<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1996.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the 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 of incorporation) (IRS Employer Identification No.)
101 METRO DRIVE, SUITE #400, SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices) (Zip Code)
(408) 441-6700
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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
---------- --------
The number of shares outstanding of the Registrant's Common Stock as of
January 31, 1997 was 30,182,932.
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<PAGE> 2
SILICON VALLEY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Condensed Balance Sheets as of
December 31, 1996 and September 30, 1996 . . . . . . . . . . . . 3
Consolidated Condensed Income Statements for
the Quarters Ended December 31, 1996 and 1995 . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows
for the Quarters Ended December 31, 1996 and 1995 . . . . . . . 5
Notes to Consolidated Condensed Financial Statements . . . . . . . 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1996 1996
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 214,642 $ 218,841
Temporary investments 55,337 43,220
Accounts receivable (net of allowance for doubtful
accounts of $5,279 and $6,003, respectively) 133,596 151,011
Inventories 221,821 213,229
Prepaid expenses 6,618 7,227
Deferred taxes 9,545 9,295
------------ ------------
Total current assets 641,559 642,823
PROPERTY AND EQUIPMENT - NET 90,336 81,577
DEPOSITS AND OTHER ASSETS 2,128 2,312
INTANGIBLE ASSETS - NET 2,626 2,665
------------ ------------
TOTAL $ 736,649 $ 729,377
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 386 $ 437
Accounts payable 34,654 35,556
Accrued liabilities 141,317 137,526
Income taxes payable 6,746 5,649
------------ ------------
Total current liabilities 183,103 179,168
CAPITAL LEASE OBLIGATIONS 121 217
DEFERRED LIABILITIES 3,281 3,338
MINORITY INTEREST 4,899 4,705
STOCKHOLDERS' EQUITY:
Common Stock - shares outstanding:
December 31, 1996: 30,180,259
September 30, 1996: 30,175,794 378,038 378,033
Retained earnings 167,247 163,916
Net unrealized gain on investments 87 --
Accumulated translation adjustments (127) --
------------ ------------
Stockholders' equity 545,245 541,949
------------ ------------
TOTAL $ 736,649 $ 729,377
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
<PAGE> 4
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
--------------
December 31,
-----------
1996 1995
---- ----
<S> <C> <C>
NET SALES $ 123,684 $ 158,280
COST OF SALES 76,199 92,879
------------ -----------
GROSS PROFIT 47,485 65,401
OPERATING EXPENSES:
Research, development and
related engineering 17,590 15,506
Marketing, general and
administrative 27,163 27,699
------------- -----------
OPERATING INCOME 2,732 22,196
INTEREST AND OTHER INCOME - NET 2,676 3,459
INTEREST EXPENSE (68) (135)
----------- -----------
INCOME BEFORE INCOME
TAXES AND MINORITY INTEREST 5,340 25,520
PROVISION FOR INCOME TAXES 1,815 8,932
MINORITY INTEREST 194 107
------------ ------------
NET INCOME $ 3,331 $ 16,481
============ ============
NET INCOME PER SHARE $ 0.11 $ 0.54
============ ============
SHARES USED IN PER SHARE
COMPUTATIONS 30,675 30,505
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
4
<PAGE> 5
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters Ended
December 31,
-----------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED)
<S> <C> <C>
Net income $ 3,331 $ 16,481
Reconciliation to net cash provided by
(used for) operating activities:
Depreciation and amortization 4,693 2,275
Amortization of intangibles 39 39
Minority interest 194 107
Changes in assets and liabilities:
Accounts receivable 17,415 (10,363)
Inventories (8,592) (16,669)
Prepaid expenses 609 (2,032)
Deposits and other assets 184 (352)
Accounts payable (902) (1,780)
Accrued and deferred liabilities 3,663 8,264
Income taxes 847 6,582
----------- ----------
Net cash provided by operating activities 21,481 2,552
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of temporary investments (18,110) (30,003)
Maturities of temporary investments 6,080 9,000
Purchases of property and equipment (13,452) (7,198)
---------- ---------
Net cash used for investing activities (25,482) (28,201)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (147) (218)
Sale of Common Stock 5 126,311
----------- ----------
Net cash (used for) provided by financing activities (142) 126,093
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (56) (86)
----------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (4,199) 100,358
CASH AND EQUIVALENTS:
Beginning of period 218,841 166,790
----------- ----------
End of period $ 214,642 $ 267,148
=========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
<PAGE> 6
SILICON VALLEY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been prepared
by the Company without audit and reflect all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management are necessary
to a fair statement of the financial position and the results of operations for
the interim periods. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission, but omit certain
information and footnote disclosures necessary to present the statements in
accordance with generally accepted accounting principles. For further
information, refer to the Consolidated Financial Statements and Notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1996. Results for fiscal 1997 interim periods are not
necessarily indicative of results to be expected for the fiscal year ending
September 30, 1997.
