<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, 1998*
[ ] 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.
[SVG LOGO](EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2264681
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
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 27, 1998,
was approximately $301,562,808. 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 27, 1998 was 32,816,577.
* See Part II, Item 8 of this report for information regarding Registrant's
fiscal year.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
parts of this Form 10-K as indicated herein:
<TABLE>
<S> <C>
Proxy Statement for Annual Meeting of Stockholders to be
held on
February 23, 1999......................................... Part III
Annual Report to Stockholders for fiscal year ended
September 30, 1998........................................ Parts II & IV
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
The information in this report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
certain risks and uncertainties, including those discussed below 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.
ITEM 1. BUSINESS.
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"). In addition, a precision
optics group supplies certain components for the Company's photolithography
products, government markets and lens systems to the cinematography industry.
The Company's products incorporate proprietary technologies and unique
processes, and focus on providing process and product technologies and
productivity enhancements to its customers. SVG works closely with its existing
and potential customers in the development of new systems and technologies and
supports its products through a network of worldwide service and technical
support organizations.
Herein the Company refers to its photolithography exposure products as SVG
Lithography Systems, Inc. "SVGL" products, its photoresist processing products
as "Track" products and its oxidation/diffusion and LPCVD products as "Thermco"
products.
INDUSTRY BACKGROUND
Continuous improvements in semiconductor process and design technologies
have led to the production of smaller, more complex and more reliable
semiconductor devices at a lower cost per function. As performance has increased
and size and cost have decreased, the demand for semiconductors has expanded in
computer systems, telecommunications systems, automotive products, consumer
goods and industrial automation and control systems. Semiconductor content as a
percentage of system cost has also increased. The Company believes that these
long-term trends will continue and will be accompanied by a growing demand for
semiconductor production equipment that can produce advanced integrated circuits
in high volumes with a low cost of ownership.*
The rapid development of advanced semiconductor applications requires
semiconductor manufacturers to continually improve their core technology and
manufacturing capabilities to remain competitive within the industry. As a
consequence, semiconductor manufacturers demand increasingly sophisticated, 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.
The semiconductor industry into which the Company sells its products is
highly cyclical and historically experienced periodic downturns that have had a
severe effect on the semiconductor industry's demand for semiconductor
processing equipment. As a result of the Asian economic crisis, an oversupply of
1
<PAGE> 3
certain semiconductor products, the impact of low cost personal computers, and
various other factors, semiconductor manufacturers have reduced planned
expenditures and cancelled or delayed the construction of new fabrication
facilities. This slowdown in demand began to impact the Company during the
fourth quarter of calendar 1997 (the Company's first fiscal quarter of 1998) as
the Company experienced lower customer bookings, customer deferrals of scheduled
equipment delivery dates and, to a lesser extent, customer order cancellations
which continued through the third calendar quarter of 1998 (the Company's fourth
fiscal quarter of 1998). These events have caused the Company to significantly
reduce its work force, consolidate and combine certain functions and redirect
product lines which necessitated a fourth quarter 1998 pretax restructuring
charge of $33,680,000. As a result of the lower bookings, order rescheduling and
cancellations, the Company believes sales during the first half of fiscal 1999
will be lower than sales during the second half of fiscal 1998.* There can be no
assurance that the Company will not experience further customer delivery
deferrals, additional order cancellations or a prolonged period of customer
orders at reduced levels, any or a combination of which would have a material
adverse effect on the Company's business and results of operations.*
STRATEGY
The Company's objective is to strengthen its position as a leading
worldwide semiconductor equipment supplier that offers a broad line of
technologically advanced products. The Company's strategy incorporates the
following key elements:
- 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.
- 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.
- 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 long term requirements
of the semiconductor industry. 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.
- 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.
2
<PAGE> 4
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 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 DUV (248 and 193
nanometer) and the increase in numerical aperture from 0.2 to approximately 0.7.
Additionally, efforts are commencing to investigate, and in some instances
develop 157 nanometer and post-optical technology to advance product line widths
as fine as .07 microns.
