<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] Annual Report Pursuant To Section 13 Or 15(d) of the Securities
Exchange Act of 1934.
For the Fiscal Year Ended September 30, 1997.*
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________to __________.
Commission File Number: 0-11348
SILICON VALLEY GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2264681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 METRO DRIVE, SUITE 400, SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 441-6700
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by persons other
than those who may be deemed affiliates of the Registrant, as of November 28,
1997, was approximately $679,538,563. 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 28, 1997 was 30,183,777.
* See Part II, Item 8 of this report for information regarding Registrant's
fiscal year.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the parts
of this Form 10-K indicated:
<TABLE>
<S> <C>
Proxy Statement for Annual Meeting of Stockholders to be held on
February 19, 1998 Part III
Annual Report to Stockholders for fiscal year ended September 30, 1997 Parts II & IV
</TABLE>
<PAGE> 3
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. SVG has three principal product groups which focus
primarily on photolithography, photoresist processing, and deposition for
oxidation/diffusion and low pressure chemical vapor deposition ("LPCVD"). The
Company's products incorporate proprietary technologies and unique processes,
and focus on providing process and product technologies and productivity
enhancements to its customers. SVG works closely with its existing and potential
customers in the development of new systems and technologies and supports its
products through a network of worldwide service and technical support
organizations.
The Company manufactures and markets its photolithography exposure
products through its wholly-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 in computer systems,
telecommunications systems, automotive products, consumer goods and industrial
automation and control systems. Semiconductor content as a percentage of system
cost has also increased. The Company believes that these long-term trends will
continue and will be accompanied by a growing demand for semiconductor
production equipment that can produce advanced integrated circuits in high
volumes with a low cost of ownership.*
The rapid development of advanced semiconductor applications requires
semiconductor manufacturers to continually improve their core technology and
manufacturing capabilities to remain competitive within the industry. As a
consequence, semiconductor manufacturers demand increasingly sophisticated, 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.
1
<PAGE> 4
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:
o Technological Innovation. The Company is committed to developing
new products, improving processes and enhancing existing
products through substantial investment in research and
development. The Company 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.
o 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. The Company works closely with its existing and
potential customers, industry consortia and research
institutions to improve current products and processes and to
define new product development opportunities. These efforts
enable the Company to participate in the development of new
technologies, to influence the design of new fabrication
processes and to position 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.
o Continuous Improvement. The industry requires that equipment
suppliers provide cost effective products that are based on
extendible technology. Cost of ownership and the ability to
satisfy customer delivery requirements are critical ingredients
in the selection process for advanced equipment. To address
these issues, the Company is responding by expanding certain of
its facilities and deploying capital for manufacturing and test
equipment to respond to the requirements of the semiconductor
industry. Additionally, the Company continues to implement
programs to increase the effectiveness of its -- material
procurement, reduce manufacturing cycle times and improve
production methods and processes to gain additional
efficiencies.
o 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 or more of the fabrication cost. Consequently,
integrated circuit manufacturers focus on obtaining advanced photolithography
equipment to help them produce critical layers for increasingly complex devices
reliably, efficiently and cost-effectively.
In the photolithography step of the fabrication process, the integrated
circuit patterns are projected through masks, or reticles, onto the silicon
wafers. As semiconductors have become more complex, the patterns have become
finer, with line widths as narrow as 0.25 micron (approximately 10 millionths of
an inch) and below in many of today's more advanced integrated circuits. As the
patterns become finer, photolithography exposure systems must be capable of
projecting the patterns through the masks with ever finer resolution. The
resolution
2
<PAGE> 5
capability of a photolithography exposure system is a function of numerical
aperture (a measure of its light gathering characteristics) and the wavelength
of the light used in exposure. 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 and 193 nanometer) and the
increase in numerical aperture from 0.2 to 0.6.
Historically, there have been two major approaches to photolithography
exposure systems: full field scanning projection aligners ("scanners") and
refractive steppers ("steppers). Scanners project a full scale mask image onto a
moving full wafer, while steppers sequentially expose a small section of a wafer
in a stepped sequence of exposures, but do so by reducing the size of a mask
image by several fold (typically 5 times). Thus, scanners offer large exposure
fields while steppers offer masks that are easier to make and have a lower cost.
These strengths are combined in the step and scan system, a technology pioneered
by SVGL.
Micrascan. The Company believes that its Micrascan photolithography step
and scan exposure system provides the increased resolution required for current
advanced logic and memory devices and for succeeding generations of complex,
fine geometry integrated circuits through its use of Deep UV lamp or laser light
source and unique projection optics design. Micrascan overcomes the line-width
limitations of steppers over a large exposure field by combining the elements of
both steppers and scanners into the Micrascan's step and scan technology.*
The Micrascan combines advantages of scanning projection aligners and
steppers by 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, using its on-the-fly focus system to keep
the wafer in the optimal focal plane, thus providing a larger usable depth of
focus. The larger the usable depth of focus field is, the more tolerant of
variations in the wafer surface the equipment will be. The Company believes
Micrascan's greater tolerance of wafer surface variations can reduce the number
of defective devices on a wafer, thereby contributing to higher yields.* It
further believes that scanning across the field instead of exposing the entire
field at one time also enables Micrascan to achieve greater uniformity of
resolution across the entire exposure field and contributes to higher yields of
faster devices.*
The Company believes that SVGL has substantial technological expertise
and process knowledge in developing Deep 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
an optical projection system that is less sensitive to environmental variants
and accommodates the use of light sources with broader spectral bandwidth (than
refractive optics), with the additional benefits of reduced 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 position of the wafer and the reticules prior to and during the
wafer exposure step. The Company believes that these servo controlled systems
contribute to the Micrascan's ability to scan the exposure field at high speeds
with no substantial loss of resolution, thereby increasing the throughput
capability of the machine.*
The Company believes that the photolithography exposure equipment market
is one of the largest segments of the semiconductor processing equipment
industry and that SVGL's Micrascan family of photolithography systems are
currently the most technically advanced step-and-scan machines shipping in
multiple quantities to global semiconductor manufacturers.* Micrascan II+
systems capable of printing .30 micron line widths sell for up to approximately
$5,300,000, depending upon configuration. The Micrascan QML lamp-based systems
and Micrascan III laser-based systems, each capable of printing .25 micron line
widths, sell for up to approximately $7,200,000, depending upon configuration.
3
<PAGE> 6
Uncertain Market for Micrascan Products. To address the market for
advanced photolithography exposure systems, the Company has invested and expects
to continue to invest substantial resources in SVGL's Micrascan technology and
its family of Micrascan deep ultraviolet ("Deep UV") step and scan
photolithography systems, capable of producing line widths of .25 micron and
below. The development of a market for the Company's Micrascan step and scan
photolithography products will be highly dependent on the continued trend
towards finer line widths in integrated circuits and the ability of other
lithography manufacturers to keep pace with this trend through either enhanced
technologies or improved processes. Lithography manufacturers have been
successful in extending the capability of I-Line steppers which have been
utilized in the fabrication of complex semiconductor devices with line widths of
less than 0.5 micron, such as 64 megabit DRAMs. The Company believes Deep UV
lithography will be required to fabricate devices with line widths below 0.3
micron.* Semiconductor manufacturers can purchase Deep UV steppers to produce
product at .25 micron line widths. However, the Company believes that as devices
increase in complexity and size and require finer line widths, the technical
advantages of Deep UV step and scan systems as compared to Deep UV steppers will
enable semiconductor manufacturers to achieve finer line widths with improved
critical dimension control which will result in higher yields of faster
devices.* The Company also believes that the transition to Deep UV step and scan
systems will accelerate in calendar 1998 and that advanced semiconductor
manufacturers are beginning to require volume quantities of production equipment
as advanced as the current and pending versions of Micrascan.* Currently,
competitive Deep UV step and scan equipment capable of producing .25 micron line
widths is available in limited quantities from two competitors, and the Company
believes that at least one other manufacturer of advanced photolithography
systems will begin limited shipments of step and scan machines in the near
future.* There can be no assurance that the Company will be successful in
competing with such systems.* Further, if manufacturers of I-Line or Deep UV
steppers are able to further enhance existing technology to achieve finer line
widths sufficiently to erode the competitive and technological advantages of
Deep UV step and scan systems, demand for the Micrascan technology may not
develop as the Company expects.*
The Company believes that advanced logic devices and DRAMs will require
increasingly finer line widths.* Consequently, SVGL must continue to develop
advanced technology equipment capable of meeting its customers' current and
future requirements while offering those customers a progressively lower cost of
ownership.* In particular, the Company believes that it must continue its
development of future systems capable of printing line widths finer than .25
micron and processing 300mm wafers.*
The Company believes that for SVGL to succeed in the long term, it must sell
its Micrascan products on a global basis. The Japanese and Pacific Rim markets
(including fabrication plants located in other parts of the world which are
operated by Japanese and Pacific Rim semiconductor manufacturers) 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. (See "Importance of the Japanese and Pacific Rim Markets".)
Micralign. SVGL also sells a family of scanning projection aligners
known as "Micralign." The most advanced product in this family, the Micralign
700, is used primarily in the production of semiconductor devices with minimum
feature sizes above 1.25 microns, or in the fabrication of less critical layers
within more sophisticated semiconductor devices. Micralign products are a mature
product family and sales of Micralign products have declined in recent years as
steppers have supplanted scanning projection aligners. The Company anticipates
that such sales will continue to decline.* A large installed base of Micralign
systems exists throughout the world and a majority of SVGL's Micralign related
revenues is derived from servicing that installed base and the sales of spare
parts. The list price of the Micralign 700 is approximately $1,250,000.
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 the Company has
developed increasingly advanced products for this market, which are
4
<PAGE> 7
capable of handling integrated circuits with line widths as narrow as 0.18
micron. Each product line includes the principal processing capabilities
described above and is generally sold in customer-specified configurations that
can include specially engineered features and capabilities. All Track products
are available in fully automated cassette-to-cassette configurations either as
stand-alone processing stations or as in-line integrated manufacturing systems.
The equipment is modular in design to allow configuration to customer
requirements. Each semiconductor manufacturer may require certain of the
processing stations to effect its proprietary or specialized processes.
As a result of being able to supply its customers with both SVGL's
Micrascan photolithography systems and Tracks photoresist processing products,
the Company believes it offers the only clustered solution manufactured by a
single supplier. Additionally, Track's 90 Series and its soon to be released
200APS systems are designed to interface with all other lithography exposure
products, regardless of manufacture.
Track's product lines correspond to the development of successive
generations of wafer processing technologies. In general, it has been the
Company's experience that introduction of new Track products has been followed
by lower order levels for older products.
200-APS. Announced 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 smaller 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 initially expected to ship
production units of the 200-APS during the second quarter of fiscal 1997.
However, certain design difficulties have delayed the introduction of the
200-APS and SVG believes that it will ship the first such units in the second
quarter of fiscal 1998.* Prices of the 200-APS will range from approximately
$1,000,000 to $2,500,000.
90 Series. The 90 Series, the 90-S and the 90-SE photoresist processing
systems are designed for use in fabrication processes for integrated circuits
with line widths as narrow as 0.25 micron, such as is required for 64 megabit
DRAMs. The 90 Series incorporates a proprietary wafer transfer system to
increase throughput and provides features allowing it to interface with factory
automation systems, such as those using automated guided vehicles. The 90 Series
can process wafers up to eight inches in diameter. The 90-S and the more recent
90-SE offer improved cost of ownership through increased productivity and a
smaller floor space requirement. Prices of the 90 Series range from
approximately $650,000 to $1,500,000.
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.
THERMCO SYSTEMS DIVISION (THERMCO)
Thermco designs, manufactures, markets and services large batch thermal
processing 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.
5
<PAGE> 8
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.
Rapid Vertical Processor - 300 ("RVP-300"). Announced in 1997, the
RVP-300 is the latest addition to the vertical furnace product line. RVP-300 is
designed for processing of 300mm (12 inch) wafers addressing requirements for
0.18um technology and beyond. The design of RVP-300 focuses on maximizing
productivity and throughput. This is done by utilizing features such as fast
temperature ramp up and ramp down capability, Model Based Temperature Control
(MBTC) for optimized temperature control across the wafer, and a dual boat
configuration. Initial shipments of the RVP-300 are scheduled to ship in the
first half of 1998. Prices of the RVP-300 will range from $1,500,000 to
$1,800,000, depending on configuration.
Series 9000 Rapid Vertical Processor ("RVP"). Introduced in 1996, the
RVP is based on the Advanced Vertical Processor ("AVP") platform, processes both
eight inch and six inch wafers and meets 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 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, in
comparison to earlier versions of VTR's, offers improved process control,
uniformity, reduced particle levels, higher throughput, internal storage
capabilities and the industry's standard mechanical interface (SMIF). Typical
prices for the Company's VTR products range from approximately $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, but at successively declining rates.* In addition, the
existing installed base of horizontal processing systems enables the Company to
6
<PAGE> 9
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, the Company is able to identify new product
development opportunities. The Company's major customers during fiscal 1997
included the following:
<TABLE>
<S> <C> <C>
Hewlett-Packard Motorola SGS-Thomson
IBM Phillips Semiconductor Samsung
Intel ProMos Technologies Siemens
Macronix International
</TABLE>
The Company relies on a limited number of customers for a substantial
percentage of its 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. For fiscal 1997, Intel and IBM represented 38% and
22%, respectively, of sales and the Company's largest five customers represented
74% of sales. In fiscal 1996 and 1997, Intel represented a substantial portion
of the total sales of both Track and SVGL. 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, would adversely affect
the Company's business and results of operations. *
MARKETING, SALES AND SERVICE
The Company markets and sells its products primarily to independent
manufacturers of semiconductor devices and computer, telecommunications and
other companies that manufacture semiconductor devices for their own use. The
market for the Company's products is worldwide. The Company sells its products
in the United States principally through its direct sales organization. The
Company sells its products overseas through a direct sales staff, independent
distributors and independent representatives 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 three fiscal years ended September 30, 1997:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1995 1996 1997
<S> <C> <C> <C>
United States 68% 65% 72%
Western Europe 24 25 18
Far East 8 10 10
</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 factors in its selection as an equipment supplier. Increasingly,
semiconductor manufacturers are requiring seven-day, around the clock, on site
or on call support. To meet this need, the Company continues to 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.
7
<PAGE> 10
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, 1997 and 1996, the Company had backlog of approximately
$421,000,000 and $395,000,000, 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 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. During the four fiscal quarters ended
March 1997, the Company's quarterly customer order bookings ("bookings") were
substantially below first half fiscal 1996 levels and the Company experienced
customer deferrals of scheduled equipment delivery dates and, to a lesser
extent, customer order cancellations. Notwithstanding a significant increase in
bookings during the third and fourth quarters of fiscal 1997, the Company's
fiscal 1997 shipments were below fiscal 1996 levels as a result of the lower
bookings in the preceding fiscal quarters. There can be no assurance that the
Company will not again experience customer delivery deferrals, order
cancellations or a prolonged period of customer orders at reduced levels, any or
a combination of which would have an adverse effect on its operating results.*
Approximately 10% of the Company's backlog at September 30, 1997
consisted of orders from customers in the Pacific Rim. In light of the recent
economic downturn in certain Asian countries, there can be no assurance that the
Company will be able to obtain additional orders or that it will not experience
cancellations or deferrals of existing orders from customers in such countries,
any of which would have an adverse effect on the Company's business and results
of operations.*
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.
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, $17,500,000 of funding for the
development of the Micrascan technology and $4,500,000 to increase SVGL's
manufacturing capability and capacity. As of September 30, 1997, the Company had
recognized all of the SEMATECH funding. Under the
8
<PAGE> 11
agreements with SEMATECH, the Company was obligated to provide certain funds
from its own resources. The Company has fulfilled these contractual obligations.
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, 1997, the Company had received
$16,000,000 in development funding from six Participants, of which $8,085,000
had been recognized and offset against research and development expenditures. In
March 1997, one participant withdrew from the program. There can be no
assurances that the other Participants will remain in the program.* In the event
that the Company does 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.
In connection with the Company's acquisition of SVGL in 1990, SVGL
received an equity investment and research and development funding commitments
for Micrascan from IBM. Under the terms of the related research and development
agreement, SVGL owed IBM certain royalties based on future operating results.
During the second quarter of fiscal 1997, the Company satisfied its obligation,
recognized an expense of $32,582,000, which represented royalties related to
products currently under development, and recorded a prepayment of $5,418,000,
which represented royalties related to existing products which are being
amortized through fiscal 2000 in proportion to the related product sales.
The Company has historically devoted a significant portion of its
personnel and financial resources to research and development programs. For
fiscal years 1997, 1996, and 1995, total research and development expenditures
were approximately $82,000,000, $72,000,000, and $53,000,000, respectively, of
which approximately $8,000,000, $5,000,000, and $13,000,000, respectively, was
funded by outside parties. Substantially all of the development funding has been
received by SVGL for the development of its Micrascan technology and systems.
During prior years, the majority of development funding was received from
SEMATECH. In fiscal 1997, the funding was received primarily from the
Participants for the development of the advanced technology 193 nanometer
system.
COMPETITION
The semiconductor equipment industry is intensely competitive. The
Company faces substantial competition both in the United States and other
countries in all of its products. The Company's competitors include Tokyo
Electron, Ltd. ("TEL") and DaiNippon Screen Mfg. Co., Ltd. in photoresist
processing equipment; TEL and Kokusai Electric Co., Ltd. in oxidation/diffusion
and LPCVD equipment; and Nikon, Canon, ASM Lithography and other suppliers of
photolithography exposure equipment, including manufacturers of steppers and
projection aligners. The trend toward consolidation in the semiconductor
processing equipment
9
<PAGE> 12
industry has made it increasingly important to have the financial resources
necessary to compete effectively across a broad range of product offerings, to
fund customer service and support on a worldwide basis and to invest in both
product and process research and development. Significant competitive factors
include technology and cost of ownership, a formula which includes such data as
initial price, system throughput and reliability and time to maintain or repair.
Other competitive factors include familiarity with particular manufacturers'
products, established relationships between suppliers and customers, product
availability and technological differentiation. Occasionally, the Company has
encountered intense price competition with respect to particular orders and has
had difficulty establishing new relationships with certain customers who have
long-standing relationships with other suppliers. The Company believes that
outside Japan and the Pacific Rim it competes favorably with respect to most of
these factors.* (See "Importance of Japanese and Pacific Rim Markets".)