2. INVENTORIES
Inventories are comprised of:
<TABLE>
<CAPTION>
December 31, September 30,
----------- ------------
1996 1996
---- ----
(In thousands)
<S> <C> <C>
Raw materials $104,011 $103,993
Work-in-process 109,230 101,293
Finished goods 8,580 7,943
---------- ----------
$221,821 $213,229
========== ==========
</TABLE>
6
<PAGE> 7
SILICON VALLEY GROUP, INC.
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, as well as
risk factors included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996, 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, manufactures, markets and services semiconductor
processing equipment used in the fabrication of integrated circuits. The
Company's products are used in photolithography for exposure and photoresist
processing, and in deposition for oxidation/diffusion and low pressure chemical
vapor deposition (LPCVD). The Company manufactures and markets its
photolithography exposure products through its majority owned subsidiary, SVG
Lithography Systems, Inc. (SVGL), its photoresist processing products through
its Track Systems Division (Track), and its oxidation/diffusion and LPCVD
products through its Thermco Systems Division (Thermco).
The semiconductor industry into which the Company sells its products is highly
cyclical and has, historically, experienced periodic downturns 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. In the
quarter ended June 1996, customer order bookings (bookings) were significantly
below those recorded during the previous quarter. Through the fourth quarter of
fiscal 1996 and the first quarter of fiscal 1997 bookings have continued to
decline, but at a less significant rate. Additionally, the Company has
experienced customer deferrals of scheduled equipment delivery dates and, to a
lesser extent, customer order cancellations. As a result of such lower
bookings, the Company believes that, at least through the first half of fiscal
1997, shipments will be below second half fiscal 1996 levels.* In addition,
there can be no assurance that the Company will not experience further customer
delivery deferrals, additional order cancellations or a prolonged period of
customer orders at reduced levels, any or a combination of which would further
reduce earnings.*
Prior downturns in the worldwide semiconductor industry have resulted in
significant reductions in the Company's net sales, gross margin and net income.
Moreover, the Company expects that its operations as a whole will continue to
be dependent on the current and
7
<PAGE> 8
anticipated demand for integrated circuits and products utilizing integrated
circuits.* Any prolonged weakness in demand in the semiconductor industry is
likely to have an adverse effect on the Company's business and results of
operations.* Further, the Company believes, due in part to a large percentage
of its customer base consisting of manufacturers of logic devices, that it will
continue to rely on a limited number of major customers for a substantial
percentage of its net sales.* During fiscal 1996, the Company's two largest
customers accounted for 41% of the Company's net sales, the largest
representing 31% of the total, and during the first quarter of fiscal 1997 a
similar trend continued. The loss of a significant customer, further delays in
shipments due to customer rescheduling or any additional reductions in orders
by a significant customer, or any reduction or rescheduling activity of
significance, including reductions in orders due to market, economic or
competitive conditions in the semiconductor industry, will adversely affect the
Company's business and results of operations.*
For the first quarter of fiscal 1997, the Company recorded net sales of
$123,684,000, a 22% decrease from net sales of $158,280,000 during the
year-earlier quarter and 14% below fourth quarter fiscal 1996 net sales of
$143,122,000. In comparison to both the year-earlier and preceding quarters,
the lower first quarter fiscal 1997 net sales were the result of reduced
shipments by Track and Thermco. During the first quarter of fiscal 1997, the
Company recorded bookings of $125,212,000 (which represented a book-to-bill
ratio of 1.01 to 1), significantly lower than bookings during the year-earlier
quarter of $185,252,000 (which represented a book-to-bill ratio of 1.17 to 1)
and approximately equal to bookings during the preceding quarter of
$127,662,000 (which represented a book-to-bill ratio of 0.89 to 1). At
December 31, 1996, the Company had a backlog of $396,117,000, approximately
level with 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 all terms and conditions agreed upon and for which
delivery has been specified within twelve months. At December 31, 1996, the
backlog included orders for 39 Micrascan photolithography systems. In addition
to the systems included in backlog, SVGL had orders for twelve systems with
scheduled delivery dates outside the twelve month backlog window, including
orders for seven advanced technology 193 nanometer Micrascan systems currently
under development.