Historically, there have been two major approaches to photolithography
exposure systems: full field scanning projection aligners ("scanners") and
refractive steppers ("steppers"). Scanners project a full scale mask image onto
a moving full wafer, while steppers sequentially expose a small section of a
wafer in a stepped sequence of exposures, but do so by reducing the size of a
mask image by several fold (typically 5 times). Thus, scanners offer large
exposure fields while steppers offer masks that are easier to make and have a
lower cost. These strengths are combined in the step-and-scan system, a
technology pioneered by SVGL.
Micrascan. The Company believes that its Micrascan photolithography
step-and-scan exposure system provides the increased resolution required for
current advanced logic and memory devices and for succeeding generations of
complex, fine geometry integrated circuits through its use of DUV lamp or laser
light source and unique projection optics design. Micrascan overcomes the line
width limitations of steppers over a large exposure field by combining the
elements of both steppers and scanners into the Micrascan's step-and-scan
technology.*
The Micrascan combines advantages of scanning projection aligners and
steppers by scanning a portion of the wafer, then "stepping" to another portion
of the wafer and repeating the process as necessary. Each scan has the
capability to expose a large segment of the wafer. The large exposure field
enables Micrascan to fabricate larger devices in a single scan than steppers,
thus avoiding the necessity of "stitching" a circuit together through two
different exposures, and depending on the size of the chip provides the ability
to expose more than one device in an exposure field. In addition, Micrascan
continuously modifies the position of the wafer surface during the scan, using
its on-the-fly focus system to keep the wafer in the optimal focal plane, thus
providing a larger usable depth of focus. The larger the usable depth of focus
field is, the more tolerant of variations in the wafer surface the equipment
will be. The Company believes Micrascan's greater tolerance of wafer surface
variations can reduce the number of defective devices on a wafer, thereby
contributing to higher yields.* It further believes that scanning across the
field instead of exposing the entire field at one time also enables Micrascan to
achieve greater uniformity of resolution across the entire exposure field and
contributes to higher yields of faster devices.*
The Company believes that SVGL has substantial technological expertise and
process knowledge in developing deep ultraviolet ("DUV") step-and-scan
photolithography systems. SVGL has developed internal capability to design and
fabricate optical lenses, mirrors and coatings. This includes a combination of
purchased and proprietary optical metrology using phase measuring interferometry
to precisely measure and test the optical elements it produces. Micrascan
incorporates both mirrors and lenses in its optical system, which the Company
believes allows for an optical projection system that is less sensitive to
environmental
3
<PAGE> 5
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. Micrascan III+
capable of producing line widths of .15 micron sell for approximately
$8,300,000. Although the Company specifies that its systems to produce certain
line widths, it is commonplace that the combination of the tool's robustness and
the customer's process technology achieves finer line widths than those
specified.
Uncertain Market for Micrascan Products. To address the market for advanced
photolithography exposure systems, the Company has invested and expects to
continue to invest substantial resources in SVGL's Micrascan technology and its
family of Micrascan DUV step-and-scan photolithography systems, capable of
producing line widths of .18 micron and below. The development of a market for
the Company's Micrascan step-and-scan photolithography products will be highly
dependent on the continued trend towards finer line widths in integrated
circuits and the ability of other lithography manufacturers to keep pace with
this trend through either enhanced technologies or improved processes. The
Company believes DUV lithography will be required to fabricate devices with line
widths below 0.3 micron.* Semiconductor manufacturers can purchase DUV steppers
to produce product at .25 micron line widths. However, the Company believes that
as devices increase in complexity and size and require finer line widths, the
technical advantages of DUV step-and-scan systems, as compared to DUV steppers,
will enable semiconductor manufacturers to achieve finer line widths with
improved critical dimension control which will result in higher yields of faster
devices.* The Company also believes that the transition to DUV step-and-scan
systems will accelerate in calendar 1999 and that advanced semiconductor
manufacturers are beginning to require volume quantities of production equipment
as advanced as the current and pending versions of Micrascan to produce both
critical and to some degree sub-critical layers of semiconductor devices.*
Currently, competitive DUV step-and-scan equipment capable of producing .25
micron line widths 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 DUV
steppers are able to further enhance existing technology to achieve finer line
widths sufficiently to erode the competitive and technological advantages of DUV
step-and-scan systems, or other manufacturers of step-and-scan systems are
successful in supplying sufficient quantities of product in a timely manner that
are technically equal to or better than the Micrascan, demand for the Micrascan
technology may not develop as the Company expects.*
The Company believes that advanced logic devices 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 .18
micron and processing 300mm wafers.* Any failure by the Company to develop the
advanced technology required by its customers at progressively lower costs of
ownership could have a material adverse impact on the Company's financial
condition and results of operations.*
4
<PAGE> 6
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 $1,350,000.