Many of the Company's competitors are Japanese corporations. With the
current strength of the U.S. dollar in relation to the Japanese yen, the
Company's ability to compete on the basis of price has been and may continue to
be impaired. In light of the recent economic downturn in certain Asian countries
which represent significant markets for such competitors, the Company believes
that it may encounter more severe price competition in its non-Asian markets.
Certain of the Company's existing and potential competitors have
substantially greater name recognition, financial, engineering, manufacturing
and marketing resources and customer service and support capabilities than the
Company. Additionally, the Company is a relative newcomer in the
photolithography exposure market. Nikon, and to a lesser extent Canon, have long
established relationships as suppliers of photolithography equipment to most of
the semiconductor manufacturers. Although the Company has supplied Track and
Thermco equipment to many of these customers, it has not previously sold
meaningful quantities of Micrascan photolithography equipment to them.
The Company's competitors can be expected to continue to improve the
design and performance of their current products and processes and to introduce
new products and processes with improved price/performance characteristics.
The Micralign products manufactured by SVGL are generally not
competitive with steppers for fabrication of semiconductor devices with line
widths smaller than 1.25 micron. In marketing Micrascan systems, SVGL continues
to face competition from suppliers employing other technologies, principally
I-Line and Deep UV steppers, including Nikon Corp., Canon and ASM Lithography.
Additionally, two competitors, Nikon and ASM Lithography have begun shipping
initial quantities of .25 micron step and scan photolithography systems which
utilize Deep UV light sources, and the Company believes that Canon will begin
initial shipments of a similar step and scan system in the near future.* Stepper
manufacturers have been successful in extending the capability of I-Line
steppers which have been utilized in the fabrication of complex semiconductor
devices with line widths of less than 0.5 micron, such as 64 megabit DRAMs. The
Company believes Deep UV lithography will be required to fabricate devices with
line widths below 0.3 micron.* Semiconductor manufacturers can purchase Deep UV
steppers to produce product at .25 micron line widths. However, the Company
believes that as devices increase in complexity and size and require finer line
widths, the technical advantages of Deep UV step and scan systems as compared to
Deep UV steppers will enable semiconductor manufacturers to achieve finer line
widths with improved critical dimension control to produce higher yields of
faster devices.* There can be no assurance that the Company will be successful
in competing with such systems.* The availability of limited quantities of .25
micron step and scan systems from Nikon, as well as ASM Lithography, or
announcements of competitive product introductions by Canon or some other
supplier, may cause customers to delay purchases from the Company until such new
products have been evaluated.* Further, if manufacturers of I-Line or Deep UV
steppers are able to further enhance existing technology to achieve finer line
widths sufficiently to erode the competitive and technological advantages of
Deep UV step and scan systems, demand for the Micrascan technology may not
develop as the Company expects.*
10
<PAGE> 13
IMPORTANCE OF THE JAPANESE AND PACIFIC RIM MARKETS
The Company's customers are heavily concentrated in the United States
and Europe. The Japanese and Pacific Rim markets (including fabrication plants
located in other parts of the world which are operated by Japanese and Pacific
Rim semiconductor manufacturers) represent a substantial portion of the overall
market for semiconductor manufacturing equipment. To date, neither the Company's
shipments into Japan nor into the Pacific Rim have been significant. The Company
believes that the Japanese companies with which it competes have a competitive
advantage because their dominance of the Japanese and Pacific Rim semiconductor
equipment market provides them with the sales and technology base to compete
more effectively throughout the rest of the world. The Company is not engaged in
any significant collaborative effort with any Japanese or Pacific Rim
semiconductor manufacturers. As a result, the Company may be at a competitive
disadvantage to the Japanese equipment suppliers which are engaged in such
collaborative efforts with Japanese and Pacific Rim semiconductor manufacturers.
The Company believes that it must substantially increase its share of these
markets if it is to compete as a global supplier.* Further, in many instances,
Japanese and Pacific Rim semiconductor manufacturers fabricate devices such as
dynamic random access memory devices ("DRAMs"), with potentially different
economic cycles than those affecting the sales of devices manufactured by the
majority of the Company's U.S. and European customers. Failure to secure
customers in these markets may limit the global market share available to the
Company and may increase the Company's vulnerability to industry or geographic
downturns.*
In the past, several of the Company's larger customers have entered into
joint ventures ("JV") with European, Japanese or Pacific Rim semiconductor
manufacturers. In such cases, the Company has encountered intense price
competition from foreign competitors who are suppliers to the non-U.S. member of
the JV. Further, in certain instances the Company has not secured the equipment
order when the non-U.S. member has had the responsibility for selecting the
equipment to be used by the JV in its U.S. operations. There can be no assurance
that as the Company's customers form additional alliances, whether in the U.S.
or in other parts of the world, that the Company will be successful in obtaining
equipment orders or that it will be able to obtain orders with sufficient gross
margin to generate profitable transactions, either of which could have an
adverse effect on the Company's results of operations.*
In the Pacific Rim, the Company has been investing in the staffing and
facilities necessary to sell, service and support customers, primarily in Korea,
and intends to commence such investments in Taiwan.* 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 this
region.* Further, in light of the recent economic downturn in certain Asian
countries, there can be no assurance that the Company will be able to obtain
additional orders or that it will not experience cancellations or deferrals of
existing orders from customers in such countries, any of which would have an
adverse effect on the Company's business and results of operations.*
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.
From time-to-time, the Company has experienced delays in the
introduction of its products and product enhancements due to technical,
manufacturing and other difficulties and may experience similar delays in the
future.* For example, during fiscal 1996, the Company announced a new Track
product, the 200-APS. Initial shipments of the 200-APS were scheduled to
commence during the second quarter of fiscal 1997, but have been delayed by
approximately twelve months.* There can be no assurance that the Company will
not experience manufacturing problems as a result of instability of the design
of either the hardware or software elements of the new technology, or be able to
efficiently manufacture the 200-APS or other products.* These issues could
result in product delivery
11
<PAGE> 14
delays and a subsequent loss of future sales.* Semiconductor manufacturers tend
to select either a single supplier or a primary supplier for a certain type of
equipment. The Company believes that prolonged delays in delivering initial
quantities of newly developed products to multiple customers, whether due to the
protracted release of product from engineering into manufacturing or due to
manufacturing difficulties, could result in semiconductor manufacturers electing
to install competitive equipment in their fabrication facilities and could
preclude industry acceptance of the Company's products.* Therefore, the
Company's inability to effect the timely production of new products or any
failure of these products to achieve market acceptance could have a material
adverse effect on the Company's business and results of operations.*
Historically, the unit cost of the Company's products has been the
highest when they are newly introduced into production and cost reductions have
come over time through engineering improvements, economies of scale and
improvements in the manufacturing process.* As a result, new products have, at
times, had an unfavorable impact on the Company's gross margins and results of
operations. There can be no assurance that the initial shipments of new products
will not have an adverse effect on the Company's profitability or that the
Company will be able to attain design improvements, manufacturing efficiencies
or manufacturing process improvements over time.* Further, the potential
unfavorable effect of newly introduced products on profitability can be
exacerbated when there is intense price competition in the marketplace.*
Based upon its forecast of continued high growth in demand for
photolithography equipment and potential future demand for advanced lithography
products, the Company is increasing SVGL's production capacity under an
extremely aggressive expansion schedule.* In August 1996, as part of this
expansion, the Company purchased from The Perkin-Elmer Corporation a 243,000
square foot facility occupied by SVGL in Wilton, Connecticut and an additional
201,000 square foot building, which SVGL now occupies, in Ridgefield,
Connecticut. During fiscal 1997, the Company has invested in significant further
capital improvements related to the buildings purchased and the equipment
required to expand the production capabilities of SVGL.* In addition to the
timely construction and equipping of facilities, successful completion of this
expansion will require the recruitment, training and retention of a high quality
workforce, and the achievement of satisfactory manufacturing results on a scale
greater than SVGL has attempted in the past. There can be no assurance that the
Company can manage these efforts successfully. Any failure to manage such
efforts could result in product delivery delays and a subsequent loss of future
revenues. In particular, the Company believes that protracted delays in
delivering 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.
One of the most critical components of the Micrascan systems are the
projection optics, which are primarily manufactured by SVGL. As part of its
overall investment in capacity, the Company is increasing SVGL's optical
manufacturing floorspace, procuring metrology equipment, and in some instances
fabricating test stands. The Company believes that in order for SVGL to attain
it goals, it must successfully reduce the cycle times required to build
projection optics and increase the optical manufacturing output.*
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc.
("TLI") in exchange for approximately 1,091,000 shares of Company Common Stock.
TLI designs, manufactures and sells precision optical components, assemblies and
systems to customers in a variety of industries and research endeavors. A
primary reason for the acquisition was TLI's technology and expertise relating
to aspherical lenses, a key component of SVGL's photolithography products, and
to have TLI commence fabrication of non-aspherical lenses which are currently
produced by SVGL.* However, there can be no assurance that TLI's technology is
scalable, or that such expertise can be transferred without substantial time or
expense, if at all. The inability of SVGL to transfer this production technology
for use in processes of a substantially larger scale could have a material
adverse effect on the Company's ability to realize any significant benefits from
the acquisition of TLI.
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
12
<PAGE> 15
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. The supplier has committed to
expand its capacity to meet SVGL's projected requirements in exchange for a
long-term, non-cancelable supply agreement. The agreement specifies quantities
of material that increase over time and the supplier is obligated to create and
store certain defined quantities of safety stock. Additionally, a version of the
Company's Micrascan III photolithography system utilizes an Excimer laser
manufactured in volume by only one supplier. There can be no assurance that
either supplier will be able to supply the quantities of material required by
SVGL. If either supplier was unable to meet its commitments, SVGL would be
unable to manufacture the quantity of systems required to meet the anticipated
future demand, which would have a material adverse effect on the Company's
business and results of operations. SVGL is currently working to qualify an
additional source of lasers for its current and future versions of Micrascan
systems. However, there can be no assurance that these efforts will be
successful.
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 notified
the Company 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 that
it intends to seek indemnification from the Company for any damages and expenses
resulting from this matter if found liable or if the customer settles the claim.
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 Perkin-Elmer, approximately
50 acres of land and a 201,000 square foot building thereon (the "Property")
located in Ridgefield, Connecticut. At the time the Company purchased the
Property, it was aware that certain groundwater and soil contamination was
present and that the Property was subject to a clean-up order being performed by
Perkin-Elmer under the jurisdiction of the Connecticut Department of
Environmental Protection. Agreements between the Company and Perkin-Elmer
provide that Perkin-Elmer has sole responsibility for all obligations or
liabilities related to the clean-up order. While the Company believes that it
has been adequately indemnified, if for some reason Perkin-Elmer was unable to
comply or did not comply with the clean-up order, the Company could be required
to do so.
The Company does not anticipate any material capital expenditures for
environmental control facilities in 1998.*
13
<PAGE> 16
BUSINESS INTERRUPTION
The Company manufactures its Track products in San Jose, California and
substantially all of its Thermco products in Orange, California. SVGL's
photolithography exposure products are manufactured in Wilton and Ridgefield,
Connecticut. If the Company were to lose the use of one of its facilities as a
result of an earthquake, flood or other natural disaster, the resultant
interruptions in operations would have a material adverse effect on the
Company's results of operations and financial condition. The Company's
California facilities are located in seismically active regions.
EMPLOYEES
At September 30, 1997, the Company had 3,099 full-time employees and 290
part-time employees and contract personnel, including 674 in research and
development, 1,507 in manufacturing, 1,047 in marketing, sales and customer
service and support and 161 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.
14
<PAGE> 17
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Papken S. Der Torossian 58 Chairman of the Board and Chief Executive Officer
William A. Hightower 54 President and Chief Operating Officer
Russell G. Weinstock 54 Vice President, Finance and Chief Financial Officer
Edward A. Dohring 64 Vice President, President, SVG Lithography Systems, Inc.
Steven L. Jensen 48 Vice President, Worldwide Sales and Service
Jeffrey M. Kowalski 44 Vice President, President, Thermco Systems Division
Boris Lipkin 50 Vice President, Corporate
John W. Mathews 49 Vice President, Worldwide Service
Larry W. Sonsini 56 Secretary
</TABLE>
Mr. Der Torossian became Chairman of the Board and Chief Executive
Officer in July 1991, and has been a director of the Company since October 1984.
Mr. Hightower became President and Chief Operating Officer in August
1997. He has been a member of the Board of Directors of the Company since 1994.
From January 1996 to August 1997, Mr. Hightower was the Chairman of the Board of
Directors and Chief Executive Officer of Cadnet Corporation and from August 1989
to December 1995, he was the President and Chief Executive Officer of Telematics
International, Inc.
Mr. Weinstock has been Vice President of Finance and Chief Financial
Officer of the Company and Vice President of Finance and Chief Financial Officer
of SVGL since July 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.
Mr. Jensen became a Vice President of the Company in July 1992 and Vice
President, Worldwide Sales in April 1992.
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.
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.
Mr. Sonsini has been Secretary since November 1988. He was a member of
the Board of Directors of the Company from 1991 to 1997. Mr. Sonsini is a member
of the law firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel to the Company, and is the Chairman of the firm's Executive Committee.
Mr. Sonsini serves on the boards of directors of Lattice Semiconductor
Corporation, Novell, Inc., and PIXAR.
15
<PAGE> 18
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 $95,000 and a lease expiration of
2004. The second is also a two story building consisting of approximately 83,000
square feet. The monthly base rental for this facility is approximately $84,000
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.
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 $50,000 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
243,000 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. As part of its expansion of SVGL's capacity, the
Company is in the process of adding an additional 33,000 square feet to the
Wilton facility.
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, 1997.
16
<PAGE> 19
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, 1997, at
page 33 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, 1997, at
page 33 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, 1997, at
pages 34 to 44 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, 1997, at
pages 13 to 32, 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 29, 1995, September 27, 1996, and October 3, 1997. For
convenience, this Report and the Company's Consolidated Financial Statements
refer to all such fiscal years as ending at September 30. Fiscal 1995 and fiscal
1996 each included 52 weeks. Fiscal 1997 included 53 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.
17
<PAGE> 20
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 19, 1998, 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.
18
<PAGE> 21
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, 1997, are incorporated by reference:
Independent Auditors' Report.
Consolidated Balance Sheets at September 30, 1997 and 1996.
Consolidated Statements of Income for the Years Ended September
30, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995.
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.
19
<PAGE> 22
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
10.42** Employment Agreement between Registrant and Papken S. Der
Torossian, dated August 1, 1997.
10.43** Employment Agreement between Registrant and William A.
Hightower, dated August 1, 1997.
10.44** Employment Agreement between Registrant and Russell G.
Weinstock, dated August 1, 1997.
10.45** Employment Agreement between Registrant and Boris Lipkin, dated
August 1, 1997.
13.1 Selected data from Annual Report to Stockholders for fiscal year
ended September 30, 1997.
21.1 Registrant's wholly-owned subsidiaries are (i) SVG Lithography
Systems, Inc., a Delaware Corporation (SVGL), (ii) Tinsley
Laboratories, Inc., a California Corporation ("TLI"), (iii)
Silicon Valley Group, K.K., a Japanese corporation, (iv) SVG
International Service, a California corporation ("SVG
International"), (v) Silicon Valley Group FSC Incorporated, a
Barbados corporation, (vi) SVG Israel, Inc., a Delaware
corporation and (vii) SVG Thailand, Inc., a Delaware
corporation. SVG Lithography Japan Co., Ltd., a Japanese
Corporation, SVG Lithography (Europe) B.V., a Netherlands
Corporation, SVG Lithography Systems Korea, Inc., a Delaware
corporation, SVG France S.A.R.L., a French corporation, and SVG
Lithography Systems FSC, Inc., a Barbados corporation are
wholly-owned by SVGL. Century Precision Industries, Inc., a
California Corporation is wholly-owned by TLI. 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.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
24.1 Power of Attorney (see page 22).
27 Financial Data Schedule.
</TABLE>
- --------------------------------------
** 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.
(b) REPORTS ON FORM 8-K. None
(c) EXHIBITS. See (a) above.
(d) FINANCIAL STATEMENT SCHEDULES. See (a) above.
20
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Silicon Valley Group, Inc.:
We have audited the consolidated financial statements of Silicon Valley
Group, Inc. and subsidiaries as of September 30, 1996 and 1997, and for each of
the three years in the period ended September 30, 1997, and have issued our
report thereon dated October 27, 1997; such consolidated financial statements
and report are included in your 1997 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.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Jose, California
October 27, 1997
21
<PAGE> 24
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 30, 1997
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>
Chairman of the Board, December 30, 1997
/s/ Papken S. Der Torossian Chief Executive
- ---------------------------------- Officer and Director (Principal
Papken S. Der Torossian Executive Officer)
President December 30, 1997
/s/ William A. Hightower Chief Operating Officer
- ---------------------------------- and Director
William A. Hightower
Vice President, Finance December 30, 1997
/s/ Russell G. Weinstock and Chief Financial Officer
- ---------------------------------- (Principal Financial and
Russell G. Weinstock Accounting Officer)
/s/ William L. Martin Director December 30, 1997
- ----------------------------------
William L. Martin
/s/ Nam P. Suh Director December 30, 1997
- ----------------------------------
Nam P. Suh
/s/ Lawrence Tomlinson Director December 19, 1997
- ----------------------------------
Lawrence Tomlinson
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
<S> <C>
10.42 Employment Agreement between Registrant and Papken S. Der
Torossian, dated August 1, 1997.
10.43 Employment Agreement between Registrant and William A.
Hightower, dated August 1, 1997.
10.44 Employment Agreement between Registrant and Russell G.
Weinstock, dated August 1, 1997.
10.45 Employment Agreement between Registrant and Boris Lipkin,
dated August 1, 1997.
13.1 Selected data from Annual Report to Stockholders for fiscal
year ended September 30, 1997.
23.1 Consent of Deloitte & Touche, independent auditors.
27 Financial Data Schedule.
</TABLE>
--------------------------------
23
<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 9/30/95:
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
YEAR ENDED 9/30/97:
Allowance for
Doubtful Accounts 6,003 7,611 --- (7,009) 6,605
Product
Warranty Reserves 42,899 42,320 --- (41,685) 43,534
</TABLE>
(1) Write-offs of uncollectible accounts and costs incurred for warranty
repairs.