Gross margin was 38.4% for the first quarter of fiscal 1997, down from gross
margin of 41.3% in the year-earlier quarter and 42.7% in the fourth quarter of
fiscal 1996. In comparison to both the year-earlier and preceding quarters, the
decreased gross margin resulted from lower manufacturing and shipping volumes
in Track and Thermco offset in part by increased SVGL gross margins. The
improved SVGL gross margins were primarily due to models of Micrascan
photolithography systems shipped during the quarter and, particularly in
comparison to the year-earlier quarter, increased manufacturing volumes and
efficiencies related to its Micrascan systems.
Research, development and related engineering is net of funding received from
outside parties under development agreements. Such funding is typically payable
upon the attainment of one or more development milestones 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. Through the fourth quarter of fiscal 1996 SEMATECH provided the
majority of development funding, primarily to SVGL.
8
<PAGE> 9
Research, development and related engineering expense (R&D) was $17,590,000
(14.2% of net sales) during the first quarter of fiscal 1997 compared to
$15,506,000 (9.8% of net sales) during the first quarter of fiscal 1996 and
$16,976,000 (11.9% of net sales) in the preceding quarter. During the first
quarter of fiscal 1997 and the first and fourth quarters of fiscal 1996,
development funding of $636,000, $2,959,000 and $717,000, respectively, was
recognized and offset against R&D. The increase in R&D over both the first
and fourth quarters of fiscal 1996 was primarily the result of new product
development by SVGL and Track. In particular, compared to the year-earlier
quarter, SVGL recognized significantly less outside development funding as an
offset to R&D. The increase in R&D as a percentage of net sales compared to the
first and fourth quarters of fiscal 1996 reflects the combined effect of the
higher expenditures and the lower net sales.
Marketing, general and administrative expenses (MG&A) were $27,163,000 (22.0%
of net sales) in the first quarter of fiscal 1997 compared to $27,699,000
(17.5% of net sales) for the year-earlier quarter and $28,852,000 (20.2% of net
sales) in the preceding quarter. The decrease in MG&A expenditures from both
the year-earlier and preceding quarters was primarily due to shipment-related
costs in Track and Thermco which declined due to the reduced level of product
shipments. The increase in MG&A as a percentage of net sales compared to the
first and fourth quarters of fiscal 1996 reflects the effect of the lower net
sales.
Operating income was $2,732,000 for the first quarter of fiscal 1997, compared
to $22,196,000 for the year-earlier quarter and $15,313,000 for the preceding
quarter. The decrease in operating income from both the year-earlier and
preceding quarters resulted from decreased gross margins on lower net sales and
increased R&D expenditures.
Interest and other income was $2,676,000 during the first quarter of fiscal
1997 compared to $3,459,000 during the year-earlier quarter and $2,756,000
during the preceding quarter. The year-to-year decrease in 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
average cash balances available for investment. The Company invests in tax-free
and tax-advantaged instruments when the after-tax yields on such instruments
are higher than those on taxable instruments.
During the first quarter of fiscal 1997, interest expense was $68,000 compared
to $135,000 and $103,000 during the first and fourth quarters of fiscal 1996,
respectively.
The Company recorded a 34% provision for income taxes for the first quarter of
fiscal 1997, compared to a 35% provision for all of fiscal 1996. Variations in
the Company's effective tax rate relate primarily to changes in the geographic
distribution of the Company's pretax income.
The reductions for minority interest of $194,000 during the first quarter of
fiscal 1997 and $107,000 and $184,000 during the first and the fourth quarters
of fiscal 1996, respectively, represent that share of SVGL's operating results
attributable to its minority shareholder.