TRACK SYSTEMS (TRACK)
Track designs, manufactures, markets and services photoresist processing
equipment which performs all the steps necessary to process semiconductor wafers
prior to photolithography exposure, including cleaning, adhesion promotion and
photoresist coating, and which performs all the steps required to treat wafers
after photolithography exposure prior to etching, including developing and
baking. As photoresist processing technology has evolved, the Company has
developed increasingly advanced products for this market, which are capable of
handling integrated circuits with line widths as narrow as 0.18 micron. Each
product line includes the principal processing capabilities described above and
is generally sold in customer-specified configurations that can include
specially engineered features and capabilities. All Track products are available
in fully automated cassette-to-cassette configurations either as stand-alone
processing stations or as in-line integrated manufacturing systems. The
equipment is modular in design to allow configuration to customer requirements.
Each semiconductor manufacturer may require certain of the processing stations
to effect its proprietary or specialized processes.
As a result of being able to supply its customers with both SVGL's
Micrascan photolithography systems and Track's photoresist processing products,
the Company believes it offers the only clustered solution manufactured by a
single supplier. Additionally, Track's 90 Series is designed to interface with
all other lithography exposure products, regardless of 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.
90 Series. The 90 Series, the 90-S and the 90-SE photoresist processing
systems are designed for use in fabrication processes for integrated circuits
with line widths as narrow as 0.25 micron, such as is required for 64 megabit
DRAMs. The 90 Series incorporates a proprietary wafer transfer system to
increase throughput and provides features allowing it to interface with factory
automation systems, such as those using automated guided vehicles. The 90 Series
can process wafers up to eight inches in diameter. The 90-S and the more recent
90-SE offer improved cost of ownership through increased productivity and a
smaller floor space requirement. Prices of the 90 Series range from
approximately $650,000 to $1,700,000.
8800 Series. The 8800 Series is designed to meet market needs for
photoresist contamination control and photoresist processing down to 0.8 micron
line widths. The 8800 Series incorporates such automation features as beltless
wafer handling, compatibility with low contamination wafer storage and movement
techniques, advanced software and communications capabilities and certain
process control improvements. The 8800 Series can process wafers from three to
six inches in diameter. The 8800 series is a mature product and sales have
declined in recent years. The Company anticipates that such sales will continue
to decline.* Prices of the 8800 Series range from approximately $200,000 to
$550,000.
5
<PAGE> 7
THERMCO SYSTEMS (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.
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 0.18 micron
technology and beyond. The design of RVP-300 focuses on maximizing productivity
and throughput. This is done by utilizing features such as fast temperature ramp
up and ramp down capability, Model Based Temperature Control (MBTC) for
optimized temperature control across the wafer, and a dual boat configuration.
Initial shipments of the RVP-300 occurred in the second quarter of fiscal 1998.
Prices of the RVP-300 range from $1,200,000 to $1,500,000, depending on
configuration.