<PAGE> 1
EXHIBIT 10.42
EMPLOYMENT AGREEMENT
THIS AGREEMENT, effective as of the first day of August, 1997, by and
between Papken S. Der Torossian (the "Employee") and Silicon Valley Group, Inc.,
a Delaware corporation (the "Corporation").
It is the intent of the parties that this Agreement shall supersede and
replace that certain Employment Agreement by and between the parties dated as of
August 1, 1994.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Corporation, the
parties agree as follows:
1. Duties and Scope of Employment.
(a) Position. The Corporation agrees to employ the Employee for
the term of his employment under this Agreement in the position of Chief
Executive Officer, as such position was defined in terms of responsibilities and
compensation as of the effective date of this Agreement.
(b) Obligations. During the term of his employment under this
Agreement, the Employee shall devote his full business efforts and time to the
Corporation and its subsidiaries. The foregoing, however, shall not preclude the
Employee from engaging in appropriate civic, charitable or religious activities
or from devoting a reasonable amount of time to private investments or from
serving on the boards of directors of other entities, as long as such activities
and service do not interfere or conflict with his responsibilities to the
Corporation.
2. Base Compensation. During the term of his employment under this
Agreement, the Corporation agrees to pay the Employee as compensation for his
services a base salary at the annual rate of $600,000, or at such higher rate as
the Corporation's Board of Directors may determine from time to time, along with
such performance bonus amounts and car allowances, if any, as the Board shall
authorize, in its discretion, from time to time. Such salary shall be payable in
approximately equal bi-weekly installments. (The annual compensation specified
in this Section 2, together with any increases in such compensation that the
Board of Directors may grant from time to time, is referred to in this Agreement
as "Base Compensation.")
<PAGE> 2
3. Employee Benefits.
(a) General. During the term of his employment under this
Agreement, the Employee shall be eligible to participate in the employee benefit
plans and executive compensation programs maintained by the Corporation,
including (without limitation) pension plans, savings or profit-sharing plans,
deferred compensation plans, supplemental retirement or excess-benefit plans,
stock option, incentive or other bonus plans, life, disability, health, accident
and other insurance programs, paid vacations, and similar plans or programs,
subject in each case to the generally applicable terms and conditions of the
plan or program in question and to the determination of any committee
administering such plan or program.
(b) Stock Options. The Corporation has granted to the Employee
options to purchase certain shares of the Common Stock of the Corporation. The
terms of the options shall be governed by the Corporation's Stock Option
Agreement attached hereto as Exhibit A.
4. Business Expenses and Travel. During the term of his employment
under this Agreement, the Employee shall be authorized to incur necessary and
reasonable travel, entertainment and other business expenses in connection with
his duties hereunder. The Corporation shall reimburse the Employee for such
expenses upon presentation of an itemized account and appropriate supporting
documentation, all in accordance with the Corporation's generally applicable
policies.
5. Term of Employment.
(a) Basic Rule. The Corporation agrees to continue the
Employee's employment, and the Employee agrees to remain in employment with the
Corporation, from the effective date of this Agreement until the date when the
Employee's employment terminates pursuant to the provisions of this Agreement.
(b) Termination by the Corporation. The Corporation may
terminate Employee's employment at any time, for any reason whatsoever, by
giving the Employee thirty (30) days' advance notice in writing.
-2-
<PAGE> 3
(i) Termination Without Cause. If the Corporation
terminates Employee's employment without Cause, the provisions of Section 6(a)
shall apply.
(ii) Termination Upon Disability. If the Corporation
terminates the Employee's employment for Disability, the provisions of Section
6(a) shall apply. For all purposes under this Agreement, "Disability" shall mean
that the Employee, at the time notice is given, has been unable to perform his
duties under this Agreement for a period of not less than six consecutive months
as the result of his incapacity due to physical or mental illness. In the event
that the Employee resumes the performance of substantially all of his duties
hereunder before the termination of his employment under this subsection (ii)
becomes effective, the notice of termination shall automatically be deemed to
have been revoked.
(iii) Termination Within Twelve (12) Months of a Change in
Control. If the Corporation terminates Employee's employment within twelve (12)
months after a Change in Control, whether such termination is with or without
Cause, is due to Employee's death or Disability, or constitutes a Constructive
Termination (as defined in Section 5(c) below), the provisions of Sections 6(a)
and 6(b) shall apply. For all purposes under this Agreement, "Change in Control"
shall mean the occurrence of any of the following events:
(x) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Corporation representing fifty
percent (50%) or more of the total voting power represented by the Corporation's
then outstanding voting securities except pursuant to a negotiated agreement
with the Corporation and pursuant to which such securities are purchased from
the Corporation; or
(y) A change in the composition of the Board of
Directors of the Corporation, as a result of which fewer than a majority of the
incumbent directors are directors who either (A) had been directors of the
Corporation thirty-six (36) months prior to such change or (B) were elected, or
nominated for election, to the Board of Directors of the Corporation with the
affirmative votes of at least a majority of the directors who had been directors
of the Corporation thirty-six (36) months prior to such change and who were
still in office at the time of the election or nomination; or
-3-
<PAGE> 4
(z) The shareholders of the Corporation approve a
merger or consolidation of the Corporation with any other corporation, other
than a merger or consolidation which would result in the voting securities of
the Corporation outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Corporation or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the corporation approve a plan of complete liquidation of the Corporation or
an agreement for the sale or disposition by the Corporation of all or
substantially all the Corporation's assets.
Any other provision of this Section notwithstanding, the term "Change in
Control" shall not include either of the following events undertaken at the
election of the Corporation:
(1) Any transaction, the sole purpose of which is
to change the state of the Corporation's incorporation;
(2) A transaction, the result of which is to sell
all or substantially all of the assets of the Corporation to another corporation
(the "surviving corporation"); provided that the surviving corporation is owned
directly or indirectly by the shareholders of the Corporation immediately
following such transaction in substantially the same proportions as their
ownership of the Corporation's common stock immediately preceding such
transaction; and provided, further, that the surviving corporation expressly
assumes this Agreement.
(iv) Death. Upon the event of the Employee's death,
Employee's employment with the Corporation shall be considered automatically
terminated and the provisions of Section 6(a) shall apply.
(v) Termination for Cause. Except as set forth in Section
5(b)(iii), if the Corporation terminates Employee's employment for Cause, the
provisions of Section 6(c) shall apply. For all purposes under this Agreement,
"Cause" shall mean (i) a willful failure by the Employee to substantially
perform his duties hereunder (other than a failure resulting from the Employee's
complete or partial incapacity due to physical or mental illness or impairment)
after there has been delivered to Employee a written demand for performance from
the Company which describes the basis for the Company's belief that Employee has
not substantially performed his duties
-4-
<PAGE> 5
and sets forth specific performance goals to cure such defaults; provided that
upon any determination by the Company that Employee has willfully failed to
perform his duties, Employee shall have 120 days in which to cure such willful
failure to perform his duties, (ii) a willful act by the Employee which
constitutes gross misconduct and which is injurious to the Corporation, (iii) a
willful breach by the Employee of a material provision of this Agreement, or
(iv) a material and willful violation of a federal or state law or regulation
applicable to the business of the Corporation. No act, or failure to act, by the
Employee shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Corporation's
best interest.
(c) Voluntary Termination by the Employee. The Employee may
terminate his employment by giving the Corporation thirty (30) days' advance
notice in writing. If the Employee terminates his employment under the preceding
sentence other than as a result of a Constructive Termination, the provisions of
Section 6(d) shall apply. If the Employee terminates his employment pursuant to
this Section 5(c) as a result of a Constructive Termination, the provisions of
Section 6(a) shall apply. For all purposes under this Agreement, "Constructive
Termination" shall mean a material reduction in salary or benefits, a material
change in responsibilities, or a requirement to relocate, except for office
relocations that would not increase the Employee's one-way commute distance by
more than forty (40) miles.
(d) Waiver of Notice. Any waiver of notice shall be valid only
if it is made in writing and expressly refers to the applicable notice
requirement in this Section 5.
6. Payments Upon Termination of Employment.
(a) Payments Upon Termination Pursuant to Section 5(b)(i)-(iv)
and Constructive Termination. If, during the term of this Agreement, the
Employee's employment is terminated pursuant to any of the reasons set forth in
Section 5(b)(i)-(iv) or voluntarily by Employee under Section 5(c) as a result
of a Constructive Termination, the Employee shall be entitled to receive a
severance payment from the Corporation (the "Severance Payment") in an amount
equal to the following:
(i) an amount equal to three hundred percent (300%) of the
Employee's Base Compensation in effect on the date of employment termination;
plus
-5-
<PAGE> 6
(ii) the greater of (x) an amount equal to three hundred
percent (300%) of the aggregate bonus and car allowance, if any, payable to the
employee for the immediately preceding 12-month period, and (y) an amount equal
to three hundred percent (300%) of the aggregate bonus and car allowance, if
any, paid to the employee for the immediately preceding fiscal year.
The Severance Payment shall be made in a lump sum within thirty (30)
days following the date of the employment termination. The Severance Payment
shall be in lieu of any further payments to the Employee under Section 2 and any
further accrual of benefits under Section 3 with respect to periods subsequent
to the date of the employment termination. Notwithstanding the preceding
sentence, the Severance Payment shall not reduce or offset any benefits the
Employee may be entitled to under the specific terms of the benefit plans of the
Corporation, including but not limited to payments of premiums on a life
insurance policy for which the Employee or any designee of the Employee is the
beneficiary.
The Employee shall not be required to mitigate the amount of any payment
contemplated by this Section 6(a) (whether by seeking new employment or in any
other manner), nor shall any such payment be reduced by any earnings that the
Employee may receive from any other source.
(b) Option Acceleration Upon Termination on Change in Control.
If, during the term of this Agreement, the Employee's employment is terminated
pursuant to the reasons set forth in Section 5(b)(iii), then the unvested
portion of any stock option held by the Employee under the Company's stock
option plans shall automatically be accelerated as of the date of employment
termination and the Employee or the Employee's representative, as the case may
be, shall have the right to exercise all or any portion of such stock option, in
addition to any portion of the option exercisable prior to such termination. If
a termination of Employee's employment results in acceleration of vesting of any
option, the Employee shall have 90 days following the date of employment
termination to exercise such option, notwithstanding any contrary provision of
the option agreement.
(c) Termination For Cause. If the Employee's employment is
terminated for Cause pursuant to Section 5(b)(v), except as otherwise set forth
in Section 5(b)(iii), no compensation or payments will be paid or provided to
the Employee for the periods following the date when such a
-6-
<PAGE> 7
termination of employment is effective. Notwithstanding the preceding sentence,
nothing herein shall be interpreted to reduce or offset any benefits the
Employee may be entitled to under the terms of the benefit plans of the
Corporation.
(d) Payments Upon Voluntary Termination. In the event that,
during the term of this Agreement, the Employee's employment is terminated
pursuant to Section 5(c) other than as a result of a Constructive Termination,
no compensation or payments will be paid or provided to the Employee for the
periods following the date when such a termination of employment is effective.
Notwithstanding the preceding sentence, nothing herein shall be interpreted to
reduce or offset any benefits the Employee may be entitled to under the terms of
the benefit plans of the Corporation.
(e) Limitation on Payments.
(i) In the event that the severance and other benefits
provided for in this Agreement or otherwise payable to the Executive (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this
Section would be subject to the excise tax imposed by Section 4999 of the Code,
then the Executive's severance benefits under Section 6 shall be payable either
(i) in full, or (ii) as to such lesser amount which would result in no portion
of such severance benefits being subject to excise tax under Section 4999 of the
Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Executive on an after-tax basis, of the
greatest amount of severance benefits under this Agreement, notwithstanding that
all or some portion of such severance benefits may be taxable under Section 4999
of the Code.
(ii) If a reduction in the payments and benefits that would
otherwise be paid or provided to the Executive under the terms of this Agreement
is necessary to comply with the provisions of Section 6(e)(i), the Executive
shall be entitled to select which payments or benefits will be reduced and the
manner and method of any such reduction of such payments or benefits (including
but not limited to the number of options that would vest under Section 6(b)
subject to reasonable limitations (including, for example, express provisions
under the Company's benefit plans) (so long as the requirements of Section
6(e)(i) are met). Within thirty (30) days after the amount of any required
reduction in payments and benefits is finally determined in accordance with
-7-
<PAGE> 8
the provisions of Section 6(e)(iii), the Executive shall notify the Company in
writing regarding which payments or benefits are to be reduced. If no
notification is given by the Executive, the Company will determine which amounts
to reduce. If, as a result of any reduction required by Section 6(e)(i), amounts
previously paid to the Executive exceed the amount to which the Executive is
entitled, the Executive will promptly return the excess amount to the Company.
(iii) Unless the Company and the Executive otherwise agree
in writing, any determination required under this Section shall be made in
writing by the Company's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon the Executive and the
Company for all purposes. For purposes of making the calculations required by
this Section, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section.
7. Successors.
(a) Corporation's Successors. Any successor to the Corporation
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Corporation's business and/or assets shall assume this Agreement and agree
expressly to perform this Agreement in the same manner and to the same extent as
the Corporation would be required to perform it in the absence of a succession.
For all purposes under this Agreement, the term "Corporation" shall include any
successor to the Corporation's business and/or assets which executes and
delivers the assumption agreement described in this subsection (a) or which
becomes bound by this Agreement by operation of law.
(b) Employee's Successors. This Agreement and all rights of the
Employee hereunder shall continue to benefit, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
-8-
<PAGE> 9
8. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Corporation in writing. In the case of the Corporation,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
9. Termination of Agreement. This Agreement shall terminate upon the
earlier of (i) the date that all obligations of the parties hereunder have been
satisfied or (ii) August 1, 2004. A termination of this Agreement pursuant to
the preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation or
benefits on account of a termination of employment occurring prior to the
termination of this Agreement.
10. Miscellaneous Provisions.
(a) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Corporation (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(b) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to employment matters.
(c) Choice of Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
California.
(d) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
-9-
<PAGE> 10
(e) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Jose, California, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction. Punitive damages shall not be awarded.
(f) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) Employment At Will; Limitation of Remedies. The Corporation
and the Employee acknowledge that the Employee's employment is at will, as
defined under applicable law. If the Employee's employment terminates for any
reason, the Employee shall not be entitled to any payments, benefits, damages,
awards or compensation other than as provided by this Agreement.
(h) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable taxes.
(i) Assignment of Agreement by Corporation. The Corporation may
assign its rights under this Agreement to an affiliate, and an affiliate may
assign its rights under this Agreement to another affiliate of the Corporation
or to the Corporation. In the case of any such assignment, the term
"Corporation" when used in a section of this Agreement shall mean the
corporation that actually employs the Employee.
(j) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
-10-
<PAGE> 11
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Corporation by its duly authorized officer, as of the day and
year first above written.
SILICON VALLEY GROUP, INC.
By: /s/ WILLIAM A. HIGHTOWER
-----------------------------------
Title: President and COO
-------------------------------
/s/ LARRY W. SONSINI
Secretary
/s/ PAPKEN S. DER TOROSSIAN
--------------------------------------
PAPKEN S. DER TOROSSIAN
-11-
<PAGE> 1
EXHIBIT 10.43
EMPLOYMENT AGREEMENT
THIS AGREEMENT, effective as of the first day of August, 1997, by and
between William A. Hightower (the "Employee") and Silicon Valley Group, Inc., a
Delaware corporation (the "Corporation").
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Corporation, the
parties agree as follows:
1. Duties and Scope of Employment.
(a) Position. The Corporation agrees to employ the Employee for
the term of his employment under this Agreement in the position of President and
Chief Operating Officer, as such position was defined in terms of
responsibilities and compensation as of the effective date of this Agreement.
(b) Obligations. During the term of his employment under this
Agreement, the Employee shall devote his full business efforts and time to the
Corporation and its subsidiaries. The foregoing, however, shall not preclude the
Employee from engaging in appropriate civic, charitable or religious activities
or from devoting a reasonable amount of time to private investments or from
serving on the boards of directors of other entities, as long as such activities
and service do not interfere or conflict with his responsibilities to the
Corporation.
2. Base Compensation. During the term of his employment under this
Agreement, the Corporation agrees to pay the Employee as compensation for his
services a base salary at the annual rate of $375,000, or at such higher rate as
the Corporation's Board of Directors may determine from time to time, along with
such performance bonus amounts and car allowances, if any, as the Board shall
authorize, in its discretion, from time to time. Such salary shall be payable in
approximately equal bi-weekly installments. (The annual compensation specified
in this Section 2, together with any increases in such compensation that the
Board of Directors may grant from time to time, is referred to in this Agreement
as "Base Compensation.")
<PAGE> 2
3. Employee Benefits.
(a) General. During the term of his employment under this
Agreement, the Employee shall be eligible to participate in the employee benefit
plans and executive compensation programs maintained by the Corporation,
including (without limitation) pension plans, savings or profit-sharing plans,
deferred compensation plans, supplemental retirement or excess-benefit plans,
stock option, incentive or other bonus plans, life, disability, health, accident
and other insurance programs, paid vacations, and similar plans or programs,
subject in each case to the generally applicable terms and conditions of the
plan or program in question and to the determination of any committee
administering such plan or program.
(b) Stock Options. The Corporation has granted to the Employee
options to purchase 200,000 shares of the Common Stock of the Corporation at the
closing price on the date hereof. The terms of the options shall be governed by
the Corporation's Stock Option Agreement attached hereto as Exhibit A.
(c) The Employee shall be entitled to receive a target bonus in
the amount of $243,750 for the fiscal year ended September 31, 1998. Such bonus
may be adjusted by the Board of Directors from time to time.
4. Business Expenses and Travel. During the term of his employment
under this Agreement, the Employee shall be authorized to incur necessary and
reasonable travel, entertainment and other business expenses in connection with
his duties hereunder. The Corporation shall reimburse the Employee for such
expenses upon presentation of an itemized account and appropriate supporting
documentation, all in accordance with the Corporation's generally applicable
policies.
5. Term of Employment.
(a) Basic Rule. The Corporation agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the
Corporation, from the effective date of this Agreement until the date when the
Employee's employment terminates pursuant to the provisions of this Agreement.