The Company had net income of $3,331,000 ($0.11 per share) during the first
quarter of fiscal 1997 compared to net income of $16,481,000 ($0.54 per share)
and $11,491,000 ($0.38 per share) for the first and fourth quarters of fiscal
1996, respectively.
9
<PAGE> 10
FLUCTUATIONS IN QUARTERLY RESULTS, DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND
GEOGRAPHIC MARKET PENETRATION
The Company has, at times during its existence, experienced quarterly
fluctuations in its operating results. Due to the relatively small number of
systems sold during each fiscal quarter and the relatively high revenue per
system, customer order rescheduling or cancellations, or production or shipping
delays can significantly affect quarterly revenues and profitability. The
Company has experienced, and may again experience, quarters during which a
substantial portion of the Company's net sales are realized near the end of the
quarter.* Accordingly, delays in shipments near the end of a quarter can cause
quarterly net sales to fall short of anticipated levels. Since most of the
Company's expenses are fixed in the short term, such shortfalls in net sales
could have a material adverse effect on the Company's business and results of
operations.* The Company's operating results may also vary from quarter to
quarter based upon numerous factors including the timing of new product
introductions, product mix, level of sales, the relative proportion of
domestic and international sales, activities of competitors, acquisitions,
international events, and problems obtaining materials or components on a
timely basis.* In light of these factors and the effect of the current
uncertainty in the global semiconductor market on demand for the Company's
wafer fabrication systems, the Company is likely to again experience
variability in quarterly operating results.*
Semiconductor manufacturing equipment and processes are subject to rapid
technological change. The Company believes that its future success will depend
in part upon its ability to continue to enhance its existing products and their
process capabilities and to develop and manufacture new products with improved
process capabilities that enable semiconductor manufacturers to fabricate
semiconductors more efficiently.* Additionally, the Company believes that it
will have to develop products capable of processing 300mm wafers as advanced
semiconductor manufacturers progress from the current 200mm wafer standard.*
Failure to successfully introduce new products in a timely manner could result
in the loss of competitive position and reduced sales of existing products.* In
addition, new product introductions could contribute to quarterly fluctuations
in operating results as orders for new products commence and increase the
potential for a decline in orders of existing products, particularly if new
products are delayed.*
During fiscal 1996, the Company introduced new products in all three of its
product groups for shipment in fiscal 1997. From time-to-time, the Company has
experienced difficulty in effecting transitions to new products or in ramping
up production and, consequently, has suffered delays in product deliveries.
There can be no assurance that the Company will not experience manufacturing
problems as a result of capacity constraints or ramping up production by
upgrading or expanding existing operations.* These issues could result in
product delivery delays and a subsequent loss of future sales.* The Company
believes that protracted delays in delivering initial quantities of newly
developed products to multiple customers could result in semiconductor
manufacturers electing to install competitive equipment in their fabrication
facilities and could preclude industry acceptance of its products.* The
inability to produce such products or any failure to achieve market acceptance
could have a material adverse effect on the Company's business and results of
operations.*
10
<PAGE> 11
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 which will increase
profitability.* Further, the potential unfavorable effect of newly introduced
products on profitablity can be exacerbated when there is intense price
competition in the marketplace.*
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. Further, in many instances,
Japanese and Pacific Rim semiconductor manufacturers fabricate devices such as
DRAMs, with potentially different economic cycles than those affecting the
sales of devices manufactured by the majority of the Company's U.S. and
European customers. To date neither the Company's shipments into Japan nor into
the Pacific Rim have been significant. The Company believes that it must
substantially increase its share of these markets if it is to compete as an
industry leader.* 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 order to expand its market share in the Pacific Rim, the Company has begun
investing in the staffing and facilities necessary to sell, service and support
customers in this area through entities in Korea, Singapore and Thailand.