Series 9000 Rapid Vertical Processor ("RVP"). Introduced in 1996, the RVP
is based on the Advanced Vertical Processor ("AVP") platform, processes both
eight inch and six inch wafers and meets 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
$1,000,000 to $1,300,000, 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
6
<PAGE> 8
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
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 1998
included the following:
<TABLE>
<S> <C>
Hewlett-Packard Phillips Semiconductor
IBM ProMos Technologies
Intel SGS-Thomson
LSI Logic Siemens
Motorola White Oak Semiconductor
</TABLE>
The Company relies on a limited number of customers for a substantial
percentage of its sales. For fiscal 1998, Intel, IBM and Motorola represented
40%, 17% and 13%, respectively, of sales and the Company's largest five
customers represented 76% of sales. In fiscal 1997 and 1998, Intel represented a
substantial portion of the total sales of both Track and SVGL products. The loss
of a significant customer (and in particular the loss of Intel as a Track or
SVGL customer -- See "Manufacturing and Raw Materials"), a delay in shipment due
to customer rescheduling or any substantial reduction in orders by a significant
customer, including reductions in orders due to market, economic or competitive
conditions in the semiconductor industry, would adversely affect the Company's
business and results of operations.*
MARKETING, SALES AND SERVICE
The Company markets and sells its products primarily to independent
manufacturers of semiconductor devices and computer, telecommunications and
other companies that manufacture semiconductor devices for their own use. The
market for the Company's products is worldwide. The Company sells its products
in the United States principally through its direct sales organization. The
Company sells its products overseas through a direct sales staff, independent
distributors and independent representatives. The following table sets forth the
Company's revenues by geographic area as a percentage of net sales for the three
fiscal years ended September 30:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
United States................................. 66% 72% 65%
Western Europe................................ 24 18 31
Far East...................................... 10 10 4
</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
7
<PAGE> 9
processing systems. The Company believes that its field service and process
support capabilities are major factors in its selection as an equipment
supplier. Increasingly, semiconductor manufacturers are requiring seven-day,
around the clock, on site or on call support. To meet this need, the Company
continues to enhance its training programs and deploy spare part inventories at
both customer sites and regional field depots. Service personnel are based in
field offices throughout the United States, Western Europe, Japan and the
Pacific Rim and increasingly on site at particularly large customer locations.
The Company warrants its products against defects in design, materials and
workmanship, generally for periods ranging from one to two years.
BACKLOG
At September 30, 1998 and 1997, the Company had a backlog of approximately
$254,130,000 and $437,668,000, 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. As a result of the current semiconductor environment, the Company did
receive in each quarter of fiscal 1998 customer deferrals and order
cancellations of product with scheduled delivery dates. This led to reduced
levels of shipments in the second half of fiscal 1998 and the decline will
potentially continue in the first half of fiscal 1999.* There can be no
assurance that the Company will not continue to experience customer delivery
deferrals, order cancellations or a prolonged period of customer orders at
reduced levels, any or a combination of which would have an adverse effect on
its operating results.*
As of September 30, 1998, the Company had recognized net sales of
approximately $53,000,000 from two customers who accepted and took title to the
related equipment and agreed to normal credit payment terms, but requested that
the Company store the equipment until predetermined shipment dates.
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.
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
8
<PAGE> 10
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, 1998, the Company had received $20,000,000 in development funding
from six Participants, of which $19,765,000 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 stipulates 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 a material
adverse effect on the Company's results of operations.*
In connection with the Company's acquisition of SVGL in 1990, SVGL received
an equity investment and research and development funding commitments for
Micrascan from IBM. Under the terms of the related research and development
agreement, SVGL owed IBM certain royalties based on future operating results.
