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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 March 31, 1997.
[ ] 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
April 18, 1997 was 30,846,997.
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SILICON VALLEY GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
<S> <C> <C>
Consolidated Condensed Balance Sheets as of
March 31, 1997 and September 30, 1996 3
Consolidated Condensed Income Statements
for the Quarters and the Six Month Periods
Ended March 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 17
SIGNATURES 19
</TABLE>
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PART I. FINANCIAL INFORMATION
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
--------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 192,887 $ 218,841
Temporary investments 71,126 43,220
Accounts receivable (net of allowance for doubtful
accounts of $5,883 and $6,003, respectively) 121,611 151,011
Inventories 222,595 213,229
Prepaid expenses 10,472 7,227
Deferred taxes 12,995 9,295
--------- ---------
Total current assets 631,686 642,823
PROPERTY AND EQUIPMENT - NET 105,445 81,577
DEPOSITS AND OTHER ASSETS 4,392 2,312
INTANGIBLE ASSETS - NET 2,588 2,665
--------- ---------
TOTAL $ 744,111 $ 729,377
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 813 $ 437
Accounts payable 38,883 35,556
Accrued liabilities 155,715 137,526
Income taxes payable 699 5,649
--------- ---------
Total current liabilities 196,110 179,168
LONG-TERM DEBT AND CAPITAL LEASES 6,047 217
DEFERRED LIABILITIES 3,215 3,338
MINORITY INTEREST -- 4,705
STOCKHOLDERS' EQUITY:
Common Stock - shares outstanding:
March 31, 1997: 30,676,232
September 30, 1996: 30,175,794 388,124 378,033
Retained earnings 150,877 163,916
Net unrealized loss on investments (12) --
Accumulated translation adjustments (250) --
--------- ---------
Stockholders' equity 538,739 541,949
--------- ---------
TOTAL $ 744,111 $ 729,377
========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 140,701 $ 170,668 $ 264,385 $ 328,948
COST OF SALES 87,899 100,254 164,098 193,133
--------- --------- --------- ---------
GROSS PROFIT 52,802 70,414 100,287 135,815
OPERATING EXPENSES:
Research, development and
related engineering 17,176 17,118 34,766 32,624
Marketing, general and
administrative 30,505 29,234 57,668 56,933
Settlement of royalty obligation 32,582 -- 32,582 --
--------- --------- --------- ---------
OPERATING (LOSS) INCOME (27,461) 24,062 (24,729) 46,258
INTEREST AND OTHER INCOME - NET 2,629 3,411 5,305 6,870
INTEREST EXPENSE (125) (117) (193) (252)
--------- --------- --------- ---------
(LOSS) INCOME BEFORE INCOME
TAXES AND MINORITY INTEREST (24,957) 27,356 (19,617) 52,876
(CREDIT) PROVISION FOR INCOME
TAXES (8,485) 9,575 (6,670) 18,507
MINORITY INTEREST (102) 128 92 235
--------- --------- --------- ---------
NET (LOSS) INCOME $ (16,370) $ 17,653 $ (13,039) $ 34,134
========= ========= ========= =========
NET (LOSS) INCOME PER SHARE $ (0.54) $ 0.58 $ (0.43) $ 1.12
========= ========= ========= =========
SHARES USED IN PER SHARE
COMPUTATIONS 30,255 30,520 30,217 30,516
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (13,039) $ 34,134
Reconciliation to net cash provided by
operating activities:
Depreciation and amortization 10,026 5,558
Amortization of intangibles 77 77
Settlement of royalty obligation 27,582 --
Deferred income taxes (3,700) (500)
Minority interest 92 235
Changes in assets and liabilities:
Accounts receivable 20,279 (15,623)
Inventories (9,366) (33,537)
Prepaid expenses (145) (2,309)
Deposits and other assets 238 (658)
Accounts payable 3,327 7,283
Accrued and deferred liabilities 4,623 17,111
Income taxes (4,950) (683)
--------- ---------
Net cash provided by operating activities 35,044 11,088
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of temporary investments (60,102) (68,642)
Maturities of temporary investments 32,184 28,735
Purchases of property and equipment (35,688) (22,629)
Purchase of minority interest in subsidiary (3,000) --
--------- ---------
Net cash used for investing activities (66,606) (62,536)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (294) (440)
Proceeds from borrowings 6,500 --
Sale of Common Stock 97 126,349
--------- ---------
Net cash provided by financing activities 6,303 125,909
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (695) (177)
--------- ---------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (25,954) 74,284
CASH AND EQUIVALENTS:
Beginning of period 218,841 166,790
--------- ---------
End of period $ 192,887 $ 241,074
========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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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 which are, in the
opinion of management, 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 of fiscal 1997 interim
periods are not necessarily indicative of results to be expected for the fiscal
year ending September 30, 1997.
2. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
-------- -------------
(In thousands)
<S> <C> <C>
Raw materials $ 94,260 $103,993
Work-in-process 124,177 101,293
Finished goods 4,158 7,943
-------- --------
$222,595 $213,229
======== ========
</TABLE>
3. ACQUISITION OF SVGL MINORITY INTEREST
On March 18, 1997, the Company purchased IBM's 6% equity interest in SVGL for
$3,000,000. As a result, the Company now accounts for SVGL as a wholly-owned
subsidiary.
4. 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 payment to IBM in exchange for $5,000,000 in cash,
489,296 shares of Common Stock valued at $10,000,000 and $23,000,000 in SVGL
product. Of the $38,000,000 total, $32,582,000 related to products currently
under development and was recognized as an expense in the second quarter of
fiscal 1997, and $5,418,000 related to existing products and was recorded as a
prepayment which will be amortized to expense through fiscal year 2000 in
proportion to the related product sales.
5. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the first quarter of fiscal 1998 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
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SFAS 128 replaces current EPS reporting requirements 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.
If SFAS 128 had been in effect during the current and prior year periods, basic
EPS would have been $(.54) and $.58 for the quarters ended March 31, 1997 and
1996, respectively, and $(.43) and $1.12 for the year to date periods,
respectively. Diluted EPS under SFAS 128 would not have been significantly
different than EPS currently reported for the periods.
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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 subsidiary, SVG Lithography Systems, Inc. (SVGL), its
photoresist processing products through its Photo Process Division, formerly the
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. Since March 1996,
customer order bookings (bookings) declined each quarter until the quarter ended
March 31, 1997 and were then approximately level with those of the preceding
quarter. In addition to the decreased level of bookings, 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 fiscal 1997 shipments will be lower than 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 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
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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 six months 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.*
Net sales for the second fiscal quarter ended March 31, 1997 were $140,701,000,
a 14% increase over net sales of $123,684,000 for the preceding quarter, but 18%
below net sales of $170,668,000 during the second quarter of fiscal 1996. For
the first half of fiscal 1997, net sales were $264,385,000, a 20% decrease from
net sales of $328,948,000 during the first half of fiscal 1996. The growth in
net sales over the preceding quarter was the result of increased shipments of
SVGL and Track products. In comparing both the second quarter and first six
months of fiscal 1997 to the corresponding year-earlier periods, the lower net
sales were principally due to reduced shipment levels in Track and Thermco
offset in part by increased shipments of SVGL's Micrascan photolithography
systems.
During the second quarter of fiscal 1997, the Company recorded bookings of
$127,726,000 (which represented a book-to-bill ratio of 0.91 to 1),
significantly lower than bookings during the year-earlier quarter of
$193,541,000 (which represented a book-to-bill ratio of 1.13 to 1) and
approximately equal to bookings during the preceding quarter of $125,212,000
(which represented a book-to-bill ratio of 1.01 to 1). Bookings for the second
quarter of fiscal 1997 reflect the Company's recognition of an order
cancellation of approximately $10,000,000. At March 31, 1997, the Company had a
backlog of $383,142,000, down slightly from 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 March 31, 1997, the backlog included orders for 39 Micrascan
photolithography systems. In addition to the systems included in backlog, SVGL
had orders for 21 systems with scheduled delivery dates outside the twelve month
backlog window, including orders for six advanced technology 193 nanometer
Micrascan systems currently under development.