Throughout the Pacific Rim, the Company will be competing with established
equipment suppliers with significant market share and anticipates that it will
encounter significant price competition as well as competition based on
technological ability.* There can be no assurance that the Company's Pacific
Rim operations will be profitable, even if it is successful in obtaining
significant sales into this region.*
SVG LITHOGRAPHY SYSTEMS, INC. (SVGL)
The Company believes that the photolithography exposure equipment market is one
of the largest segments of the semiconductor processing equipment industry and
that the SVGL Micrascan II series of photolithography systems are currently the
most technically advanced step-and-scan machines shipping in multiple
quantities to global semiconductor manufacturers.* Additionally, in December
1996, SVGL shipped the first laser- based Micrascan III system, which is
capable of printing .25 micron line widths. The Company believes that advanced
semiconductor manufacturers are beginning to require volume quantities of
production equipment as advanced as the current and pending versions of
Micrascans, however it does not believe that substantial sales of such systems
will begin until late calendar 1997 or 1998.* Currently, customers can purchase
deep ultraviolet (DUV) steppers to produce product at .25 micron line widths.
If manufacturers of traditional I-line or DUV steppers are able to further
enhance existing technology to achieve finer line widths sufficiently to erode
Micrascan's competitive and technological advantages, demand for the Micrascan
technology may not develop as the Company expects.* Additionally, competitive
11
<PAGE> 12
equipment capable of producing .25 micron line widths using step-and-scan
technology is currently available in limited quantities.
The Company believes that advanced logic devices and DRAMs will require
increasingly finer line widths.* The ability to maintain technological
leadership is critical to SVGL's success and it must continue to develop
advanced technology equipment capable of meeting manufacturers' requirements.*
In particular, the Company believes that it must, during the second quarter of
fiscal 1997, begin shipping its lamp-based Micrascan QML system capable of
printing .25 micron line widths, as well as progressing on its development of
future systems capable of printing line widths finer than .25 micron.*
The Company believes that its ability to supply systems in volume will be a
major factor in customer decisions to commit to the Micrascan technology.*
During fiscal 1996, the Company began implementing a program to expand SVGL's
manufacturing capacity to meet potential future demand for its advanced
photolithography systems.* As part of the expansion program, the Company
purchased both the existing SVGL facility and a second building to provide
immediate and longer-term expansion capability. During the current fiscal year
the Company intends to invest in significant further capital improvements
related to the facilities and the equipment required to expand the production
capabilities of SVGL.*
The time required to build a Micrascan system is significant. If SVGL is to be
successful in supplying increased quantities of Micrascan systems, it will not
only need to be able to build more systems, it will need to build them faster.*
SVGL will require additional trained personnel and raw materials and
components, as well as improved manufacturing and testing techniques to both
facilitate volume and shorten manufacturing cycle time.* To that end, SVGL is
continuing to increase staffing levels, develop its vendor supply
infrastructure and implement manufacturing improvements to meet expected 1997
and 1998 shipment volumes. Additionally, the Company must increase its field
service and technical support organization staffing and infrastructure to
support the anticipated customer requirements. There can be no assurance that
the Company will not experience manufacturing difficulties or encounter
problems in its attempt to increase production and upgrade or expand existing
operations.* In particular, the Company believes that protracted delays in
delivering initial 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, which could preclude industry acceptance of the
Micrascan technology and products.* In addition, the Company's operating
results could also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity and field
service and technical support activities if net sales do not increase
commensurately.*
Historically, the Company has depended on external funding to assist in the
high cost of development in its photolithography operation. The agreements
which are currently in effect are discussed in detail below.
In September 1994, the Company and SEMATECH entered into a series of agreements
whereby the Company sold SEMATECH warrants to purchase the Company's Common
Stock and SEMATECH agreed, based upon the Company achieving certain performance
milestones, to provide, through 1997, $22,000,000 of funding for the
development of the
12
<PAGE> 13
Micrascan technology and to increase SVGL's manufacturing capability and
capacity. As of December 31, 1996, the Company had recognized $17,250,000 of
such SEMATECH funding.
During fiscal 1996, the Company entered into agreements with certain customers
(the Participants) whereby each agreed to assist in funding the Company's
development of an advanced technology 193 nanometer Micrascan system. In
exchange for such funding, 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 December 31, 1996, the Company had received $11,000,000 in
funding from six Participants, of which $1,087,000 had been recognized and
offset against R&D expenditures. There can be no assurances that the
Participants will remain in the program.* In the event that the Company did not
receive the funding anticipated under the agreements, it would be required to
replace the shortfall from its own funds or other sources. If the Company were
required to use its own funds, its research and development expenses would
increase and its operating income would be reduced correspondingly. The
agreements with the Participants stipulate that if the Company receives funding
for the development program in excess of $25,000,000, it will issue, ratably to
the Participants, credits totaling such excess in the form of a cash discount
which can be applied to the purchase of additional systems by each Participant.