During the second quarter of fiscal 1997, the Company satisfied its obligation,
recognized an expense of $32,582,000, which represented royalties related to
products currently under development, and recorded a prepayment of $5,418,000,
which represented royalties related to existing products which are being
amortized through fiscal 2000 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
1998, 1997, and 1996, total research and development expenditures were
approximately $99,000,000, $82,000,000, and $72,000,000, respectively, of which
approximately $12,000,000, $8,000,000, and $5,000,000, 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 the
industry consortium of semiconductor manufacturers, SEMATECH. In fiscal 1997 and
1998, 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, and projection aligners. The trend toward consolidation in
the semiconductor processing equipment industry has made it increasingly
important to have the financial resources necessary to compete effectively
across a broad range of product offerings, to fund customer service and support
on a worldwide basis and to invest in both product and process research and
development. Significant competitive factors include technology and cost of
ownership, a formula which includes such data as initial price, system
throughput and reliability and time to maintain or repair. Other competitive
factors include familiarity with particular manufacturers' products, established
relationships between suppliers and customers, product availability and
technological differentiation. Occasionally, the Company has encountered intense
price competition with respect to particular orders and has had
9
<PAGE> 11
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. As a result of
the strength of the U.S. dollar in relation to the Japanese yen, the Company is
at a disadvantage when competing on the basis of price. 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. To compete effectively in these
markets, the Company may be forced to reduce prices, which could cause further
reduction in net sales and gross margins and, consequently, have a material
adverse effect on the Company's financial condition and results of operations.*
Certain of the Company's existing and potential competitors have
substantially greater name recognition, financial, engineering, manufacturing
and marketing resources and customer service and support capabilities than the
Company. Additionally, the Company is a relative newcomer in the
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
DUV 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
DUV light sources, and the Company believes that Canon will begin initial
shipments of a similar step-and-scan system in the near future.* The Company
believes DUV lithography will be required to fabricate devices with line widths
below 0.3 micron.* Semiconductor manufacturers can purchase DUV steppers to
produce product at .25 micron line widths. However, the Company believes that as
devices increase in complexity and size and require finer line widths, the
technical advantages of DUV step-and-scan systems as compared to DUV steppers
will enable semiconductor manufacturers to achieve finer line widths with
superior 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, ASM Lithography, 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 DUV steppers are able to
further enhance existing technology to achieve finer line widths sufficiently to
erode the competitive and technological advantages of DUV step-and-scan systems,
or lithography manufacturers are able to supply step-and-scan systems in
sufficient quantity that are technically equal or better than Micrascan, demand
for the Micrascan technology may not develop as the Company expects.*
IMPORTANCE OF THE JAPANESE AND PACIFIC RIM MARKETS
The Company's customers are heavily concentrated in the United States and
Europe. The Japanese and Pacific Rim markets (including fabrication plants
located in other parts of the world which are operated by Japanese and Pacific
Rim semiconductor manufacturers) represent a substantial portion of the overall
market for semiconductor manufacturing equipment. To date, neither the Company's
shipments into Japan nor the Pacific Rim have been significant. The Company
believes that the Japanese companies with which it competes have a competitive
advantage because their dominance of the Japanese and Pacific Rim semiconductor
equipment market provides them with the sales and technology base to compete
more effectively throughout the rest of the world. The Company is not engaged in
any significant collaborative effort with any
10
<PAGE> 12
Japanese or Pacific Rim semiconductor manufacturers. As a result, the Company
may be at a competitive disadvantage to the Japanese equipment suppliers that
are engaged in such collaborative efforts with Japanese and Pacific Rim
semiconductor manufacturers. The Company believes that it must substantially
increase its share of these markets if it is to compete as a global supplier.*
Further, in many instances, Japanese and Pacific Rim semiconductor manufacturers
fabricate devices such as dynamic random access memory devices ("DRAMs"), with
potentially different economic cycles than those affecting the sales of devices
manufactured by the majority of the Company's U.S. and European customers.
Failure to secure customers in these markets may limit the global market share
available to the Company and may increase the Company's vulnerability to
industry or geographic downturns.* Recent economic difficulties in certain Asian
countries, particularly Korea, will adversely affect the Company's ability to
penetrate such markets.*
In the past, several of the Company's larger customers have entered into
joint ventures ("JV") with European, Japanese or Pacific Rim semiconductor
manufacturers. In such cases, the Company has encountered intense price
competition from foreign competitors who are suppliers to the non-U.S. member of
the JV. Further, in certain instances the Company has not secured the equipment
order when the non-U.S. member has had the responsibility for selecting the
equipment to be used by the JV in its U.S. operations. There can be no assurance
that as the Company's customers form additional alliances, whether in the U.S.
