 in
initial funding from four Participants and had received single unit orders for
systems from two other customers. There can be no assurances that the
Participants will remain in the program.* In the event that the Company did not
receive the funding anticipated under the agreements, it would be required to
replace the shortfall from its own funds or other sources. 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. The
agreements with the Participants stipulate that if the Company receives funding
for the development program in excess of $25,000,000, it will issue, ratably to
the Participants, credits totaling such excess in the form of a cash discount
that can be applied to the purchase of additional systems by each Participant.
There is no assurance that the Company will receive all funding that it
currently anticipates or that it will be able to obtain future outside funding
beyond that which it is currently receiving.
THIRTY-FIVE
SVG
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While the recent volume of orders for Micrascan systems has been consistent and
encouraging, they are not necessarily indicative of industry-wide acceptance of
the Micrascan technology. Although SVGL has been profitable during fiscal 1996,
the Company believes that with the costs associated with the continued
development of the Micrascan technology, the expansion of SVGL's manufacturing
capacity, the additional manpower requirements related to the expanded capacity
and customer support and the potential difficulties inherent in manufacturing
initial quantities of the 0.25-micron Micrascan systems, there can be no
assurance that SVGL will be able to operate profitably in the future.*
Additionally, SVGL is subject to the accrual of certain royalties based on
operating income and payable to IBM under the terms of a research and
development agreement. If SVGL is successful in increasing its operating income,
the Company believes that such royalties will be significant.*
LIQUIDITY AND CAPITAL RESOURCES
In October 1995, the Company sold 4,025,000 shares of its Common Stock through
an underwritten public offering. The net proceeds of the offering were
approximately $126,200,000.
At September 30, 1996, cash and cash equivalents and temporary investments
totaled $262,061,000 compared to the September 30, 1995 total of $180,523,000,
an increase of $81,538,000. The proceeds of the Common Stock offering and
significant cash inflows resulting from customer deposits on advanced
photolithography systems were offset in part by cash used to finance the growth
of accounts receivable resulting from the Company's increased shipments, higher
inventory levels required to satisfy the current backlog of customer orders, and
purchases of property and equipment.
During fiscal 1996, the Company provided SVGL, its 94%-owned subsidiary, with
intercompany loans of approximately $46,255,000 (including approximately
$21,200,000 for its purchase of land and buildings). The Company believes that
for the foreseeable future it will have to continue providing SVGL with a
significant amount of funding. In connection with its acquisition of SVGL in
1990, the Company committed to purchase under certain circumstances, additional
SVGL securities (the SVGL Calls) in an amount up to $23,200,000 at any time
through May 1997. To the extent the SVGL Calls are not exercised, the Company
has the option to purchase up to $15,000,000 of SVGL Common Stock under similar
terms. The Company may choose to continue funding SVGL through intercompany
loans or it may choose to make an additional equity investment in SVGL.
In July 1996, the Board of Directors authorized the Company to institute a stock
repurchase program whereby up to 5,000,000 shares of its Common Stock may be
purchased in the open market from time to time. Through December 20, 1996, no
Common Stock had been repurchased and the Company had not announced its
intention to commence such repurchases.
The Company has a $75,000,000 unsecured revolving bank credit facility. Advances
under the facility bear interest at either the U.S. prime rate or the LIBOR rate
plus 1%. In November 1996, the term of the credit facility was extended an
additional year to December 1999. At December 20, 1996, 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 provide for the expansion of its business for
the foreseeable future.*
THIRTY-SIX
SILICON VALLEY GROUP, INC.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-31298 and 33-85020 of Silicon Valley Group, Inc. on Form S-8 of our reports
dated October 24, 1996 appearing in and incorporated by reference in this
Annual Report on Form 10-K of Silicon Valley Group, Inc. for the year ended
September 30, 1996.
/s/ DELOITTE & TOUCHE
DELOITTE & TOUCHE LLP
San Jose, California
December 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, AS
INCORPORATED BY REFERENCE INTO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 1996, AND IS QUALIFIELD IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FORM 10K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 218,841
<SECURITIES> 43,220
<RECEIVABLES> 157,014
<ALLOWANCES> 6,003
<INVENTORY> 213,229
<CURRENT-ASSETS> 642,823
<PP&E> 150,130
<DEPRECIATION> 68,553
<TOTAL-ASSETS> 729,377
<CURRENT-LIABILITIES> 179,168
<BONDS> 0
0
0
<COMMON> 378,033
<OTHER-SE> 163,916
<TOTAL-LIABILITY-AND-EQUITY> 729,377
<SALES> 639,928
<TOTAL-REVENUES> 639,928
<CGS> 371,636
<TOTAL-COSTS> 371,636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 437
<INCOME-PRETAX> 98,384
<INCOME-TAX> 34,437
<INCOME-CONTINUING> 63,221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,221<F1>
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 0
<FN>
<F1>MINORITY INTEREST OF $726,000 IS DEDUCTED FROM AFTER-TAX INCOME IN ARRIVING AT
NET INCOME OF $63,221,000.
</FN>
</TABLE>