-2-
<PAGE> 3
(b) Termination by the Corporation. The Corporation may
terminate Employee's employment at any time, for any reason whatsoever, by
giving the Employee thirty (30) days' advance notice in writing.
(i) Termination Without Cause. If the Corporation
terminates Employee's employment without Cause, the provisions of Section 6(a)
shall apply.
(ii) Termination Upon Disability. If the Corporation
terminates the Employee's employment for Disability, the provisions of Section
6(a) shall apply. For all purposes under this Agreement, "Disability" shall mean
that the Employee, at the time notice is given, has been unable to perform his
duties under this Agreement for a period of not less than six consecutive months
as the result of his incapacity due to physical or mental illness. In the event
that the Employee resumes the performance of substantially all of his duties
hereunder before the termination of his employment under this subsection (ii)
becomes effective, the notice of termination shall automatically be deemed to
have been revoked.
(iii) Termination Within Twelve (12) Months of a Change in
Control. If the Corporation terminates Employee's employment within twelve (12)
months after a Change in Control, whether such termination is with or without
Cause, is due to Employee's death or Disability, or constitutes a Constructive
Termination (as defined in Section 5(c) below), the provisions of Sections 6(a)
and 6(b) shall apply. For all purposes under this Agreement, "Change in Control"
shall mean the occurrence of any of the following events:
(x) Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Corporation representing fifty
percent (50%) or more of the total voting power represented by the Corporation's
then outstanding voting securities except pursuant to a negotiated agreement
with the Corporation and pursuant to which such securities are purchased from
the Corporation; or
(y) A change in the composition of the Board of
Directors of the Corporation, as a result of which fewer than a majority of the
incumbent directors are directors who either (A) had been directors of the
Corporation thirty-six (36) months prior to such change or (B) were elected, or
nominated for election, to the Board of Directors of the Corporation with the
-3-
<PAGE> 4
affirmative votes of at least a majority of the directors who had been directors
of the Corporation thirty-six (36) months prior to such change and who were
still in office at the time of the election or nomination; or
(z) The shareholders of the Corporation approve
a merger or consolidation of the Corporation with any other corporation, other
than a merger or consolidation which would result in the voting securities of
the Corporation outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Corporation or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the corporation approve a plan of complete liquidation of the Corporation or
an agreement for the sale or disposition by the Corporation of all or
substantially all the Corporation's assets.
Any other provision of this Section notwithstanding, the term "Change in
Control" shall not include either of the following events undertaken at the
election of the Corporation:
(1) Any transaction, the sole purpose of which is to change
the state of the Corporation's incorporation;
(2) A transaction, the result of which is to sell all or
substantially all of the assets of the Corporation to another corporation (the
"surviving corporation"); provided that the surviving corporation is owned
directly or indirectly by the shareholders of the Corporation immediately
following such transaction in substantially the same proportions as their
ownership of the Corporation's common stock immediately preceding such
transaction; and provided, further, that the surviving corporation expressly
assumes this Agreement.
(iv) Death. Upon the event of the Employee's death, Employee's
employment with the Corporation shall be considered automatically terminated and
the provisions of Section 6(a) shall apply.
(v) Termination for Cause. Except as set forth in Section
5(b)(iii), if the Corporation terminates Employee's employment for Cause, the
provisions of Section 6(c) shall apply. For all purposes under this Agreement,
"Cause" shall mean (i) a willful failure by the Employee to substantially
perform his duties hereunder (other than a failure resulting from the
-4-
<PAGE> 5
Employee's complete or partial incapacity due to physical or mental illness or
impairment) after there has been delivered to Employee a written demand for
performance from the Company which describes the basis for the Company's belief
that Employee has not substantially performed his duties and sets forth specific
performance goals to cure such defaults; provided that upon any determination by
the Company that Employee has willfully failed to perform his duties, Employee
shall have 120 days in which to cure such willful failure to perform his duties,
(ii) a willful act by the Employee which constitutes gross misconduct and which
is injurious to the Corporation, (iii) a willful breach by the Employee of a
material provision of this Agreement, or (iv) a material and willful violation
of a federal or state law or regulation applicable to the business of the
Corporation. No act, or failure to act, by the Employee shall be considered
"willful" unless committed without good faith and without a reasonable belief
that the act or omission was in the Corporation's best interest.
(c) Voluntary Termination by the Employee. The Employee may
terminate his employment by giving the Corporation thirty (30) days' advance
notice in writing. If the Employee terminates his employment under the preceding
sentence other than as a result of a Constructive Termination, the provisions of
Section 6(d) shall apply. If the Employee terminates his employment pursuant to
this Section 5(c) as a result of a Constructive Termination, the provisions of
Section 6(a) shall apply. For all purposes under this Agreement, "Constructive
Termination" shall mean a material reduction in salary or benefits, a material
change in responsibilities, or a requirement to relocate, except for office
relocations that would not increase the Employee's one-way commute distance by
more than forty (40) miles.
(d) Waiver of Notice. Any waiver of notice shall be valid only if
it is made in writing and expressly refers to the applicable notice requirement
in this Section 5.
6. Payments Upon Termination of Employment.
(a) Payments Upon Termination Pursuant to Section 5(b)(i)-(iv)
and Constructive Termination. If, during the term of this Agreement, the
Employee's employment is terminated
-5-
<PAGE> 6
pursuant to any of the reasons set forth in Section 5(b)(i)-(iv) or voluntarily
by Employee under Section 5(c) as a result of a Constructive Termination, the
Employee shall be entitled to receive a severance payment from the Corporation
(the "Severance Payment") in an amount equal to the following:
(i) an amount equal to three hundred percent (300%) of
the Employee's Base Compensation in effect on the date of employment
termination; plus
(ii) the greater of (x) an amount equal to three
hundred percent (300%) of the aggregate bonus and car allowance, if any, payable
to the employee for the immediately preceding 12-month period, and (y) an amount
equal to three hundred percent (300%) of the aggregate bonus and car allowance,
if any, paid to the employee for the immediately preceding fiscal year.
The Severance Payment shall be made in a lump sum within thirty (30)
days following the date of the employment termination. The Severance Payment
shall be in lieu of any further payments to the Employee under Section 2 and any
further accrual of benefits under Section 3 with respect to periods subsequent
to the date of the employment termination. Notwithstanding the preceding
sentence, the Severance Payment shall not reduce or offset any benefits the
Employee may be entitled to under the specific terms of the benefit plans of the
Corporation, including but not limited to payments of premiums on a life
insurance policy for which the Employee or any designee of the Employee is the
beneficiary.
The Employee shall not be required to mitigate the amount of any payment
contemplated by this Section 6(a) (whether by seeking new employment or in any
other manner), nor shall any such payment be reduced by any earnings that the
Employee may receive from any other source.
(b) Option Acceleration Upon Termination on Change in Control.
If, during the term of this Agreement, the Employee's employment is terminated
pursuant to the reasons set forth in Section 5(b)(iii), then the unvested
portion of any stock option held by the Employee under the Company's stock
option plans shall automatically be accelerated as of the date of employment
termination and the Employee or the Employee's representative, as the case may
be, shall have the right to exercise all or any portion of such stock option, in
addition to any portion of the option
-6-
<PAGE> 7
exercisable prior to such termination. If a termination of Employee's employment
results in acceleration of vesting of any option, the Employee shall have 90
days following the date of employment termination to exercise such option,
notwithstanding any contrary provision of the option agreement.
(c) Termination For Cause. If the Employee's employment is
terminated for Cause pursuant to Section 5(b)(v), except as otherwise set forth
in Section 5(b)(iii), no compensation or payments will be paid or provided to
the Employee for the periods following the date when such a termination of
employment is effective. Notwithstanding the preceding sentence, nothing herein
shall be interpreted to reduce or offset any benefits the Employee may be
entitled to under the terms of the benefit plans of the Corporation.
(d) Payments Upon Voluntary Termination. In the event that,
during the term of this Agreement, the Employee's employment is terminated
pursuant to Section 5(c) other than as a result of a Constructive Termination,
no compensation or payments will be paid or provided to the Employee for the
periods following the date when such a termination of employment is effective.
Notwithstanding the preceding sentence, nothing herein shall be interpreted to
reduce or offset any benefits the Employee may be entitled to under the terms of
the benefit plans of the Corporation.
(e) Limitation on Payments.
(i) In the event that the severance and other benefits
provided for in this Agreement or otherwise payable to the Executive (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this
Section would be subject to the excise tax imposed by Section 4999 of the Code,
then the Executive's severance benefits under Section 6 shall be payable either
(i) in full, or (ii) as to such lesser amount which would result in no portion
of such severance benefits being subject to excise tax under Section 4999 of the
Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Executive on an after-tax basis, of the
greatest amount of severance benefits under this Agreement, notwithstanding that
all or some portion of such severance benefits may be taxable under Section 4999
of the Code.
-7-
<PAGE> 8
(ii) If a reduction in the payments and benefits that would
otherwise be paid or provided to the Executive under the terms of this Agreement
is necessary to comply with the provisions of Section 6(e)(i), the Executive
shall be entitled to select which payments or benefits will be reduced and the
manner and method of any such reduction of such payments or benefits (including
but not limited to the number of options that would vest under Section 6(b)
subject to reasonable limitations (including, for example, express provisions
under the Company's benefit plans) (so long as the requirements of Section
6(e)(i) are met). Within thirty (30) days after the amount of any required
reduction in payments and benefits is finally determined in accordance with the
provisions of Section 6(e)(iii), the Executive shall notify the Company in
writing regarding which payments or benefits are to be reduced. If no
notification is given by the Executive, the Company will determine which amounts
to reduce. If, as a result of any reduction required by Section 6(e)(i), amounts
previously paid to the Executive exceed the amount to which the Executive is
entitled, the Executive will promptly return the excess amount to the Company.
(iii) Unless the Company and the Executive otherwise agree
in writing, any determination required under this Section shall be made in
writing by the Company's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon the Executive and the
Company for all purposes. For purposes of making the calculations required by
this Section, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section.
7. Successors.
(a) Corporation's Successors. Any successor to the Corporation
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Corporation's business and/or assets shall assume this Agreement and agree
expressly to perform this Agreement in the same manner and to the same extent as
the Corporation
-8-
<PAGE> 9
would be required to perform it in the absence of a succession. For all purposes
under this Agreement, the term "Corporation" shall include any successor to the
Corporation's business and/or assets which executes and delivers the assumption
agreement described in this subsection (a) or which becomes bound by this
Agreement by operation of law.
(b) Employee's Successors. This Agreement and all rights of the
Employee hereunder shall continue to benefit, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
8. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Corporation in writing. In the case of the Corporation,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
9. Termination of Agreement. This Agreement shall terminate upon the
earlier of (i) the date that all obligations of the parties hereunder have been
satisfied or (ii) August 1, 2004. A termination of this Agreement pursuant to
the preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation or
benefits on account of a termination of employment occurring prior to the
termination of this Agreement.
10. Miscellaneous Provisions.
(a) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Corporation (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
-9-
<PAGE> 10
(b) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to employment matters.
(c) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(d) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(e) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Jose, California, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction. Punitive damages shall not be awarded.
(f) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) Employment At Will; Limitation of Remedies. The Corporation
and the Employee acknowledge that the Employee's employment is at will, as
defined under applicable law. If the Employee's employment terminates for any
reason, the Employee shall not be entitled to any payments, benefits, damages,
awards or compensation other than as provided by this Agreement.
(h) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable taxes.
(i) Assignment of Agreement by Corporation. The Corporation may
assign its rights under this Agreement to an affiliate, and an affiliate may
assign its rights under this Agreement to another affiliate of the Corporation
or to the Corporation. In the case of any such assignment, the term
"Corporation" when used in a section of this Agreement shall mean the
corporation that actually employs the Employee.
-10-
<PAGE> 11
(j) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Corporation by its duly authorized officer, as of the day and
year first above written.
SILICON VALLEY GROUP, INC.
By: /s/ PAPKEN S. DER TOROSSIAN
-------------------------------------
Title: Chairman and CEO
----------------------------------
/s/ WILLIAM A. HIGHTOWER
---------------------------------------
WILLIAM A. HIGHTOWER
-11-
<PAGE> 1
EXHIBIT 10.44
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of August 1,
1997, by and between Russell G. Weinstock (the "Employee") and Silicon Valley
Group, Inc., a Delaware corporation (the "Company").
R E C I T A L S
A. The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its stockholders to assure
that the Company will have the continued dedication and commitment of the
Employee.
B. In order to accomplish the foregoing objectives, the Board of
Directors has directed the Company, upon execution of this Agreement by the
Employee, to agree to the terms provided herein.
C. Certain capitalized terms used in the Agreement are defined in
Section 6 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
(a) Position. The Company shall employ the Employee in the
position of Vice President of Finance and Chief Financial Officer, as such
position was defined in terms of responsibilities and compensation as of the
effective date of this Agreement; provided, however, that the Board shall have
the right, prior to the occurrence of a Change of Control (as defined in Section
6 below), to revise such responsibilities and compensation from time to time as
the Board may deem necessary or appropriate, subject to the Involuntary
Termination provisions under Section 6(b).
(b) Obligations. The Employee shall devote his full business
efforts and time to the Company and its subsidiaries. The foregoing, however,
shall not preclude the Employee from engaging in such activities and services as
do not interfere or conflict with his responsibilities to the Company.
2. Base Compensation. The Company shall pay the Employee as compensation
for his services a base salary at the annualized rate of $300,000, along with
such performance bonus amounts and car allowances, if any, as the Board shall
authorize, in its discretion, from time to time. Such salary shall be reviewed
at least annually and shall be increased from time to time subject to
accomplishment of such performance and contribution goals and objectives as may
be established from time to time by the Board. Such salary shall be paid
periodically in accordance with normal
<PAGE> 2
Company payroll. The annual compensation (including bonus amounts) specified in
this Section 2, together with any increases in such compensation that the Board
may grant from time to time, is referred to in this Agreement as "Base
Compensation."
3. Employee Benefits. The Employee shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained by the
Company applicable to other key executives of the Company, including (without
limitation) retirement plans, savings or profit-sharing plans, deferred
compensation plans, supplemental retirement or excess-benefit plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the plan or
program in question and to the determination of any committee administering such
plan or program.
4. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is at will, as defined under applicable law. If the
Employee's employment terminates for any reason, the Employee shall not be
entitled to any payments, benefits, damages, awards or compensation other than
as provided by this Agreement. The terms of this Agreement shall terminate upon
the earlier of (i) the date that all obligations of the parties hereunder have
been satisfied, (ii) twelve (12) months after a Change of Control or (iii) so
long as there has been no Change in Control, August 1, 2004. A termination of
the terms of this Agreement pursuant to the preceding sentence shall be
effective for all purposes, except that such termination shall not affect the
payment or provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
5. Severance Benefits. Subject to Section 7 below, if the Employee's
employment terminates at any time, then the Employee's right, if any, to receive
severance benefits shall be as set forth in this Section 5 in lieu of any other
severance or severance-type benefits to which Employee may otherwise be entitled
under the Company's existing plans, policies or programs.
(a) Voluntary Resignation; Termination For Cause. If the
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
under the Company's then existing severance and benefits plans and policies at
the time of such termination applicable to a voluntary termination or
termination for cause.
(b) Involuntary Termination. If the Employee's employment is
terminated as a result of Involuntary Termination other than for Cause, then the
Employee shall be entitled to receive severance pay in an aggregate amount equal
to two times the Employee's Base Compensation for the twelve-calendar month
period immediately preceding the Termination Date. Any severance payments to
which the Employee is entitled pursuant to this section shall be paid, at the
option of the Employee, either in twenty-four (24) equal monthly installments
following the Termination Date, or in a single, lump-sum payment within thirty
days following the Termination Date.
-2-
<PAGE> 3
(c) Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability, or the Employee's
employment is terminated due to the death of the Employee, then the Employee (or
the Employee's estate, if such termination results from Employee's death) shall
be entitled, at the Employee's option, to (i) continue receiving the Employee's
Base Compensation for 24 months following such termination, at the same
annualized rate as was in effect at the Termination Date, offset, in the case of
Disability, by any payments Employee receives from any governmental agency or
private disability insurance plan as a result of such Disability, or (ii)
receive the full amount set forth in Section 5(c)(i) in a single, lump-sum
payment.
(d) Options.
(i) If the Employee's employment is terminated following
a Change of Control as a result of an Involuntary Termination other than for
Cause, then the unvested portion of any stock option held by the Employee under
the Company's stock option plans shall automatically be accelerated as of the
Termination Date and the Employee or the Employee's representative, as the case
may be, shall have the right to exercise all or any portion of such stock
option, in addition to any portion of the option exercisable prior to such
termination. If a termination of Employee's employ ment results in acceleration
of vesting of any option, the Employee shall have 90 days following the
Termination Date to exercise such option, notwithstanding any contrary provision
of the option agreement.
(ii) If a Change of Control occurs within 90 days
following the termination of Employee's employment as a result of an Involuntary
Termination other than for Cause, then Employee or the Employee's
representative, as the case may be, shall have the right to exercise all options
which were not exercisable as of the Termination Date, at the same exercise
price as would have applied if Employee had still been employed at the time of
the Change in Control. Promptly following the occurrence of any such Change of
Control within such 90 days, the Company will provide to the employee written
notice of such Change of Control and a written statement as to the number of
shares exercisable by Employee as a result of this Section 5(d)(ii) and the
exercise price or prices thereof. The right to exercise such option shall
continue for 90 days following the Company's delivery of the written notice
contemplated by the preceding sentence. In the event that the securities
issuable upon exercise of such options have been converted into different
securities as a result of the Change of Control, or have been converted into a
right to receive consideration as a result of the Change of Control, Employee
shall, upon exercise of such option, be entitled to receive the same securities
or consideration as Employee would have received had the option been exercised
immediately prior to the Change of Control.
(e) Set-off. In the event that, upon any termination of
Employee's employment (whether voluntary or involuntary) prior to a Change of
Control, the Employee owes any amounts to the Company, (i) the amount of each
monthly severance payment to be paid to Employee shall be reduced by the amount
of all accrued interest on, and a portion of the outstanding principal amount
of, any such debt owing from Employee to the Company at the Termination Date if
the Employee
-3-
<PAGE> 4
has elected to receive severance payments over twenty-four months, or (ii) the
payment will be reduced by the outstanding principal amount and accrued interest
if the Employee has elected to receive a single, lump-sum payment. The portion
of the principal amount of such debt by which each monthly severance payment
will be reduced shall be 1/24 in the case of a termination covered under Section
5(b) or Section 5(c) or in full if the Employee has elected to receive a single,
lump-sum payment.
6. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the
occurrence of any of the following events:
(i) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities; or
(ii) A change in the composition of the Board occurring
within a two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date hereof, or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors to the Company); or
(iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or the consummation of the sale or disposition by the
Company of all or substantially all the Company's assets.
(b) Involuntary Termination. "Involuntary Termination" shall mean
(i) without the Employee's express written consent, the assignment to the
Employee of any duties or the reduc tion of the Employee's duties, either of
which results in a significant diminution in the Employee's position or
responsibilities with the Company in effect immediately prior to such
assignment, or the removal of the Employee from such position and
responsibilities, including but not limited to the removal of the title of Vice
President of Finance and Chief Financial Officer; (ii) a substantial
-4-
<PAGE> 5
reduction, without good business reasons and without the Employee's written
consent, of the facilities and perquisites (including office space and location)
available to the Employee immediately prior to such reduction; (iii) a reduction
by the Company in the Base Compensation of the Employee as in effect immediately
prior to such reduction, other than (A) a bonus reduction resulting from
application of a bonus formula or plan on a basis that is consistent with prior
practice or (B) a reduction which is comparable (on a percentage basis) to a
reduction applicable to all executive officers of the Company; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Employee is entitled immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly reduced other than, so
long as there is no Change of Control, a reduction which is comparable to a
reduction applicable to all executive officers of the Company; (v) the
relocation of the Employee to a facility or a location more than 25 miles from
the Employee's then present location, without the Employee's express written
consent; (vi) any purported termination of the Employee by the Company which is
not effected for Disability or for Cause, or any purported termination for which
the grounds relied upon are not valid; (vii) the failure of the Company to
obtain the assumption of this agreement by any successors contemplated in
Section 9 below; or (viii) any purported termination of the Employee's
employment by the Company which is not effected pursuant to a notice of
termination satisfying the requirements of Section 10(b) below, and for purposes
of this Agreement, no such purported termination shall be effective.
(c) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony, (iii) a willful act by the Employee which constitutes
gross misconduct and which is injurious to the Company, and (iv) con tinued
violations by the Employee of the Employee's obligations under Section 1 of this
Agreement which are demonstrably willful and deliberate on the Employee's part
after (a) there has been deliv ered to the Employee a written demand for
performance from the Company which describes the basis for the Company's belief
that the Employee has not substantially performed his duties and sets forth
specific performance goals to cure such defaults, and (b) the Employee has been
given 120 days during which the Employee has been unable to cure such failure to
perform hereunder.
(d) Disability. "Disability" shall mean that the Employee has
been unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and agreed to the Employee or
the Employee's legal representative (such agreement not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days' written notice by the Company of its intention to terminate the
Employee's employment. In the event that the Employee resumes the performance of
substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
-5-
<PAGE> 6
(e) Termination Date. "Termination Date" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee shall
not have returned to the performance of the Employee's duties on a full-time
basis during such thirty (30) day period), (ii) if the Employee's employment is
terminated by the Company for any other reason, the date on which a notice of
termination is given,
provided that if within thirty (30) days after the Company gives the Employee
notice of termination, the Employee notifies the Company that a dispute exists
concerning the termination, the Termination Date shall be the date on which the
dispute is finally determined, either by mutual written agreement of the
parties, by final judgment, order or decree of a court of competent jurisdiction
(the time for appeal therefrom having expired and no appeal having been
perfected), or (iii) if the Agreement is terminated by the Employee, the date on
which the Employee delivers the notice of termination to the Company.
(f) Dispute Resolution. If a dispute should arise between the
Employee and the Company as to whether Employee's duties or responsibilities
have been substantially reduced, thereby constituting an Involuntary Termination
pursuant to Section 6(b), the Company agrees to pay to the Employee and the
Employee agrees to accept from the Company severance benefits pursuant to
Section 5 for a period of twelve (12) months.
7. Limitation on Payments.
(a) In the event that the severance and other benefits provided
for in this Agreement or otherwise payable to the Executive (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Executive's severance benefits under Section 5 shall be payable either (i) in
full, or (ii) as to such lesser amount which would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Executive on an after-tax basis, of the greatest amount of
severance benefits under this Agreement, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code.
(b) If a reduction in the payments and benefits that would
otherwise be paid or provided to the Executive under the terms of this Agreement
is necessary to comply with the provisions of Section 7(a), the Executive shall
be entitled to select which payments or benefits will be reduced and the manner
and method of any such reduction of such payments or benefits (including but not
limited to the number of options that would vest under Section 5(d) subject to
reasonable limitations (including, for example, express provisions under the
Company's benefit plans) (so long as the requirements of Section 7(a) are met).
Within thirty (30) days after the amount of any required reduction in payments
and benefits is finally determined in accordance with the provisions of Section
7(c), the Executive shall notify the Company in writing regarding which payments
or benefits are to be reduced. If no notification is given by the Executive, the
Company
-6-
<PAGE> 7
will determine which amounts to reduce. If, as a result of any reduction
required by Section 7(a), amounts previously paid to the Executive exceed the
amount to which the Executive is entitled, the Executive will promptly return
the excess amount to the Company.
(c) Unless the Company and the Executive otherwise agree in
writing, any determination required under this Section shall be made in writing
by the Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Executive and the Company
for all purposes. For purposes of making the calculations required by this
Section, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section.
8. Covenants of the Employee.
(a) Covenants. As additional consideration for the Company's
agreements set forth herein, Employee agrees that Employee will not:
(i) directly or indirectly, in any manner or capacity,
as advisor, principal, agent, partner, officer, director, stockholder, employee,
member of any association or otherwise, engage in any business or activity
conducted by the Company as of the Termination Date or have an interest in any
firm, corporation, partnership or association engaged in any such business or
activity or similar business or activity; provided, however, that ownership by
Employee, as a passive investment, of less than 1% of the outstanding shares of
capital stock of any corporation with one or more classes of its capital stock
listed on a national securities exchange or publicly traded in the
over-the-counter market shall not constitute a breach of this paragraph;
(ii) so long as there has been no Change of Control,
engage in any conduct detrimental to the Company or the conduct of its business.
(b) Consequences of Breach. In the event Employee breaches his
obligations under Section 8(a), (i) the Company's obligation to make payments to
Employee pursuant to this Agreement shall immediately terminate upon the
occurrence of the actions which constitute such breach, (ii) all loans from the
Company to Employee shall become immediately due and payable and (iii) if the
Company has paid any amounts to Employee since the occurrence of the actions
which constitute such breach, Employee shall repay such amounts upon demand by
the Company.
-7-
<PAGE> 8
9. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Employee's Successors. The terms of this Agreement and all
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
10. Notice.
(a) General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for
Disability or Cause, or by the Employee as a result of a voluntary resignation
or an Involuntary Termination shall be communicated by a notice of termination
to the other party hereto given in accordance with this Section 10(b). Such
notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than thirty (30)
days after the giving of such notice). The failure by the Employee to include in
the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder or
preclude the Employee from asserting such fact or circumstance in enforcing his
rights hereunder.
11. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source,
except as specifically provided for herein.
-8-
<PAGE> 9
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth or explicitly referenced in this Agreement have been
made or entered into by either party with respect to employment matters.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Santa Clara County, California, in accor dance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. Punitive damages shall not
be awarded.
(g) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (g) shall be
void.
(h) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable taxes.
(i) Assignment by Company. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
-9-
<PAGE> 10
(j) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY SILICON VALLEY GROUP, INC.
By: /s/ PAPKEN S. DER TOROSSIAN
-------------------------------
Papken S. Der Torossian,
Chief Executive Officer
EMPLOYEE /s/ RUSSELL G. WEINSTOCK
---------------------------------
Russell G. Weinstock
-10-
<PAGE> 1
EXHIBIT 10.45
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of August 1,
1997, by and between Boris Lipkin (the "Employee") and Silicon Valley Group,
Inc., a Delaware corporation (the "Company").
R E C I T A L S
A. The Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its stockholders
to assure that the Company will have the continued dedication and commitment of
the Employee.
B. In order to accomplish the foregoing objectives, the Board of
Directors has directed the Company, upon execution of this Agreement by the
Employee, to agree to the terms provided herein.
C. Certain capitalized terms used in the Agreement are defined in
Section 6 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
(a) Position. The Company shall employ the Employee in the
position of Vice President, Corporate, as such position was defined in terms of
responsibilities and compensation as of the effective date of this Agreement;
provided, however, that the Board shall have the right, prior to the occurrence
of a Change of Control (as defined in Section 6 below), to revise such respon
sibilities and compensation from time to time as the Board may deem necessary or
appropriate subject to the Involuntary Termination provisions under Section
6(b).
(b) Obligations. The Employee shall devote his full business
efforts and time to the Company and its subsidiaries. The foregoing, however,
shall not preclude the Employee from engaging in such activities and services as
do not interfere or conflict with his responsibilities to the Company.
2. Base Compensation. The Company shall pay the Employee as
compensation for his services a base salary at the annualized rate of $275,000,
along with such performance bonus amounts and car allowances, if any, as the
Board shall authorize, in its discretion, from time to time. Such salary shall
be reviewed at least annually and shall be increased from time to time subject
to accomplishment of such performance and contribution goals and objectives as
may be established from time to time by the Board. Such salary shall be paid
periodically in accordance with normal
<PAGE> 2
Company payroll. The annual compensation (including bonus amounts) specified in
this Section 2, together with any increases in such compensation that the Board
may grant from time to time, is referred to in this Agreement as "Base
Compensation."
3. Employee Benefits. The Employee shall be eligible to participate
in the employee benefit plans and executive compensation programs maintained by
the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, deferred
compensation plans, supplemental retirement or excess-benefit plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the plan or
program in question and to the determination of any committee administering such
plan or program.
4. At-Will Employment. The Company and the Employee acknowledge that
the Employee's employment is at will, as defined under applicable law. If the
Employee's employment terminates for any reason, the Employee shall not be
entitled to any payments, benefits, damages, awards or compensation other than
as provided by this Agreement. The terms of this Agreement shall terminate upon
the earlier of (i) the date that all obligations of the parties hereunder have
been satisfied, (ii) twelve (12) months after a Change of Control or (iii) so
long as there has been no Change in Control, August 1, 2004. A termination of
the terms of this Agreement pursuant to the preceding sentence shall be
effective for all purposes, except that such termination shall not affect the
payment or provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
5. Severance Benefits. Subject to Section 7 below, if the Employee's
employment terminates at any time, then the Employee's right, if any, to receive
severance benefits shall be as set forth in this Section 5 in lieu of any other
severance or severance-type benefits to which Employee may otherwise be entitled
under the Company's existing plans, policies or programs.
(a) Voluntary Resignation; Termination For Cause. If the
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
under the Company's then existing severance and benefits plans and policies at
the time of such termination applicable to a voluntary termination or
termination for cause.
(b) Involuntary Termination. If the Employee's employment is
terminated as a result of Involuntary Termination other than for Cause, then the
Employee shall be entitled to receive severance pay in an aggregate amount equal
to two times the Employee's Base Compensation for the twelve-calendar month
period immediately preceding the Termination Date. Any severance payments to
which the Employee is entitled pursuant to this section shall be paid, at the
option of the Employee, either in twenty-four (24) equal monthly installments
following the Termination Date, or in a single, lump-sum payment within thirty
days following the Termination Date.
-2-
<PAGE> 3
(c) Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability, or the Employee's
employment is terminated due to the death of the Employee, then the Employee (or
the Employee's estate, if such termination results from Employee's death) shall
be entitled, at the Employee's option, to (i) continue receiving the Employee's
Base Compensation for 24 months following such termination, at the same
annualized rate as was in effect at the Termination Date, offset, in the case of
Disability, by any payments Employee receives from any governmental agency or
private disability insurance plan as a result of such Disability, or (ii)
receive the full amount set forth in Section 5(c)(i) in a single, lump-sum
payment.
(d) Options.
(i) If the Employee's employment is terminated following a
Change of Control as a result of an Involuntary Termination other than for
Cause, then the unvested portion of any stock option held by the Employee under
the Company's stock option plans shall automatically be accelerated as of the
Termination Date and the Employee or the Employee's representative, as the case
may be, shall have the right to exercise all or any portion of such stock
option, in addition to any portion of the option exercisable prior to such
termination. If a termination of Employee's employ ment results in acceleration
of vesting of any option, the Employee shall have 90 days following the
Termination Date to exercise such option, notwithstanding any contrary provision
of the option agreement.
(ii) If a Change of Control occurs within 90 days following
the termination of Employee's employment as a result of an Involuntary
Termination other than for Cause, then Employee or the Employee's
representative, as the case may be, shall have the right to exercise all options
which were not exercisable as of the Termination Date, at the same exercise
price as would have applied if Employee had still been employed at the time of
the Change in Control. Promptly following the occurrence of any such Change of
Control within such 90 days, the Company will provide to the employee written
notice of such Change of Control and a written statement as to the number of
shares exercisable by Employee as a result of this Section 5(d)(ii) and the
exercise price or prices thereof. The right to exercise such option shall
continue for 90 days following the Company's delivery of the written notice
contemplated by the preceding sentence. In the event that the securities
issuable upon exercise of such options have been converted into different
securities as a result of the Change of Control, or have been converted into a
right to receive consideration as a result of the Change of Control, Employee
shall, upon exercise of such option, be entitled to receive the same securities
or consideration as Employee would have received had the option been exercised
immediately prior to the Change of Control.
(e) Set-off. In the event that, upon any termination of
Employee's employment (whether voluntary or involuntary) prior to a Change of
Control, the Employee owes any amounts to the Company, (i) the amount of each
monthly severance payment to be paid to Employee shall be reduced by the amount
of all accrued interest on, and a portion of the outstanding principal amount
of, any such debt owing from Employee to the Company at the Termination Date if
the Employee
-3-
<PAGE> 4
has elected to receive severance payments over twenty-four months, or (ii) the
payment will be reduced by the outstanding principal amount and accrued interest
if the Employee has elected to receive a single, lump-sum payment. The portion
of the principal amount of such debt by which each monthly severance payment
will be reduced shall be 1/24 in the case of a termination covered under Section
5(b) or Section 5(c) or in full if the Employee has elected to receive a single,
lump-sum payment.
6. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the
occurrence of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A change in the composition of the Board occurring
within a two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date hereof, or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors to the Company); or
(iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or the consummation of the sale or disposition by the
Company of all or substantially all the Company's assets.
(b) Involuntary Termination. "Involuntary Termination" shall
mean (i) without the Employee's express written consent, the assignment to the
Employee of any duties or the reduc tion of the Employee's duties, either of
which results in a significant diminution in the Employee's position or
responsibilities with the Company in effect immediately prior to such
assignment, or the removal of the Employee from such position and
responsibilities; (ii) a substantial reduction, without good business reasons
and without the Employee's written consent, of the facilities and perquisites
-4-
<PAGE> 5
(including office space and location) available to the Employee immediately
prior to such reduction; (iii) a reduction by the Company in the Base
Compensation of the Employee as in effect immediately prior to such reduction,
other than (A) a bonus reduction resulting from application of a bonus formula
or plan on a basis that is consistent with prior practice or (B) a reduction
which is com parable (on a percentage basis) to a reduction applicable to all
executive officers of the Company; (iv) a material reduction by the Company in
the kind or level of employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is significantly reduced other than, so long as there is no
Change of Control, a reduction which is comparable to a reduction applicable to
all executive officers of the Company; (v) the relocation of the Employee to a
facility or a location more than 25 miles from the Employee's then present
location, without the Employee's express written consent; (vi) any purported
termination of the Employee by the Company which is not effected for Disability
or for Cause, or any purported termination for which the grounds relied upon are
not valid; (vii) the failure of the Company to obtain the assumption of this
agreement by any successors contemplated in Section 9 below; or (viii) any
purported termination of the Employee's employment by the Company which is not
effected pursuant to a notice of termination satisfying the requirements of
Section 10(b) below, and for purposes of this Agreement, no such purported
termination shall be effective.
(c) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony, (iii) a willful act by the Employee which constitutes
gross misconduct and which is injurious to the Company, and (iv) con tinued
violations by the Employee of the Employee's obligations under Section 1 of this
Agreement which are demonstrably willful and deliberate on the Employee's part
after (a) there has been deliv ered to the Employee a written demand for
performance from the Company which describes the basis for the Company's belief
that the Employee has not substantially performed his duties and sets forth
specific performance goals to cure such defaults, and (b) the Employee has been
given 120 days during which the Employee has been unable to cure such failure to
perform hereunder.
(d) Disability. "Disability" shall mean that the Employee has
been unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and agreed to the Employee or
the Employee's legal representative (such agreement not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days' written notice by the Company of its intention to terminate the
Employee's employment. In the event that the Employee resumes the performance of
substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
(e) Termination Date. "Termination Date" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the
-5-
<PAGE> 6
Employee (provided that the Employee shall not have returned to the performance
of the Employee's duties on a full-time basis during such thirty (30) day
period), (ii) if the Employee's employment is terminated by the Company for any
other reason, the date on which a notice of termination is given, provided that
if within thirty (30) days after the Company gives the Employee notice of
termination, the Employee notifies the Company that a dispute exists concerning
the termination, the Termination Date shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected), or (iii)
if the Agreement is terminated by the Employee, the date on which the Employee
delivers the notice of termination to the Company.
(f) Dispute Resolution. If a dispute should arise between the
Employee and the Company as to whether Employee's duties or responsibilities
have been substantially reduced, thereby constituting an Involuntary Termination
pursuant to Section 6(b), the Company agrees to pay to the Employee and the
Employee agrees to accept from the Company severance benefits pursuant to
Section 5 for a period of twelve (12) months.
7. Limitation on Payments.
(a) In the event that the severance and other benefits provided
for in this Agreement or otherwise payable to the Executive (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Executive's severance benefits under Section 5 shall be payable either (i) in
full, or (ii) as to such lesser amount which would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Executive on an after-tax basis, of the greatest amount of
severance benefits under this Agreement, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code.