or in other parts of the world, that the Company will be successful in obtaining
equipment orders or that it will be able to obtain orders with sufficient gross
margin to generate profitable transactions, either of which could have an
adverse effect on the Company's results of operations.*
Throughout the Pacific Rim, the Company is attempting to compete with major
equipment suppliers having significant market share and established service and
support infrastructures in place. Although the Company has invested in the
staffing and facilities that it believes are necessary to sell, service and
support customers in the Pacific Rim, it 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, due to recent economic issues in certain Asian countries,
particularly Korea, the Company's ability to penetrate such markets has been
more difficult. Failure to secure customers in these markets would have an
adverse effect on the Company's business and results of operations.*
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
products are primarily manufactured in Orange, California and limited
manufacturing in Billingshurst, West Sussex, England, which the Company
announced will be closed and product responsibility transferred to Orange,
California. Tinsley manufactures optical components in Richmond and North
Hollywood, California. SVGL photolithography exposure products are manufactured
in Wilton and Ridgefield, Connecticut.
From time-to-time, the Company has experienced delays in the introduction
of its products and product enhancements due to technical, manufacturing and
other difficulties and may experience similar delays in the future.* For
example, during fiscal 1996, the Company announced the subsequently terminated
200-APS Track product. Initial shipments of the 200-APS were scheduled to
commence during the second quarter of fiscal 1997, and were delayed until the
second quarter of fiscal 1998. This delay, as well as industry developments,
caused the Company to implement a plan, which was announced on September 30,
1998, to terminate future development and shipments of its 200-APS products, and
to concentrate its efforts on completing a new product which has been in
development for approximately one year. There can be no assurance that the
Company will not experience delays in development or manufacturing problems
related to its new product as a result of instability of the design of either
the hardware or software elements of the new technology, or be able to
efficiently manufacture the new product or other products.* 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
11
<PAGE> 13
due to the protracted release of product from engineering into manufacturing or
due to manufacturing difficulties, could result in semiconductor manufacturers
electing to install competitive equipment in their fabrication facilities and
could preclude industry acceptance of the Company's products.* For example, the
Company's largest Track customer has decided to secure deliveries from another
source, a decision the Company believes is primarily due to the delay and
subsequent termination of the 200-APS. The release into the market of a new
technology Track product will not be accomplished for a number of quarters.* As
a result, competitors will increase their market share, and it will be
increasingly more difficult for the Company to regain market position.* The
Company's inability to effect the timely production of new products or any
failure of these products to achieve market acceptance could have a material
adverse effect on the Company's business and results of operations.*
Historically, the unit cost of the Company's products has been the highest
when they are newly introduced into production and cost reductions have come
over time through engineering improvements, economies of scale and improvements
in the manufacturing process.* As a result, new products have, at times, had an
unfavorable impact on the Company's gross margins and results of operations.