Gross margin was 37.5% in the second quarter of fiscal 1997, compared to 38.4%
during the preceding quarter and 41.3% in the second quarter of fiscal 1996. For
the first six months of fiscal 1997, gross margin was 37.9% compared to 41.3%
for the first half of fiscal 1996. The decrease from the preceding quarter was
principally due to costs related to Track's most recent generation product, the
200APS. Shipments of 200APS systems were to commence during the second quarter
of fiscal 1997, but have been delayed by approximately nine to twelve months.*
In comparing the second quarter and first half of fiscal 1997 to the
corresponding periods of fiscal 1996, the lower gross margin was primarily due
to reduced volumes in Track and Thermco and the costs related to Track's 200APS
product discussed above, offset in part by increased SVGL margin. The
improvement in the SVGL gross margin compared to the year earlier periods
resulted primarily from the mix of Micrascan photolithography systems shipped as
well as increased manufacturing volumes and efficiencies related to its
Micrascan systems.
Research, development and related engineering (R&D) was $17,176,000 (12% of net
sales) during the second quarter of fiscal 1997, $17,590,000 (14% of net sales)
during the preceding quarter
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and $17,118,000 (10% of net sales) during the second quarter of fiscal 1996. The
Company's R&D expenditures are net of funding received from outside parties
under development agreements. During the second and first quarters of fiscal
1997 and the second quarter of fiscal 1996 respectively, such funding totaled
$1,550,000, $636,000 and $1,889,000. While the amount of R&D was relatively
comparable in each of the three quarters, the Company expects that multiple
lithography development programs, the efforts in Track, Thermco and SVGL to
design equipment capable of processing the next generation 300mm wafer and costs
associated with Track's 200APS program will result in increased R&D during the
second half of fiscal 1997.*
During the first six months of fiscal 1997 R&D was $34,766,000, up from
$32,624,000 during the same period of fiscal 1996. The increase was primarily
due to new product development at SVGL offset in part by reduced spending at
Thermco. In particular, SVGL recognized significantly less outside development
funding as an offset to R&D. During the six month periods ended March 31, 1997
and 1996, funding received under joint development agreements of $2,186,000 and
$4,848,000, respectively, was offset against R&D expenditures.
Marketing, general and administrative (MG&A) expenses were $30,505,000 (22% of
net sales) during the second quarter of fiscal 1997 compared to $27,163,000 (22%
of net sales) during the preceding quarter and $29,234,000 (17% of net sales)
during the second quarter of fiscal 1996. The increase in MG&A from the
preceding quarter was primarily due to costs associated with the increased level
of shipments at SVGL and Track, costs incurred by Thermco in support of its
international installed base and higher general management costs. In comparison
to the year-earlier quarter, the increase in MG&A was principally the result of
costs incurred by SVGL as a result of its larger installed base, including its
technical customer training and support functions, expenditures by Thermco
related to its international installed base and increased general management
costs, offset in part by a reduction in certain costs at Track and Thermco
corresponding to their decline in shipments from year-earlier levels. The
increase in MG&A as a percentage of sales compared to the year-earlier quarter
was the result of the decrease in net sales.
During the first six months of fiscal 1997, MG&A was $57,668,000 (22% of net
sales) compared to $56,933,000 (17% of net sales) during the first half of
fiscal 1996. The increase in MG&A over the year-earlier period corresponds to
the year to year quarterly comparison above. The increase in MG&A as a
percentage of sales compared to the year-earlier period was the result of the
decrease in net sales.
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.
(See Note 4 to Consolidated Condensed Financial Statements).