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.
While the recent volume of orders for Micrascan systems has been relatively
consistent and encouraging, they are not necessarily indicative of
industry-wide acceptance of the Micrascan technology. Although the first
quarter of fiscal 1997 was SVGL's seventh consecutive profitable quarter, the
Company believes that with the costs associated with the continued development
of the Micrascan technology, the expansion of SVGL's manufacturing capacity,
the additional manpower requirements related to the expanded capacity and
customer support and the potential difficulties inherent in manufacturing
initial quantities of the .25 micron Micrascan systems, there can be no
assurance that SVGL will be able to operate profitably in the future.*
Additionally, SVGL is subject to the accrual of certain royalties based on
operating income and payable to IBM under the terms of a research and
development agreement. If SVGL is successful in increasing its operating
income, the Company believes that such royalties will be significant.*
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, cash and cash equivalents and temporary investments
totaled $269,979,000 compared to the September 30, 1996 total of $262,061,000,
an increase of $7,918,000. Cash generated from operations, in particular the
collection of accounts receivable, was offset in part by cash used to finance
increased inventory levels and purchases of property and equipment, primarily
to facilitate SVGL's increased level of production and manufacturing capacity.
13
<PAGE> 14
During the first quarter of fiscal 1997, the Company provided SVGL, its
94%-owned subsidiary, with approximately $15,100,000 in funding, all of which
was recorded as intercompany loans. The Company believes that for the
foreseeable future it will have to continue providing SVGL with a significant
amount of funding. In connection with its acquisition of SVGL in 1990, the
Company committed to purchase under certain circumstances, additional SVGL
securities (the SVGL Calls) in an amount up to $23,200,000 at any time through
May 1997. To the extent the SVGL Calls are not exercised, the Company has the
option to purchase up to $15,000,000 of SVGL Common Stock under similar terms.
The Company may choose to continue funding SVGL through intercompany loans or
it may choose to make an additional equity investment in SVGL.
In July 1996, the Board of Directors authorized the Company to institute a
stock repurchase program whereby up to 5,000,000 shares of its Common Stock may
be purchased in the open market from time to time. Through February 7, 1997, no
Common Stock had been repurchased and the Company had not announced its
intention to commence such repurchases.
The Company has a $75,000,000 unsecured revolving bank credit facility which
expires in December 1999. Advances under the facility bear interest at either
the U.S. prime rate or the LIBOR rate plus 1%. At February 7, 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.*
14
<PAGE> 15
PART II. OTHER INFORMATION
SILICON VALLEY GROUP, INC.
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
15
<PAGE> 16
SILICON VALLEY GROUP, INC.
SIGNATURES
Pursuant to the requirements 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.
..............................
(Registrant)
Date: February 7, 1997 By:/s/ Papken S. Der Torossian
-----------------------------
Papken S. Der Torossian
Chief Executive Officer and
Chairman of the Board
Date: February 7, 1997 By:/s/ Russell G. Weinstock
-----------------------------
Russell G. Weinstock
Vice President Finance and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE FIRST QUARTER OF FISCAL 1997 AS FILED IN THE
COMPANY'S FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 214,642
<SECURITIES> 55,337
<RECEIVABLES> 133,596
<ALLOWANCES> 5,279
<INVENTORY> 221,821
<CURRENT-ASSETS> 641,559
<PP&E> 163,487
<DEPRECIATION> 73,151
<TOTAL-ASSETS> 736,649
<CURRENT-LIABILITIES> 183,103
<BONDS> 0
0
0
<COMMON> 378,038
<OTHER-SE> 167,207
<TOTAL-LIABILITY-AND-EQUITY> 736,649
<SALES> 123,684
<TOTAL-REVENUES> 123,684
<CGS> 76,199
<TOTAL-COSTS> 76,199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 5,340
<INCOME-TAX> 1,815
<INCOME-CONTINUING> 3,331
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,331<F1>
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0
<FN>
<F1>MINORITY INTEREST OF 194,000 IS DEDUCTED FROM AFTER-TAX INCOME IN ARRIVING AT
NET INCOME OF 3,331,000
</FN>
</TABLE>