There can be no assurance that the initial shipments of new products will not
have an adverse effect on the Company's profitability or that the Company will
be able to attain design improvements, manufacturing efficiencies or
manufacturing process improvements over time.* Further, the potential
unfavorable effect of newly introduced products on profitability can be
exacerbated when there is intense price competition in the marketplace.*
The 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 growth in demand, the transition from steppers to
step-and-scan equipment for photolithography equipment, and potential future
demand for advanced lithography products, the Company has been in the process of
increasing SVGL's production capacity 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. Through fiscal 1998, the Company has
invested in significant capital improvements related to the buildings purchased
and the equipment required to expand the production capabilities of SVGL. While
the Company intends to continue certain of the expansion activities, it may not
invest in all of the metrology and other equipment required to maximize
manufacturing capacity until industry demand recovers.* However, the Company
plans to continue increasing capacity to produce optical components, thus
enabling it to quickly respond to customer requirements. Once demand recovers,
the timely construction and equipping of facilities to successfully complete the
increase in capacity will require the continued recruitment, training and
retention of a high quality workforce, as well as the achievement of
satisfactory manufacturing results on a scale greater than SVGL has attempted in
the past. There can be no assurance that 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 delivery quantities of current and
future Micrascan products could result in semiconductor manufacturers electing
to install competitive equipment in their advanced fabrication facilities, which
could impede acceptance of the Micascan products on an industry-wide basis.*
This could result in the Company's operating results being adversely affected by
the increase in fixed costs and operating expenses related to increases in
production capacity if net sales, for any reason, do not increase
commensurately.*
The time required to build a Micascan system is significant. If SVGL is to
be successful in supplying increased quantities of Micrascan systems, it will
not only need to be able to build more systems, it will need to build them
faster.* SVGL will require additional trained personnel, additional raw
materials and components and improved manufacturing and testing techniques to
both facilitate volume increases and shorten manufacturing cycle time.* To that
end, SVGL is continuing to develop its vendor supply infrastructure, and
implement manufacturing improvements.* Additionally, the Company believes that
once industry demand recovers, it must resume increasing its factory, field
service and technical support organization staffing and infrastructure to
support the anticipated customer requirements.* There can be no assurance that
the Company will not experience manufacturing difficulties or encounter problems
in its attempt to increase production and upgrade or expand existing
operations.*
12
<PAGE> 14
One of the most critical components of the Micrascan systems is the
projection optics, which are primarily manufactured by SVGL. As part of its
overall investment in capacity, the Company has increased SVGL's optical
manufacturing floorspace. The Company believes that in order for SVGL to be a
viable supplier of advanced lithography systems in the future, it must
successfully reduce the cycle times required to build projection optics.*
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
primary reasons for the acquisition were TLI's technology and expertise relating
to aspherical lenses, a key component of SVGL's photolithography products, the
adaptation of certain of TLI's manufacturing processes by SVGL and TLI's
commencement of the fabrication of non-aspherical lenses which are currently
produced by SVGL. However, there can be no assurance that TLI's manufacturing
technology is scaleable, or that such expertise can be transferred without
substantial time or expense, if at all.* The inability of SVGL to transfer this
production technology for use in processes of a substantially larger scale or
the inability of TLI to manufacture non-aspherical lenses for SVGL in sufficient
quantities to realize efficiencies of scale could adversely affect the Company's
ability to realize any significant benefits from the acquisition of TLI.*
The Company believes that protracted delays in delivering quantities of
both current and future generations of Micrascan products to multiple customers
could result in semiconductor manufacturers electing to install competitive
equipment in their advanced fabrication facilities, and could preclude industry
acceptance of the Micrascan technology and products.* In addition, the Company's
operating results could also be adversely affected by the increase in fixed
costs and operating expenses related to increases in production capacity and
field service and technical support activities if net sales do not increase
commensurately.*
SVGL -- Sole Source Materials and Components. Most raw materials and
components not produced by the Company are available from more than one
supplier. However, certain raw materials, components and subassemblies are
obtained from single sources or a limited group of suppliers. Although the
Company seeks to reduce its dependence on these sole and limited source
suppliers, and the Company has not experienced significant production delays due
to unavailability or delay in procurement of component parts or raw materials to
date, disruption or termination of certain of these sources could occur and such
disruptions could have at least a temporary adverse effect on the Company's
business and results of operations.* Moreover, a prolonged inability to obtain
certain components could have a material adverse effect on the Company's
business and results of operations and could result in damage to customer
relationships.*
The raw material for a proprietary component of the optical system for the
Micrascan is available from only one supplier. The supplier has expanded its
capacity to meet SVGL's projected long-term requirements and has created and
stored agreed upon quantities of safety stock. There can be no assurance that
the supplier will be able to provide acceptable quantities of material required
by SVGL.* Additionally, a version of the Company's Micrascan III
photolithography system utilizes an Excimer laser that is manufactured in volume
by only one supplier, which until the first quarter of fiscal 1998 was the only
supplier the Company had determined could meet its specifications. SVGL has
recently qualified an additional source of lasers for its current and future
versions of Micrascan products, allowing the potential for the integration of
such lasers into its system configurations.* However, there can be no assurance
that its customers will be receptive to procuring products with lasers from this
supplier, or the supplier will be able to provide product of sufficient quantity
and quality. If these suppliers were unable to meet their commitments, SVGL
would be unable to manufacture the quantity of products required to meet the
anticipated future demand, which would have a material adverse effect on the
Company's business and results of operations.*
PATENTS AND LICENSES
The Company owns several domestic and foreign patents relating to the
businesses of Track, Thermco and SVGL products. Although the Company has
historically relied and continues to rely on the technical and
13
<PAGE> 15
marketing competence and creative ability of its personnel, rather than patents,
to maintain its competitive position, it has begun to pursue both domestic and
foreign patent protection more aggressively.