(b) If a reduction in the payments and benefits that would
otherwise be paid or provided to the Executive under the terms of this Agreement
is necessary to comply with the provisions of Section 7(a), the Executive shall
be entitled to select which payments or benefits will be reduced and the manner
and method of any such reduction of such payments or benefits (including but not
limited to the number of options that would vest under Section 5(d) subject to
reasonable limitations (including, for example, express provisions under the
Company's benefit plans) (so long as the requirements of Section 7(a) are met).
Within thirty (30) days after the amount of any required reduction in payments
and benefits is finally determined in accordance with the provisions of Section
7(c), the Executive shall notify the Company in writing regarding which payments
or benefits are to be reduced. If no notification is given by the Executive, the
Company will determine which amounts to reduce. If, as a result of any reduction
required by Section 7(a), amounts previously paid to the Executive exceed the
amount to which the Executive is entitled, the
-6-
<PAGE> 7
Executive will promptly return the excess amount to the Company.
(c) Unless the Company and the Executive otherwise agree in
writing, any determination required under this Section shall be made in writing
by the Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Executive and the Company
for all purposes. For purposes of making the calculations required by this
Section, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section.
8. Covenants of the Employee.
(a) Covenants. As additional consideration for the Company's
agreements set forth herein, Employee agrees that Employee will not:
(i) directly or indirectly, in any manner or capacity, as
advisor, principal, agent, partner, officer, director, stockholder, employee,
member of any association or otherwise, engage in any business or activity
conducted by the Company as of the Termination Date or have an interest in any
firm, corporation, partnership or association engaged in any such business or
activity or similar business or activity; provided, however, that ownership by
Employee, as a passive investment, of less than 1% of the outstanding shares of
capital stock of any corporation with one or more classes of its capital stock
listed on a national securities exchange or publicly traded in the
over-the-counter market shall not constitute a breach of this paragraph;
(ii) so long as there has been no Change of Control,
engage in any conduct detrimental to the Company or the conduct of its business.
(b) Consequences of Breach. In the event Employee breaches his
obligations under Section 8(a), (i) the Company's obligation to make payments to
Employee pursuant to this Agreement shall immediately terminate upon the
occurrence of the actions which constitute such breach, (ii) all loans from the
Company to Employee shall become immediately due and payable and (iii) if the
Company has paid any amounts to Employee since the occurrence of the actions
which constitute such breach, Employee shall repay such amounts upon demand by
the Company.
9. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner
-7-
<PAGE> 8
and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
10. Notice.
(a) General. Notices and all other communications contemplated
by this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for
Disability or Cause, or by the Employee as a result of a voluntary resignation
or an Involuntary Termination shall be communicated by a notice of termination
to the other party hereto given in accordance with this Section 10(b). Such
notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than thirty (30)
days after the giving of such notice). The failure by the Employee to include in
the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder or
preclude the Employee from asserting such fact or circumstance in enforcing his
rights hereunder.
11. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source,
except as specifically provided for herein.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by
-8-
<PAGE> 9
the other party shall be considered a waiver of any other condition or provision
or of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth or explicitly referenced in this Agreement have been
made or entered into by either party with respect to employment matters.
(d) Choice of Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Santa Clara County, California, in accor dance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. Punitive damages shall not
be awarded.
(g) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (g) shall be
void.
(h) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable taxes.
(i) Assignment by Company. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(j) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
-9-
<PAGE> 10
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY SILICON VALLEY GROUP, INC.
By: /s/ PAPKEN S. DER TOROSSIAN
----------------------------
Papken S. Der Torossian,
Chief Executive Officer
EMPLOYEE /s/ BORIS LIPKIN
-----------------------------
Boris Lipkin
-10-
<PAGE> 1
SVG 13
EXHIBIT 13.1
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
============================================================================================
September 30, (in thousands, except share and per share amounts) 1996 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $218,841 $ 129,508
Temporary investments 43,220 76,972
Accounts receivable (net of allowance for doubtful accounts of
$6,003 and $6,605, respectively) 151,011 142,200
Inventories 213,229 227,359
Prepaid expenses and other assets 7,227 7,336
Deferred taxes 9,295 5,341
- --------------------------------------------------------------------------------------------
Total current assets 642,823 588,716
Property and equipment, net 81,577 143,553
Deposits and other assets 2,312 5,514
Intangible assets, net 2,665 3,110
- --------------------------------------------------------------------------------------------
Total $729,377 $ 740,893
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 35,556 $ 43,167
Accrued liabilities 137,526 125,762
Current portion of long-term debt and capital leases 437 659
Income taxes payable 5,649 514
- --------------------------------------------------------------------------------------------
Total current liabilities 179,168 170,102
Long-term debt and capital leases 217 5,792
Deferred and other liabilities 3,338 2,016
Commitments (See Notes 10, 14 and 15) -- --
Minority interest 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: 1996: 30,175,794; 1997: 31,181,342 378,033 397,820
Retained earnings 163,916 165,403
Cumulative translation adjustment -- (240)
- --------------------------------------------------------------------------------------------
Stockholders' equity 541,949 562,983
- --------------------------------------------------------------------------------------------
Total $729,377 $ 740,893
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 2
SVG 14
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
============================================================================================================
Years Ended September 30, (in thousands, except per share amounts) 1995 1996 1997
<S> <C> <C> <C>
Net sales $ 462,032 $ 639,928 $ 594,957
Cost of sales 278,553 371,636 365,217
- ------------------------------------------------------------------------------------------------------------
Gross profit 183,479 268,292 229,740
Operating expenses:
Research, development and related engineering 40,231 66,974 73,901
Marketing, general and administrative 90,859 115,827 130,788
Settlement of royalty obligation -- -- 32,582
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) 52,389 85,491 (7,531)
Interest and other income 9,465 13,330 10,633
Interest expense (620) (437) (710)
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 61,234 98,384 2,392
Provision for income taxes 22,045 34,437 813
Minority interest 194 726 92
- ------------------------------------------------------------------------------------------------------------
Net income $ 38,995 $ 63,221 $ 1,487
- ------------------------------------------------------------------------------------------------------------
Preferred Stock dividend $ 537 $ -- $ --
- ------------------------------------------------------------------------------------------------------------
Net income per share $ 1.57 $ 2.07 $ 0.05
- ------------------------------------------------------------------------------------------------------------
Shares used in per share computations 24,850 30,554 31,409
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 3
SVG 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
============================================================================================================================
Cumulative
Preferred Stock Common Stock Retained Translation
(dollars in thousands) Shares Amount Shares Amount Earnings Adjustment Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1994 10,000 $ 17,000 18,967,276 $105,978 $ 62,237 $ -- $185,215
Sale of 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 Preferred
Stock to Common Stock (24,943) (46,800) 2,494,300 46,800 --
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
Stock issued in settlement
of royalty obligation 489,296 9,994 9,994
Stock options exercised 299,543 3,508 3,508
Employee stock purchase plan 216,709 3,753 3,753
Tax benefit of stock option
transactions 2,532 2,532
Cumulative translation adjustment (240) (240)
Net income 1,487 1,487
- -----------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997 -- $ -- 31,181,342 $397,820 $165,403 $(240) $562,983
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
SVG 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
========================================================================================================
Years Ended September 30, (in thousands) 1995 1996 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 38,995 $ 63,221 $ 1,487
Reconciliation to net cash provided by (used for) operating
activities:
Depreciation and amortization 9,216 13,075 26,762
Settlement of royalty obligation -- -- 27,582
Amortization of intangibles 285 155 555
Deferred income taxes (831) (5,562) 948
Minority interest 194 726 92
Changes in assets and liabilities:
Accounts receivable (56,040) (28,162) (13,914)
Inventories (69,256) (59,256) (14,130)
Prepaid expenses (3,757) 162 (58)
Deposits and other assets (313) (215) (1,136)
Accounts payable 19,965 (4,663) 7,611
Accrued and deferred liabilities 45,748 38,199 (9,763)
Income taxes payable (3,266) 3,968 (2,603)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (19,060) 21,648 23,433
- --------------------------------------------------------------------------------------------------------
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) (109,872)
Maturities of temporary investments, held to maturity -- 102,380 --
Maturities of temporary investments, available for sale -- -- 76,120
Purchases of property and equipment (21,410) (67,033) (87,958)
Purchase of minority interest in subsidiary -- -- (3,000)
- --------------------------------------------------------------------------------------------------------
Net cash used for investing activities (35,143) (96,520) (124,710)
- --------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Sale of Common Stock 96,182 127,985 6,986
Sale of Preferred Stock 29,800 -- --
Collection of receivable from sale of Common Stock warrants 8,204 -- --
Proceeds from borrowing -- -- 6,500
Repayment of debt (799) (885) (703)
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 133,387 127,100 12,783
- --------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (223) (177) (839)
- --------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 78,961 52,051 (89,333)
Cash and equivalents:
Beginning of year 87,829 166,790 218,841
- --------------------------------------------------------------------------------------------------------
End of year $ 166,790 $ 218,841 $ 129,508
- --------------------------------------------------------------------------------------------------------
Non-Cash Investing and Financing Activities:
Preferred Stock dividend paid in Common Stock $ 592 $ -- $ --
- --------------------------------------------------------------------------------------------------------
Preferred Stock Converted to Common Stock $ 46,800 $ -- $ --
- --------------------------------------------------------------------------------------------------------
Common Stock issued in settlement of royalty obligation $ -- $ -- $ 9,994
- --------------------------------------------------------------------------------------------------------
Tax benefit of stock option transactions $ 3,925 $ 496 $ 2,532
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
SVG 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
THE COMPANY
AND SIGNIFICANT
ACCOUNTING
POLICIES
LINE OF BUSINESS. The Company designs, manufactures and markets semiconductor
wafer processing equipment used in the fabrication of integrated circuits.
CERTAIN RISKS AND UNCERTAINTIES. The semiconductor industry is highly cyclical
and has, historically, experienced periodic downturns that have had a severe
effect on the industry's demand for semiconductor wafer processing equipment.
Any future such downturns are likely to have an adverse effect on the Company's
results of operations.
The Company relies on a limited number of major customers for a substantial
percentage of its net sales. The loss of or any substantial reduction or
rescheduling of orders by any such customer could adversely affect the Company's
business and results of operations.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of investments and
trade receivables. The company places its cash equivalents and 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.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the
accounts of the Company and its wholly-owned subsidiaries, after elimination of
intercompany transactions and balances.
The functional currency for all of the Company's subsidiaries is the U.S.
dollar. Foreign exchange gains and losses are included in net income and were
not significant in any of the periods presented. A note receivable from one
subsidiary has been designated as long term and the cumulative translation
adjustments related to this note are presented as a separate component of
stockholders' equity.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of highly liquid
investments with a maturity date at acquisition of three months or less. Cash
and cash 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 available for sale and measured at fair value. Material unrealized
gains and losses, net of tax, are recorded as a separate
<PAGE> 6
SVG 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996 or 1997. Any
gains or losses on sales of investments are computed by specific identification.
No investments were sold in 1995, 1996 or 1997.
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 improvements 15
Buildings and improvements 40
Machinery and equipment 3 to 10
Furniture and fixtures 3 to 10
Leasehold improvements Lease term
- --------------------------------------------------------------------------------
</TABLE>
The Company adopted 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," effective October 1, 1996. The adoption of SFAS No. 121 did not
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 arrangements 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 15).
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,
<PAGE> 7
SVG 19
and convertible Preferred Stock. In March 1995, the Preferred Stock was
converted into Common Stock. There was no Preferred Stock outstanding in 1996 or
1997.
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share," which replaces current Earnings Per Share (EPS)
reporting and requires a dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
Although the Company is not permitted to adopt SFAS No. 128 until fiscal 1998,
if the Company had adopted this statement for the year ended September 30, 1997
the Company's earnings per share would have been as follows:
<TABLE>
<CAPTION>
==================================================================
Earnings Per Share 1995 1996 1997
<S> <C> <C> <C>
Basic $1.72 $2.13 $0.05
Diluted $1.57 $2.07 $0.05
</TABLE>
EMPLOYEE STOCK PLANS. The Company accounts for its stock option and employee
stock purchase plans in accordance with the provisions of the Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to apply the provisions of APB No. 25 for
purposes of determining net income and has adopted the pro forma disclosure
requirements of SFAS No. 123 effective October 1, 1996.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements; and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for a Company's business segments and related
disclosures about it's products, services, geographic areas and major customers.
Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years beginning
after December 15, 1997. The Company believes that the adoption of the new
standards will not have a material effect on the financial statements.
RECLASSIFICATIONS. Reclassifications have been made to the prior years'
Consolidated Financial Statements to conform to the fiscal 1997 presentation.
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 1995 and 1996 each included 52 weeks.
Fiscal year 1997 included 53 weeks.
<PAGE> 8
SVG 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2.
TEMPORARY
INVESTMENTS
<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands) 1996 1997
<S> <C> <C>
Temporary investments are comprised of the following:
Municipal bonds $10,272 $74,971
Municipal notes -- 2,001
Commercial paper 22,953 --
Certificates of deposit 9,995 --
- --------------------------------------------------------------------------------
Total $43,220 $76,972
- --------------------------------------------------------------------------------
</TABLE>
Of the Company's temporary investments at September 30, 1997, $52,156,000 mature
within one year and $24,816,000 mature within two years.
NOTE 3.
INVENTORIES
<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands) 1996 1997
<S> <C> <C>
Inventories consist of:
Raw materials $103,993 $ 92,939
Work-in-process 101,293 128,038
Finished goods 7,943 6,382
- --------------------------------------------------------------------------------
Total $213,229 $227,359
- --------------------------------------------------------------------------------
</TABLE>
NOTE 4.
PROPERTY
AND EQUIPMENT
<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands) 1996 1997
<S> <C> <C>
Property and equipment consist of:
Land and improvements $ 6,348 $ 10,349
Buildings and improvements 16,561 38,792
Machinery and equipment 83,859 134,023
Furniture and fixtures 21,885 28,237
Leasehold improvements 21,477 23,601
- --------------------------------------------------------------------------------
Total 150,130 235,002
Accumulated depreciation and amortization (68,553) (91,449)
- --------------------------------------------------------------------------------
Property and equipment, net $ 81,577 $ 143,553
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 9
SVG 21
NOTE 5.
INTANGIBLE
ASSETS
<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands) 1996 1997
<S> <C> <C>
Intangible assets consist of:
Goodwill $ 4,186 $ 4,186
Purchased technology 3,700 1,000
- --------------------------------------------------------------------------------
7,886 5,186
Accumulated amortization (5,221) (2,076)
- --------------------------------------------------------------------------------
Total $ 2,665 $ 3,110
- --------------------------------------------------------------------------------
</TABLE>
NOTE 6.
SVG LITHOGRAPHY
SYSTEMS, INC.
Through March 17, 1997, the Company owned 94% of SVG Lithography Systems, Inc.
(SVGL) and International Business Machines, Inc. (IBM) owned the remaining 6%.
The minority interest reflected on the Consolidated Balance Sheets represented
IBM's interest in the net assets of SVGL. On March 18, 1997, the Company
purchased IBM's 6% interest in SVGL for $3,000,000. As a result, the Company now
accounts for SVGL as a wholly-owned subsidiary.
NOTE 7.
SETTLEMENT
OF ROYALTY
OBLIGATION
Under the terms of a research and development agreement, SVGL owed IBM certain
royalties based on future operating results. On March 18, 1997, the Company
satisfied this royalty obligation to IBM in exchange for $5,000,000 in cash,
489,296 shares of Common Stock valued at approximately $10,000,000 and
$23,000,000 in SVGL product. Of the $38,000,000 total, $32,582,000 related to
products currently under development and was recognized as an expense in the
second quarter of fiscal 1997, and $5,418,000 related to existing products and
was recorded as a prepayment which will be amortized to expense through fiscal
year 2000 in proportion to the related product sales. During fiscal 1995 and
1996 the Company made royalty payments pertaining to this agreement of $354,000
and $2,370,000, respectively.
NOTE 8.
DEBT
ARRANGEMENTS
The Company has an unsecured $75,000,000 bank revolving line of credit agreement
which expires in December 1999. 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, 1997, the Company had capital lease obligations of $201,000
which are due in 1998. 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 $1,485,000 and $1,466,000, respectively, at
September 30, 1997 ($3,347,000 and $3,231,000, respectively, at September 30,
1996).
<PAGE> 10
SVG 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1997, the Company received a $6,500,000 loan from the Connecticut
Development Authority. The loan has a ten year term, bears interest at 8.25%, is
secured by the Company's Wilton, Connecticut facility which houses certain
operations of SVGL and had a remaining principal balance of $6,250,000 at
September 30, 1997.
Interest payments were $439,000 in 1995, $410,000 in 1996, and $341,000 in 1997.
NOTE 9.
ACCRUED LIABILITIES
<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands) 1996 1997
<S> <C> <C>
Accrued liabilities consist of:
Compensation $ 23,179 $ 30,347
Product warranty 42,899 43,534
Customer deposits and advances 58,020 42,559
Other 13,428 9,322
- --------------------------------------------------------------------------------
Total $137,526 $125,762
- --------------------------------------------------------------------------------
</TABLE>
NOTE 10.
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 $3,557,000 in 1995, $7,235,000 in 1996, and $1,172,000 in 1997.
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 $2,059,000 in 1995, $2,999,000 in 1996, and $3,135,000 in 1997.
In February 1997, the Company adopted a non-qualified deferred compensation plan
that allows a select group of management, highly compensated Employees and
Directors to defer a portion of their salary, bonus, fees and other benefits.
The plan is unfunded, and amounts due participants represent general obligations
of the Company. The Company may credit additional amounts to participants
account balances, depending on the amount of the employee's contribution, up to
a maximum of 5% of an employees annual salary and bonus. In addition, interest
is credited to the participants account balances at 120% of the average Moody's
corporate bond rate (9.54% in 1997). Company contributions and related interest
become 100% vested five years after the plan year in which the contribution was
made. During fiscal 1997 the Company had an expense of $609,000 and at September
30, 1997, a liability of $1,561,000 under the deferred compensation plan.
<PAGE> 11
SVB 23
At September 30, 1997, four officers of the Company had employment agreements
that provide, in the event of disability, death, or termination meeting certain
criteria, for severance payments based on a multiple of their then-current
compensation. At September 30, 1997, the aggregate potential payments under
these agreements would have been approximately $6,400,000.
NOTE 11.
INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
================================================================================
Years Ended September 30, (in thousands) 1995 1996 1997
<S> <C> <C> <C>
Current:
Federal $ 17,857 $ 32,239 $(1,850)
State 3,723 6,039 1,364
Foreign 1,296 1,721 351
- --------------------------------------------------------------------------------
Total current 22,876 39,999 (135)
- --------------------------------------------------------------------------------
Deferred:
Federal (758) (4,928) (293)
State (73) (634) 1,241
- --------------------------------------------------------------------------------
Total Deferred (831) (5,562) 948
- --------------------------------------------------------------------------------
$ 22,045 $ 34,437 $ 813
- --------------------------------------------------------------------------------
</TABLE>
Domestic and foreign income before income taxes and minority interest is as
follows:
<TABLE>
<CAPTION>
================================================================================
Years Ended September 30, (in thousands) 1995 1996 1997
<S> <C> <C> <C>
Domestic $53,731 $93,761 $2,092
Foreign 7,503 4,623 300
- --------------------------------------------------------------------------------
$61,234 $98,384 $2,392
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
SVG 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective tax rate differs from the Federal statutory rate as follows:
<TABLE>
<CAPTION>
================================================================================
Years Ended September 30, (in thousands) 1995 1996 1997
<S> <C> <C> <C>
Statutory rate $ 21,432 $ 34,437 $ 837
State taxes, net of Federal effect 1,837 3,246 131
Foreign taxes at differing rates (1,408) 197 268
FSC commission (919) (2,164) (464)
Change in valuation allowance -- (2,656) --
Tax exempt interest -- -- (2,284)
Settlement of royalty obligation -- -- 1,500
Other 1,103 1,377 825
- --------------------------------------------------------------------------------
Total $ 22,045 $ 34,437 $ 813
- --------------------------------------------------------------------------------
</TABLE>
The items giving rise to deferred taxes were as follows:
<TABLE>
<CAPTION>
==================================================================================
September 30, (in thousands) 1996 1997
<S> <C> <C>
Deferred tax assets:
Reserves not recognized for tax purposes $ 15,462 $ 11,508
Net operating loss carryforwards of acquired companies 3,130 3,130
Accelerated depreciation -- 273
- --------------------------------------------------------------------------------
Total deferred tax assets 18,592 14,911
Deferred tax liabilities, accelerated depreciation (2,733) --
Valuation allowance (9,297) (9,297)
- --------------------------------------------------------------------------------
Total $ 6,562 $ 5,614
- --------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, 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 1995, 1996 and 1997, the Company made income tax payments of $22,423,000,
$36,059,000, and $2,882,000, respectively.
<PAGE> 13
SVG 25
NOTE 12.
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 27,692 shares of Common Stock in
fiscal 1995. In March 1995, the Series A Preferred was converted into 1,000,000
shares of the Company's Common Stock.
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 15.) 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 15). 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 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. 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 acquirer
for one share of the Company's Common Stock.
<PAGE> 14
SVG 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13.
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.
Activity under the plans is as follows (shares in thousands):
<TABLE>
<CAPTION>
================================================================================
Shares
Under Weighted Average
Option Exercise Price
<S> <C> <C>
Balances, September 30, 1994 1,441 $ 8.57
Granted 737 26.47
Exercised (520) 8.59
Canceled (126) 12.74
- --------------------------------------------------------------------------------
Balances, September 30, 1995 1,532 16.81
Granted (weighted average fair value $7.78) 1,520 19.21
Exercised (104) 8.00
Canceled (1,043) 26.88
- --------------------------------------------------------------------------------
Balances, September 30, 1996 1,905 13.70
Granted (weighted average fair value $12.62) 778 25.81
Exercised (300) 11.69
Canceled (116) 17.95
- --------------------------------------------------------------------------------
Balances, September 30, 1997 2,267 $ 17.90
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning options outstanding and
exercisable as of September 30, 1997:
<TABLE>
<CAPTION>
=======================================================================================
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (in yrs.) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 4.63 - $12.63 542,067 2.50 $ 9.15 387,652 $ 8.95
$16.13 852,393 5.79 $16.13 154,611 $16.13
$16.63 - $23.31 569,017 7.83 $22.06 31,619 $19.45
$23.38 - $32.25 303,900 8.72 $30.71 5,361 $23.38
- ---------------------------------------------------------------------------------------
Total 2,267,377 5.91 $17.90 579,243 $11.57
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
SVG 27
At September 30, 1997, options to purchase 990,956 shares of Common Stock were
available for future grant. There were 335,000 and 428,000 options exercisable
as of September 30, 1995 and 1996, respectively, with a weighted average
exercise price of $8.72 and $9.37, respectively, per share.
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, 2,200,000 shares of Common
Stock were reserved for issuance of which 1,230,049 had been issued at September
30, 1997. 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 concluded
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.
PRO FORMA NET INCOME AND EARNINGS PER SHARE. The Company has elected to follow
APB No. 25, "Accounting for Stock Issued to Employees," in accounting for its
employee stock options. Under APB No. 25, because the exercise price of the
Company's employee options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized in the Company's
financial statements.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123. This information is required to be determined as if the Company
has accounted for its employee stock options (including shares under the
Employee Stock Purchase Plan) granted subsequent to September 30, 1995 under the
fair value method of that statement.
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1996 and 1997, respectively: risk free rates of 6.3% and
6.4%; a stock price volatility factor of 56%; an expected option life of two
years following vesting for Officer and Directors and nine months for all
others; and no dividends during the expected term. The Company's calculations
are based on a multiple option valuation approach and recognition of forfeitures
as they occur. The fair value of the employee purchase rights under the Employee
Stock Purchase Plan was estimated using the same model, but with the following
weighted average assumptions for fiscal 1996 and 1997, respectively: risk-free
rates of 5.5% and 5.8%, stock price volatility factor of 56%: and expected
option life of one year. The weighted average fair value of purchase rights
granted in fiscal 1996 and 1997 was approximately $9.26 and $7.75 respectively.
<PAGE> 16
SVG 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures required by SFAS No. 123, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows (in thousands except for per
share information):
<TABLE>
<CAPTION>
======================================================================================
1996 1997
<S> <C> <C>
Pro forma net income (loss) $60,593 $(5,901)
Pro forma net income (loss) per share $ 1.98 $ (0.19)
- --------------------------------------------------------------------------------------
</TABLE>
Due to compensation expense being recognized over the vesting period of the
option, the initial impact on pro forma income may not be representative of pro
forma compensation expense in future years.
NOTE 14.
COMMITMENTS
<TABLE>
<CAPTION>
================================================================================
September 30, (in thousands)
Future minimum lease payments for operating leases (primarily facilities) are as
follows:
<S> <C>
1998 $ 5,564
1999 4,497
2000 2,799
2001 2,327
2002 2,298
Thereafter through 2010 5,086
- --------------------------------------------------------------------------------
Total $22,571
- --------------------------------------------------------------------------------
</TABLE>
Rent expense was $7,907,000, $8,801,000, and $6,696,000 in 1995, 1996, and 1997,
respectively.
NOTE 15.
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 $13,877,000 in 1995, $30,288,000 in 1996, and
$40,227,000 in 1997 relating to such product development and recognized
$12,767,000, $4,994,000, and $7,968,000, respectively, in related funding.
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
<PAGE> 17
SVG 29
purchase shares of the Company's Common Stock (see Note 12) 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, $17,500,000 for the future development of Micrascan technology and
$4,500,000 to be utilized to increase capacity to build the Micrascan product.
Through September 30, 1997, the Company had recognized all of the 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 approximately $30,000,000 of the Company's newly
issued Series B Preferred (see Note 12) 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. The participants may withdraw from the development
program without penalty but payments made against complete development
milestones are not refundable and all preferential rights to future equipment
are forfeited. As of September 30, 1997, the Company had received $16,000,000 in
funding from six Participants, of which $8,085,000 had been recognized and
offset against research and development expenditures. In March 1997, one
participant withdrew from the program. 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.
<PAGE> 18
SVG 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16.
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 38% of sales in 1997, 31% of sales in 1996, and 17%
of sales in 1995, a second customer accounted for 22% of sales in 1997, was not
significant in 1996, and 12% of sales in 1995, and a third customer was not
significant in 1997, however accounted for 10% of sales in 1996, and 18% of
sales in 1995.
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.
<TABLE>
<CAPTION>
=====================================================================================
Years Ended September 30, (in thousands) 1995 1996 1997
<S> <C> <C> <C>
Net Sales:
North America:
Unaffiliated customers:
North America $ 312,613 $ 417,021 $ 426,762
Europe 68,536 129,947 84,648
Far East 24,259 49,175 52,342
Other 1,932 132 126
Inter-region transfers 35,407 29,004 25,191
Europe 41,519 27,629 21,044
Far East 13,173 16,024 10,035
Eliminations (35,407) (29,004) (25,191)
- -------------------------------------------------------------------------------------
Consolidated net sales $ 462,032 $ 639,928 $ 594,957
- -------------------------------------------------------------------------------------
Operating Income (Loss):
North America $ 45,938 $ 81,371 $ (4,522)
Europe 7,027 3,964 (1,718)
Far East 822 1,241 591
Eliminations (1,398) (1,085) (1,882)
- -------------------------------------------------------------------------------------
Consolidated operating income (loss) $ 52,389 $ 85,491 $ (7,531)
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE> 19
SVG 31
<TABLE>
<CAPTION>
=======================================================================
September 30, (in thousands) 1995 1996 1997
<S> <C> <C> <C>
Identifiable Assets:
North America $ 469,436 $ 692,143 $ 716,034
Europe 31,864 37,934 28,361
Far East 10,041 8,351 6,827
Eliminations (10,616) (9,051) (10,329)
- -----------------------------------------------------------------------
Consolidated assets $ 500,725 $ 729,377 $ 740,893
- -----------------------------------------------------------------------
</TABLE>
NOTE 17.
UNAUDITED
SUBSEQUENT EVENT
On November 26, 1997, the Company acquired Tinsley Laboratories Inc. (TLI), in a
stock for stock transaction whereby approximately 1,091,000 shares of the
Company's Common Stock were exchanged for all outstanding shares of TLI Common
Stock. TLI designs, manufactures and sells precision optical components,
assemblies and systems to customers in a variety of industries and research
endeavors. The transaction is expected to be accounted for as a pooling of
interests for financial reporting purposes and is intended to qualify as a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended. TLI's revenue for the 12-month period ended September 30, 1997 was
$20,342,000.
NOTE 18.
SUMMARIZED
QUARTERLY FINANCIAL
INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
============================================================================================
First Second Third Fourth
(in thousands, except per share amounts) Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1997
Net sales $123,684 $ 140,701 $161,138 $169,434
Gross profit 47,485 52,802 60,888 68,565
Income (loss) before income taxes
and minority interest 5,340 (24,957) 9,441 12,568
Net income (loss) 3,331 (16,370) 6,231 8,295
Net income (loss) per share 0.11 (0.54) 0.20 0.26
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
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
SVG 32
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 (the Company) as of September 30, 1996 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
1997. 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, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1997 in conformity with generally accepted accounting principles.
DELOITTE &
TOUCHE LLP
[DELOITTE &
TOUCHE LLP LOGO]
San Jose, California
October 27, 1997
<PAGE> 21
SVG 33
FINANCIAL INFORMATION
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
====================================================================================================
Years Ended September 30,
(in thousands, except per share amounts) 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $240,633 $319,922 $462,032 $639,928 $594,957
Income before income taxes
and minority interest 6,920 26,820 61,234 98,384 2,392
Net income 4,485 16,764 38,995 63,221 1,487
Preferred stock dividend 1,190 1,190 537 -- --
Net income per share 0.22 0.84 1.57 2.07 0.05
Shares used in per share computations 15,277 18,538 24,850 30,554 31,409
Balance Sheet Data:
Working capital $107,975 $171,191 $325,481 $463,655 $418,614
Total assets 212,284 271,674 500,725 729,377 740,893
Long-term debt and capital leases 2,338 1,510 654 217 5,792
Stockholders' equity 126,997 185,215 350,247 541,949 562,983
Other Data:
Backlog 145,824 209,119 391,439 394,589 420,579
Number of Employees 1,714 1,907 2,653 3,072 3,389
- -----------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK PRICES
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market under the symbol SVGI. The following table sets forth the
range of high and low sales prices of the stock during fiscal 1996 and fiscal
1997 as reported by Nasdaq-NMS.
<TABLE>
<CAPTION>
================================================================================
Fiscal 1996 High Low
<S> <C> <C>
First Quarter $38-1/2 $23
Second Quarter 30-5/8 18-1/4
Third Quarter 27 17-7/32
Fourth Quarter 19-3/8 15-3/8
- --------------------------------------------------------------------------------
<CAPTION>
Fiscal 1997 High Low
<S> <C> <C>
First Quarter $19-3/8 $15-3/8
Second Quarter 27-1/8 18-5/8
Third Quarter 26-3/8 18-1/2
Fourth Quarter 37-3/4 28-1/2
- --------------------------------------------------------------------------------
</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 28, 1997, there were 620 holders of record of the Common Stock.
<PAGE> 22
SVG 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
certain risks and uncertainties, including those discussed below, that could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward looking statements, which
speak only as of the date hereof. Forward looking statements are indicated by an
asterisk (*) following the sentence in which such statement is made. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS
OF OPERATIONS
The Company 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 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 which 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. During the four fiscal
quarters ended March 1997, the Company's quarterly customer order bookings
("bookings") were substantially below first half fiscal 1996 levels and the
Company experienced customer deferrals of scheduled equipment delivery dates
and, to a lesser extent, customer order cancellations. Notwithstanding a
significant increase in bookings during the third and fourth quarters of fiscal
1997, the Company's fiscal 1997 shipments were below fiscal 1996 levels as a
result of the lower bookings in the preceding fiscal quarters. There can be no
assurance that the Company will not again experience customer delivery
deferrals, order cancellations or a prolonged period of customer orders at
reduced levels, any or a combination of which would have an adverse effect on
its operating results.*
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 capital expenditures of semiconductor manufacturers, which in
turn will be dependent on anticipated demand for integrated circuits and
products utilizing integrated circuits.* Any prolonged weakness in demand
experienced by the semiconductor industry is likely to have an adverse effect on
the Company's business and results of operations.*
A portion of the Company's backlog consists of orders from customers in the
Pacific Rim. In light of the recent economic downturn in certain Asian
countries, there can be no assurance that the Company will be
<PAGE> 23
SVG 35
able to obtain additional orders or that it will not experience cancellations or
deferrals of existing orders from customers in such countries, any of which
would have an adverse effect on the Company's business and results of
operations.
Historically, the Company has relied on a limited number of customers for a
substantial percentage of its net sales. During fiscal 1997, the Company's two
largest customers accounted for 60% of net sales, the largest representing 38%
of the total. The loss of any significant customer, including but not limited to
the two largest customers, delays in shipments due to rescheduling or reductions
in orders by a significant customer, 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.* The Company
believes that, for the foreseeable future, due in part to its customer base
consisting primarily of manufacturers of logic devices, it will continue to rely
on a limited number of major customers for a substantial percentage of its net
sales.*
FISCAL 1997
COMPARED TO
FISCAL 1996
For fiscal 1997, net sales were $594,957,000, a decrease of 7% from net sales of
$639,928,000 during fiscal 1996. The lower net sales were the result of lower
shipments of Thermco and Track products during fiscal 1997, offset in part by
increased shipments of Micrascan photolithography systems by SVGL, particularly
revenues from shipments of Micrascan III systems which have a higher average
selling price and began shipping in the first quarter of fiscal 1997.
The Company's fiscal 1997 bookings were $620,947,000 (which represented a book
to bill ratio of 1.04 to 1), down from fiscal 1996 bookings of $643,078,000
(which represented a book to bill ratio of 1.00 to 1). At September 30, 1997,
the Company had a backlog of $420,579,000, a 7% increase over the September 30,
1996 backlog of $394,589,000. The Company includes in backlog only those orders
to which a purchase order number has been assigned by the customer, with
substantially all of the terms and conditions agreed upon and for which delivery
has been specified within twelve months. At September 30, 1997, the backlog
included orders for 48 Micrascan photolithography systems. In addition to the
systems included in backlog, SVGL had orders for 27 Micrascan photolithography
systems with scheduled delivery dates outside the twelve month backlog window,
including orders for six advanced technology 193 nanometer systems currently
under development. (See "SVG Lithography Systems, Inc. (SVGL)".)
For fiscal 1997, the Company's gross margin was 39%, significantly below the
fiscal 1996 gross margin of 42%. The decrease was primarily due to costs
associated with Track's most recent generation product, the 200-APS and reduced
shipments and manufacturing volumes in Thermco and Track. Shipments of 200-APS
systems were to commence during the second quarter of fiscal 1997, but have been
delayed by approximately twelve months.* The lower Thermco and Track margins
were offset in part by increased fiscal 1997 SVGL gross margins, primarily due
to the mix of Micrascan photolithography systems shipped and increased
manufacturing volumes and efficiencies related to Micrascan systems.
<PAGE> 24
SVG 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Research, development and related engineering expenses are net of funding
received from outside parties under various development agreements. Such funding
is typically payable upon the attainment of one or more development milestones
which 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. During prior years, the majority of development funding has been
received by SVGL from SEMATECH. In fiscal 1997, the funding was primarily
related to agreements between the Company and certain customers for the
development of a 193 nanometer Micrascan system. (See "SVG Lithography Systems,
Inc. (SVGL)".)
Research, development and related engineering expenses (R&D) were $73,901,000
(12% of net sales) during fiscal 1997, compared to $66,974,000 (11% of net
sales) during fiscal 1996. Such R&D amounts are net of funding recognized under
joint development agreements of $7,968,000 and $4,994,000 during fiscal 1997 and
fiscal 1996, respectively. The increase in fiscal 1997 R&D was primarily due to
multiple lithography development programs, efforts in all of the product groups
to design equipment capable of processing the next generation 300mm wafers and
Track's 200-APS program.