As a result of the royalty settlement discussed above, the Company incurred an
operating loss of $27,461,000 for the second quarter of fiscal 1997, compared to
operating income of $2,732,000 for the preceding quarter and $24,062,000 for the
second quarter of fiscal 1996. Correspondingly, the Company had an operating
loss of $24,729,000 during the first half of fiscal 1997 compared to operating
income of $46,258,000 for the first six months of fiscal 1996. Without giving
effect to the royalty settlement discussed above, the Company would have had
operating income for the second fiscal quarter and first six months of fiscal
1997 respectively, of $4,290,000 and $7,022,000.
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Interest and other income was $2,629,000 during the second quarter of fiscal
1997 compared to $2,676,000 for the preceding quarter and $3,411,000 for the
year-earlier quarter. For the first six months of fiscal 1997, interest and
other income was $5,305,000 compared to $6,870,000 for the first six months of
fiscal 1996. In comparing the second quarter and first half of fiscal 1997 to
the corresponding periods of fiscal 1996, the 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.
Interest expense was $125,000 during the second quarter of fiscal 1997, compared
to $68,000 during the preceding quarter and $117,000 during the year-earlier
quarter. During the first six months of fiscal 1997, interest expense was
$193,000, down from $252,000 during the first half of fiscal 1996.
The Company recorded a 34% benefit for income taxes for the first six months of
fiscal 1997, compared to a 35% provision for all of fiscal 1996. In comparison
to the preceding fiscal year, the benefit was the result of the operating loss
discussed above. Variations in the Company's effective tax rate relate primarily
to changes in the geographic distribution of the Company's pretax income.
The minority interest represented that share of SVGL's operating results which
were attributable to its minority shareholder, IBM. In March 1997, the Company
purchased IBM's interest in SVGL for $3,000,000 and now holds substantially all
of SVGL's common stock. Beginning in March 1997, the Company is accounting for
SVGL as a wholly-owned subsidiary. For the second quarter of fiscal 1997,
minority interest was recorded from the beginning of the quarter through the
purchase of IBM's interest and represented an addition to income of $102,000.
Minority interest represented reductions from income during the first quarter of
fiscal 1997 and the second quarter of fiscal 1996 of $194,000 and $128,000,
respectively. For the first six months of fiscal 1997 and 1996, minority
interest represented reductions from income of $92,000 and $235,000,
respectively.
For the second quarter of fiscal 1997 the Company had a net loss of $16,370,000
($0.54 per share), compared to net income of $3,331,000 ($0.11 per share) for
the first quarter of fiscal 1997 and net income of $17,653,000 ($0.58 per share)
for the second quarter of fiscal 1996. For the first half of fiscal 1997, the
Company had a net loss of $13,039,000 ($0.43 per share), compared to net income
of $34,134,000 ($1.12 per share) for the first six months of fiscal 1996.
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
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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 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.*
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.* 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 or to manufacturing difficulties,
could result in semiconductor manufacturers electing to install competitive
equipment in their fabrication facilities and could preclude industry acceptance
of its products.* Therefore, the inability to effect the timely production of
such products or any failure to achieve market acceptance could have a material
adverse effect on the Company's business and results of operations.*
Historically, the unit cost of the Company's products has been the highest when
they are newly introduced into production and cost reductions have come over
time through engineering improvements, economies of scale and improvements in
the manufacturing process. As a result, new products have, at times, had an
unfavorable impact on the Company's gross margins and results of operations.
There can be no assurance that the initial shipments of new products will not
have an adverse effect on the Company's profitability or that the Company will
be able to attain design improvements, manufacturing efficiencies or
manufacturing process improvements over time which will increase profitability.*
Further, the potential unfavorable effect of newly introduced products on
profitability can be exacerbated when there is intense price competition in the
marketplace.*
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. Significant competitive factors include product performance and
reliability, familiarity with particular manufacturers' products, established
relationships between suppliers and customers, particulate contamination
control, product availability and, particularly in recent months intense price
competition. Many of the
12
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Company's competitors are Japanese corporations. With the continued strength of
the U.S. Dollar in relation to the Japanese yen, the Company ability to compete
on the basis of price has been impaired.