During the second half of calendar 1996, the Company sold approximately
$20,000,000 in product to Submicron Technology PLC ("SMT"), a newly established
semiconductor foundry in Thailand. SMT paid the Company approximately
$14,000,000 before encountering severe financial difficulties. During the third
quarter of fiscal 1997, the Company determined that the remaining receivable
from SMT was uncollectible and recorded a bad debt loss of $6,000,000. In
connection with the sale to SMT, the Company had accrued costs of approximately
$2,000,000 for the installation and warranty of the systems sold to SMT, but had
yet to commence such efforts. These accrued costs were reversed at the time the
bad debt loss was recognized, resulting in a net effect on the Company's fiscal
1997 operating results of approximately $4,000,000 (the "SMT Charge").
During fiscal 1997, marketing, general and administrative expenses (MG&A), which
included the SMT Charge, were $130,788,000 (22% of net sales), significantly
above fiscal 1996 MG&A of $115,827,000 (18% of net sales). In addition to the
SMT Charge, the year to year increase in MG&A was due in part to the expansion
of the Company's sales and marketing functions, increased personnel and
operating expenditures related to SVGL's technical customer training, support
and administrative functions, and the amortization of certain prepaid royalties
related to a transaction with IBM which is discussed below. Additionally,
increases in certain costs related to SVGL's higher fiscal 1997 shipping levels
were offset by year to year reductions in similar costs at Track and Thermco as
a result of lower fiscal 1997 shipments. In comparison to the preceding fiscal
year, MG&A was higher as a percentage of net sales due to the combined effect of
increased expenditures and lower net sales during fiscal 1997.
Under the terms of a research and development agreement, SVGL owed IBM certain
royalties based on future operating results. During the second quarter of fiscal
1997, the Company satisfied its obligation, recognized an expense of
$32,582,000, which represented royalties related to products currently under
development, and recorded a prepayment of $5,418,000, which represented
royalties related to existing products which are being amortized through fiscal
2000, in proportion to the related product sales.
<PAGE> 25
SVG 37
For fiscal 1997, the Company had an operating loss of $7,531,000, compared to
operating income of $85,491,000 during fiscal 1996. In comparison to the
preceding year, the fiscal 1997 operating loss was the result of lower gross
margins on lower net sales, higher operating expenses and the royalty settlement
discussed above. Without giving effect to the royalty settlement discussed
above, the Company would have had operating income for fiscal 1997 of
$25,051,000.
Interest and other income was $10,633,000 during fiscal 1997 compared to
$13,330,000 for fiscal 1996. Compared to the preceding fiscal year, the decrease
in fiscal 1997 interest and other income was primarily the result of a
significantly greater percentage of the Company's investment portfolio
consisting of tax-free and tax-advantaged instruments, which have lower pre-tax
yields than taxable instruments, and lower cash balances available for
investment. The Company invests in tax-free and tax-advantaged instruments when
the after-tax yields on such instruments exceed those on taxable instruments.
Interest expense was $710,000 in fiscal 1997, an increase over fiscal 1996
interest expense of $437,000. The increased fiscal 1997 expense was the result
of interest paid on a $6,500,000 loan from the Connecticut Development Authority
in February 1997. (See "Liquidity and Capital Resources".)
The Company recorded a 34% provision for income taxes for fiscal 1997, compared
to a 35% provision for fiscal 1996. Variations in the Company's effective tax
rate relate primarily to changes in the geographic distribution of its pretax
income. (See Note 11 to the Consolidated Financial Statements.)
The minority interest represented that share of SVGL's operating results which
were attributable to its minority stockholder, IBM. In March 1997, the Company
purchased IBM's interest in SVGL for $3,000,000. The Company now accounts for
SVGL as a wholly-owned subsidiary and there is no longer a minority interest. In
fiscal 1997, minority interest was recorded from the beginning of the fiscal
year through the date the Company purchased IBM's interest and represented a
reduction from income of $92,000. For fiscal 1996, minority interest represented
a $726,000 reduction from income.
Net income for fiscal 1997 was $1,487,000 ($0.05 per share), compared to net
income of $63,221,000 ($2.07 per share) for fiscal 1996.
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. 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
<PAGE> 26
SVG 38
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18 Micrascan photolithography systems which had scheduled delivery dates outside
the twelve month backlog window, including orders for seven advanced technology
193 nanometer systems currently under development.
During fiscal 1996, the Company's gross margin was 42%, compared to a gross
margin of 40% in fiscal 1995. The increased gross margin was 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 (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.
Operating income was $85,491,000 during fiscal 1996 compared to operating income
of $52,389,000 during fiscal 1995. The increase in fiscal 1996 operating income
compared to the preceding fiscal year was the result of improved gross margins
on higher sales offset in part by increased operating expenses.
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 a reduction in royalty income from fiscal 1995 to fiscal 1996.
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.
The minority interest represents that share of SVGL's operating results
attributable to IBM, 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.
<PAGE> 27
SVG 39
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 Note 12 to the
Consolidated Financial Statements.)
RISKS INHERENT IN
THE COMPANY'S
BUSINESS
Fluctuations in Quarterly Results. The Company has, at times during its
existence, experienced quarterly fluctuations in its operating results. Due to
the relatively small number of systems sold during each fiscal quarter and the
relatively high revenue per system, customer order rescheduling or
cancellations, or production or shipping delays can significantly effect
quarterly revenues and profitability. The Company has experienced, and may again
experience, quarters during which a substantial portion of the Company's net
sales are realized near the end of the quarter.* Accordingly, shipments
scheduled near the end of a quarter which are delayed for any reason can cause
quarterly net sales to fall short of anticipated levels. Since most of the
Company's expenses are fixed in the short term, such shortfalls in net sales
could have an adverse effect on the Company's business and results of
operations.* The Company's operating results may also vary from quarter to
quarter based upon numerous factors including the timing of new product
introductions, product mix, level of sales, the relative proportion of domestic
and international sales, activities of competitors, acquisitions, international
events, and difficulties obtaining materials or components on a timely basis.*
In light of these factors, the Company may again experience variability in its
quarterly operating results.*
Rapid Technological Change; Dependence on New Product Development. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company believes that its future success will depend upon its ability to
continue to enhance its existing products and their process capabilities and to
develop and manufacture new products with improved process capabilities that
enable semiconductor manufacturers to fabricate semiconductors more
efficiently.* The Company is developing products capable of processing 300mm
wafers to enable advanced semiconductor manufacturers to progress from the
current 200mm wafer standard.* Failure to successfully introduce these or any
other new products in a timely manner could result in the loss of competitive
position and could reduce sales of existing products.* In addition, new product
introductions could contribute to quarterly fluctuations in operating results as
orders for new products commence and increase the potential for a decline in
orders of existing products, particularly if new products are delayed.*
From time-to-time, the Company has experienced delays in the introduction of its
products and product enhancements due to technical, manufacturing and other
difficulties and may experience similar delays in the future.* For example,
during fiscal 1996, the Company announced a new Track product, the 200-APS.
Initial shipments of the 200-APS were scheduled to commence during the second
quarter of fiscal 1997, but have been delayed by approximately twelve months.*
There can be no assurance that the Company will not experience manufacturing
problems as a result of instability of the design of either the hardware
<PAGE> 28
SVG 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
or software elements of the new technology, or be able to efficiently
manufacture the 200-APS or other products.* These issues could result in product
delivery delays and a subsequent loss of future sales.* Semiconductor
manufacturers tend to select either a single supplier or a primary supplier for
a certain type of equipment. The Company believes that prolonged delays in
delivering initial quantities of newly developed products to multiple customers,
whether due to the protracted release of product from engineering into
manufacturing or due to manufacturing difficulties, could result in
semiconductor manufacturers electing to install competitive equipment in their
fabrication facilities and could preclude industry acceptance of the Company's
products.* Therefore, the Company's inability to effect the timely production of
new products or any failure of these products to achieve market acceptance could
have a material adverse effect on the Company's business and results of
operations.*
Historically, the unit cost of the Company's products has been the highest when
they are newly introduced into production and cost reductions have come over
time through engineering improvements, economies of scale and improvements in
the manufacturing process.* As a result, new products have, at times, had an
unfavorable impact on the Company's gross margins and results of operations.
There can be no assurance that the initial shipments of new products will not
have an adverse effect on the Company's profitability or that the Company will
be able to attain design improvements, manufacturing efficiencies or
manufacturing process improvements over time.* Further, the potential
unfavorable effect of newly introduced products on profitability can be
exacerbated when there is intense price competition in the marketplace.*
SVG Lithography Systems, Inc. (SVGL)
SVGL -- Uncertain Market for Micrascan Products. The Company believes that the
photolithography exposure equipment market is one of the largest segments of the
semiconductor processing equipment industry.* To address this market, the
Company has invested and expects to continue to invest substantial resources in
SVGL's Micrascan technology and its family of Micrascan deep ultraviolet ("Deep
UV") step and scan photolithography systems, capable of producing line widths of
.25 microns and below. The development of a market for the Company's Micrascan
step and scan photolithography products will be highly dependent on the
continued trend towards finer line widths in integrated circuits and the ability
of other lithography manufacturers to keep pace with this trend through either
enhanced technologies or improved processes. Lithography manufacturers have been
successful in extending the capability of I-Line steppers which have been
utilized in the fabrication of complex semiconductor devices with line widths of
less than 0.5 micron, such as 64 megabit DRAMs. The Company believes Deep UV
lithography will be required to fabricate devices with line widths below 0.3
micron.* Semiconductor manufacturers can purchase Deep UV steppers to produce
product at .25 micron line widths. However, the Company believes that as devices
increase in complexity and size and require finer line widths, the technical
advantages of Deep UV step and scan systems as compared to Deep UV steppers will
enable semiconductor manufacturers to achieve finer line widths, improved
dimension control and higher yields of faster devices.* The Company also
believes that the transition to Deep UV step and scan systems will accelerate in
calendar 1998 and that advanced semiconductor manufacturers are beginning to
require volume quantities of production equipment as advanced
<PAGE> 29
SVG 41
as the current and pending versions of Micrascan.* Currently, competitive Deep
UV step and scan equipment capable of producing .25 micron line widths is
available in limited quantities from two competitors, and the Company believes
that at least one other manufacturer of advanced photolithography systems will
begin initial shipments of step and scan machines in the near future.* There can
be no assurance that the Company will be successful in competing with such
systems.* Further, if manufacturers of I-Line or Deep UV steppers are able to
further enhance existing technology to achieve finer line widths sufficiently to
erode the competitive and technological advantages of Deep UV step and scan
systems, demand for the Micrascan technology may not develop as the Company
expects.*
The Company believes that advanced logic devices and DRAMs will require
increasingly finer line widths.* Consequently, SVGL must continue to develop
advanced technology equipment capable of meeting its customers' current and
future requirements while offering those customers a progressively lower cost of
ownership.* In particular, the Company believes that it must continue its
development of future systems capable of printing line widths finer than .25
micron and processing 300mm wafers.*
SVGL -- Need to Increase Manufacturing Capacity and System Output. 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.* Based upon its
forecast of continued high growth in demand for photolithography equipment and
potential future demand for advanced lithography products, the Company is
increasing SVGL's production capacity under an extremely aggressive expansion
schedule. In August 1996, as part of this expansion, the Company purchased from
The Perkin-Elmer Corporation a 243,000 square foot facility occupied by SVGL in
Wilton, Connecticut and an additional 201,000 square foot building, which SVGL
now occupies, in Ridgefield, Connecticut. During fiscal 1997, the Company has
invested in significant further capital improvements related to the buildings
purchased and the equipment required to expand the production capabilities of
SVGL.* In addition to the timely construction and equipping of facilities,
successful completion of this expansion will require the recruitment, training
and retention of a high quality workforce, and the achievement of satisfactory
manufacturing results on a scale greater than SVGL has attempted in the past.
There can be no assurance that the Company can manage these efforts
successfully. Any failure to manage such efforts could result in product
delivery delays and a subsequent loss of future revenues. In particular, the
Company believes that protracted delays in delivering 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.
The time required to build a Micrascan system is significant. If SVGL is to be
successful in supplying increased quantities of Micrascan systems, it will not
only need to be able to build more systems, it will need to build them faster.*
SVGL will require additional trained personnel and additional 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 develop its vendor supply
<PAGE> 30
SVG 42
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
infrastructure, increase its staffing levels and implement manufacturing
improvements to meet anticipated shipment volumes for 1998 and beyond.*
Additionally, the Company must continue increasing 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
attempt to increase production and upgrade or expand existing operations.
One of the most critical components of the Micrascan systems are the projection
optics, which are primarily manufactured by SVGL. As part of its overall
investment in capacity, the Company is increasing SVGL's optical manufacturing
floorspace, procuring metrology equipment, and in some instances fabricating
test stands. The Company believes that in order for SVGL to attain it goals, it
must successfully reduce the cycle times required to build projection optics and
increase the optical manufacturing output.*
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI").
(See "Liquidity and Capital Resources".) TLI designs, manufactures and sells
precision optical components, assemblies and systems to customers in a variety
of industries and research endeavors. A primary reason for the acquisition was
TLI's technology and expertise relating to aspherical lenses, a key component of
SVGL's photolithography products, and to have TLI commence fabrication of
non-aspherical lenses which are currently produced by SVGL.* There can be no
assurance that such technology is scalable, or that such expertise can be
transferred without substantial time or expense, if at all. The inability of
SVGL to transfer this production technology for use in processes of a
substantially larger scale could have a material adverse effect on the Company's
ability to realize any significant benefits from the acquisition of TLI.
The Company believes that protracted delays in delivering quantities of both
current and future generations of Micrascan products to multiple customers could
result in semiconductor manufacturers electing to install competitive equipment
in their advanced fabrication facilities, and could preclude industry acceptance
of the Micrascan technology and products.* In addition, the Company's operating
results could also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity and field service
and technical support activities if net sales do not increase commensurately.*
SVGL -- Sole Source Materials and Components. 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. The supplier has committed to expand its capacity to meet SVGL's
projected requirements in exchange for a long-term, non-cancelable supply
agreement. The agreement specifies quantities of material that increase over
time and the supplier is obligated to create and store certain defined
quantities of safety stock. Additionally, a version of the Company's Micrascan
III photolithography system utilizes an Excimer laser manufactured in volume by
only one supplier. There can be no assurance that either supplier will be able
to supply the quantities of material required by SVGL. If either supplier was
unable to meet its commitments, SVGL would be unable to manufacture the quantity
of systems required to meet the anticipated future demand, which would have a
material adverse effect on the Company's business and results of operations.
SVGL is currently working to qualify an additional source of lasers for its
current and future versions of Micrascan systems. There can be no assurance that
these efforts will be successful.
<PAGE> 31
SVG 43
SVGL -- Research and Development Funding. Historically, the Company has depended
on external funding to assist in the high cost of development in its
photolithography operation. 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,
1997, the Company had received $16,000,000 in funding from six Participants, of
which $8,085,000 had been recognized and offset against research and development
expenditures. In March 1997, one participant withdrew from the program. There
can be no assurances that the other Participants will remain in the program.* In
the event that the Company does 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. 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.
SVGL -- Market Penetration. 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. Recent
economic downturns in many Asian economies, including Japan and Korea, may also
adversely effect the Company's ability to penetrate such markets.*
SVGL -- Future Profitability. While the recent volume of orders for Micrascan
systems has been encouraging, they are not necessarily indicative of
industry-wide acceptance of the Micrascan technology. If SVGL is to attain its
objective of being a volume supplier of advanced photolithography systems, the
Company believes that it must expand its customer base to include additional
customers from whom it secures and successfully fulfills orders for
production-quantities of Micrascan systems.* Although SVGL is profitable, the
Company believes that as a result of costs associated with the continued
development of the Micrascan technology, the expansion of SVGL's manufacturing
capacity, the related increase in manpower and customer support, and the
potential difficulties inherent in manufacturing initial quantities of the .25
micron and sub-.25 micron Micrascan systems, in particular the projection optics
required for these systems, there can be no assurance that SVGL will be able to
operate profitably in the future.*
<PAGE> 32
SVG 44
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND
CAPITAL RESOURCES
At September 30, 1997, cash and cash equivalents and temporary investments
totaled $206,480,000, down $55,581,000 from the September 30, 1996 balance of
$262,061,000. This decrease was primarily due to purchases of property and
equipment to facilitate the expansion of SVGL's manufacturing capacity and was
offset in part by cash generated from operations, sales of Common Stock under
employee stock option and stock purchase plans and the proceeds of a loan
discussed below.
On February 28, 1997, the Company received a $6,500,000 loan from the
Connecticut Development Authority. The loan has a ten year term, bears interest
at 8.25% and is secured by the Company's Wilton, Connecticut facility which
houses certain operations of SVGL.
In July 1996, the Board of Directors (the "Board") authorized the Company to
institute a stock repurchase program (the "Program") whereby up to 5,000,000
shares of its Common Stock could have been purchased in the open market. In
September 1997, the Board rescinded the Program. No Common Stock was purchased
under the Program.
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI") in
exchange for approximately 1,091,000 shares of Company Common Stock. TLI
designs, manufactures and sells precision optical components, assemblies and
systems to customers in a variety of industries and research endeavors. The
transaction is being accounted for as a pooling of interests for financial
reporting purposes and is intended to qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended.*
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 December 1997, the term of the credit facility was extended an
additional year to December 2000. At December 29, 1997, 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.*
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-31298, 33-85020 and 333-39499 of Silicon Valley Group, Inc. on Forms
S-8 of our reports dated October 27, 1997 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, 1997.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Jose, California
December 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR FISCAL 1997 AS FILED IN THE COMPANY'S FORM 10K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10K FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 129,508
<SECURITIES> 76,972
<RECEIVABLES> 148,805
<ALLOWANCES> 6,605
<INVENTORY> 227,359
<CURRENT-ASSETS> 588,716
<PP&E> 235,002
<DEPRECIATION> 91,449
<TOTAL-ASSETS> 740,893
<CURRENT-LIABILITIES> 170,102
<BONDS> 0
0
0
<COMMON> 397,820
<OTHER-SE> 165,163
<TOTAL-LIABILITY-AND-EQUITY> 740,893
<SALES> 594,957
<TOTAL-REVENUES> 594,957
<CGS> 365,217
<TOTAL-COSTS> 365,217
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 710
<INCOME-PRETAX> 2,392
<INCOME-TAX> 813
<INCOME-CONTINUING> 1,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,487<F1>
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.0
<FN>
<F1>MINORITY INTEREST OF 92,000 IS DEDUCTED FROM AFTER-TAX INCOME IN ARRIVING AT
NET INCOME OF 1,487,000
</FN>
</TABLE>