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 recent months 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 either 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 assure a profitable transaction, either of which could have an adverse
effect on the Company's results of operations.*
In order to expand its market share in the Pacific Rim, the Company has begun
investing in the staffing and facilities necessary to sell, service and support
customers in 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, since November 1996, SVGL
has shipped two laser-based Micrascan III systems capable of printing .25 micron
line widths, and since December 1996 has shipped three of its lamp-based
Micrascan QML systems, which are capable of printing isolated .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 Micrascan.* The Company also believes that
the transition to both deep ultraviolet (DUV) step-and-scan systems and steppers
will accelerate in calendar 1998.* Currently, customers can purchase DUV
steppers to produce product at .25 micron line widths. However, 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
13
<PAGE> 14
and technological advantages, demand for the Micrascan technology may not
develop as the Company expects.* Additionally, competitive equipment capable of
producing .25 micron line widths using step-and-scan technology is currently
available in limited quantities from one competitor, and the Company believes
that at least two other manufacturers of advanced photolithography systems will
begin shipping competitive machines in the near future.*
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 continue 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 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 infrastructure, increase its staffing levels 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.
One of the most critical components of the Micrascan systems are the projection
optics which are manufactured by SVGL. The Company purchases the raw materials
for the optics from a single supplier with which it has a long-term supply
agreement. The agreement specifies quantities of material that increase over
time. Additionally, the supplier is obligated to create and store certain
defined quantities of safety stock. There can be no assurance that the supplier
will be able to supply the quantities of material specified in the agreement. If
the supplier were unable to meet its increasing commitments, SVGL would be
unable to manufacture the quantity of systems required to meet the anticipated
future demand.
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, 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.*
14
<PAGE> 15
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 Micrascan technology and to increase SVGL's manufacturing capability and
capacity. As of March 31, 1997, 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 March 31, 1997, the Company had received $12,000,000 in
funding from six Participants, of which $2,634,000 had been recognized and
offset against R&D 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.
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. During the second quarter of fiscal
1997, the Company recorded a charge of $32,582,000 for royalties owed by SVGL to
IBM under the terms of a research and development agreement. The charge, which
resulted in a loss for the quarter, represented a portion of SVGL's total
royalty obligation to IBM of $38,000,000. The remaining $5,418,000 was recorded
as a prepayment and will be amortized over certain product shipments to which it
applies. Although SVGL had been profitable during the seven preceding quarters,
the Company believes that due to the 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.*
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, cash and cash equivalents and temporary investments totaled
$264,013,000 compared to the September 30, 1996 total of $262,061,000, an
increase of $1,952,000. Cash generated from operations, in particular the
collection of accounts receivable, and the proceeds of a loan received by SVGL,
which is discussed below, was effectively offset by cash used to purchase
property and equipment, primarily to facilitate SVGL's increased level of
production and manufacturing capacity and to finance increased inventory levels.
As part of a loan package, on February 28, 1997, the Company secured 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. The Company
anticipates that in the near future it will close the remaining portion of the
package, a $3,000,000 ten year loan from the State of Connecticut Department of
Economic and Community Development which will bear interest at 1% and will also
be secured by the Company's Wilton, Connecticut facility.*
On March 18, 1997, the Company purchased IBM's 6% minority interest in SVGL for
$3,000,000 and now owns substantially all of the voting securities of SVGL.
During the second quarter of fiscal 1997, the Company satisfied a royalty
obligation in exchange for $23,000,000 in SVGL products, 489,296 shares of
Common Stock valued at $10,000,000 and $5,000,000 in cash. (See Note 4 to the
Consolidated Condensed Financial Statements.)
The Company sold approximately $20,000,000 in product to a newly established
semiconductor foundry in Southeast Asia. The customer still owes the Company
approximately $6,000,000 and has indicated that it owes significant amounts to
its banks, has no further available bank credit and has significant unpaid trade
accounts payable.* The customer has indicated to the Company that it has had a
series of meetings with its banks, but to date the banks have not provided
additional funding. While the Company believes that is has sufficient reserves
to absorb its estimate of probable losses as a result of the customer's
potential insolvency, it is continually monitoring the situation and intends to
take all available measures to minimize its exposure.*
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 May 12, 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 May 12, 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.*
16
<PAGE> 17
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.
(a) The Annual Meeting of Stockholders of the Company was
held on February 20, 1997 (the "Annual Meeting"). The
vote of holders of record of 30,180,259 shares of the
Company's Common Stock outstanding at the close of
business on December 23, 1996 was solicited by proxy
pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
(b) The following persons were elected Directors of the
Company at the Annual Meeting:
<TABLE>
<CAPTION>
VOTES WITHHOLDING
VOTES FOR AUTHORITY
---------- ---------
<S> <C> <C>
Papken S. Der Torossian 26,429,551 748,690
William A. Hightower 26,318,751 859,490
William L. Martin 26,425,651 752,590
Larry W. Sonsini 26,440,311 737,930
Nam P. Suh 26,453,486 724,755
Lawrence Tomlinson 26,455,511 722,730
</TABLE>
(c) The proposal to amend the Company's Certificate of
Incorporation to provide that the Board of Directors
be divided into three classes of directors serving
staggered three-year terms required the approval of
the affirmative vote of a majority of outstanding
shares of Common Stock, which approval was not
obtained. The Stockholders' vote on such amendment
was 10,371,095 shares FOR; 9,262,659 shares AGAINST;
138,948 shares ABSTAINED from voting; and 7,405,539
shares were NON-VOTES.
(d) The proposal to amend the Company's Certificate of
Incorporation to require that stockholder action be
taken at an annual meeting or special meeting of
stockholders and prohibiting stockholder action by
written consent required the
17
<PAGE> 18
approval of the affirmative vote of a majority of
outstanding shares of Common Stock, which approval
was not obtained. The Stockholders' vote on such
amendment was 10,067,470 shares FOR; 9,772,016
shares AGAINST; and 134,695 shares ABSTAINED from
voting; and 7,204,060 shares were NON-VOTES.
(e) The proposal to amend the Company's Certificate of
Incorporation to eliminate cumulative voting in the
election of directors required the approval of the
affirmative vote of a majority of outstanding shares
of Common Stock, which approval was not obtained. The
Stockholders' vote on such amendment was 13,504,487
shares FOR; 6,032,301 shares AGAINST; and 235,914
shares ABSTAINED from voting; and 7,405,539 shares
were NON-VOTES.
(f) The Company's 1996 Stock Plan was adopted and
1,500,000 shares of Common Stock were reserved for
issuance thereunder. The Stockholders' vote on such
amendment was 12,397,833 shares FOR; 7,865,970 shares
AGAINST; and 268,002 shares ABSTAINED from voting;
and 6,646,436 shares were NON-VOTES.
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.
18
<PAGE> 19
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: May 12, 1997 By: /s/ Papken S. Der Torossian
------------------------
Papken S. Der Torossian
Chief Executive Officer and
Chairman of the Board
Date: May 12, 1997 By: /s/ Russell G. Weinstock
------------------------
Russell G. Weinstock
Vice President Finance and
Chief Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<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 MARCH 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 192,887
<SECURITIES> 71,126
<RECEIVABLES> 127,494
<ALLOWANCES> 5,883
<INVENTORY> 222,595
<CURRENT-ASSETS> 631,686
<PP&E> 183,538
<DEPRECIATION> 78,093
<TOTAL-ASSETS> 744,111
<CURRENT-LIABILITIES> 196,110
<BONDS> 0
0
0
<COMMON> 388,124
<OTHER-SE> 150,615
<TOTAL-LIABILITY-AND-EQUITY> 744,111
<SALES> 264,385
<TOTAL-REVENUES> 264,385
<CGS> 164,098
<TOTAL-COSTS> 164,098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> (19,617)
<INCOME-TAX> (6,670)
<INCOME-CONTINUING> (13,039)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,039)<F1>
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> 0
<FN>
<F1>MINORITY INTEREST OF 92,000 IS DEDUCTED TO AFTER-TAX LOSS IN ARRIVING AT
NET LOSS OF 13,039,000
</FN>
</TABLE>