As is typical in the semiconductor equipment industry, the Company has from
time to time received, and may in the future receive, communications from third
parties asserting patents or copyrights on certain of the Company's products and
technologies. Two of the Company's customers have notified the Company that they
have received a notice of infringement from Jerome H. Lemelson, alleging that
equipment used in the manufacture of electronic devices infringes patents issued
to Mr. Lemelson relating to "machine vision" or "barcode reader" technologies.
The customers have put the Company on notice that it intends to seek
indemnification from the Company for any damages and expenses resulting from
this matter if found liable or if the customer settles the claim. The Company
cannot predict the outcome of this or any similar claim or its effect upon the
Company, and there can be no assurance that any such litigation or claim would
not have a material adverse effect upon the Company's financial condition or
results of operations.*
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 1999.*
BUSINESS INTERRUPTION
The Company manufactures its Track products in San Jose, California and
substantially all of its Thermco products in Orange, California. Tinsley's
optical components are manufactured in Richmond and North Hollywood, California.
These California facilities are located in seismically active regions. SVGL's
photolithography exposure products are manufactured in Wilton and Ridgefield,
Connecticut. If the Company were to lose the use of one of its facilities as a
result of an earthquake, flood or other natural disaster, the resultant
interruptions in operations would have a material adverse effect on the
Company's results of operations and financial condition.*
YEAR 2000
As the Year 2000 approaches, a universal issue has emerged regarding how
existing application software programs and operating systems can accommodate
date values. The Company has completed the modification of its internal-use
computer software for the Year 2000. The third party costs associated with such
modifications were not material and were expensed in fiscal 1998. The Company
does not segregate internal costs incurred to assess and remedy deficiencies
related to the Year 2000 problem or modifications to its products, however, the
Company has incurred approximately $124,000 with third parties to identify and
modify its internal-use computers systems. Although the company believes that
the solutions, which were extensively tested, have resulted in its internal-use
systems being Year 2000 compliant, there can be no assurance that unforeseen
problems that could disrupt operations will arise, or that the Company could be
required to expend further cost and effort to solve such problems.*
14
<PAGE> 16
The Company has evaluated its products and identified those areas
containing date sensitive Year 2000 issues. The Company has informed its
customers of ship dates for Year 2000 compliant products and has made available
for potential sale the necessary modifications to bring previously shipped
products into compliance. The Company is in the process of contacting its
suppliers and service providers to ascertain their state of readiness and
compliance for Year 2000 issues. The Company will continue to monitor their
progress and compliance for these issues. There can be no assurance, however,
that the Company's suppliers and service providers will timely provide the
Company with products or services which are Year 2000 compliant. Any failure to
do so by such third parties could have a material adverse impact on the
Company's results of operations.*
At this time the Company does not feel it is necessary to develop a
contingency plan. As risks are identified, plans will be developed and
implemented as required.
Although the Company believes its Year 2000 plans will be successful, there
can be no assurance that unforeseen problems will not happen which could have a
material adverse effect on the Company.*
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in
foreign currency exchange rates and interest rates. The Company attempts to
minimize its currency fluctuation risk by actively managing the balances of
current assets and liabilities denominated in foreign currencies. The Company
does not use derivative financial instruments. A 10% change in the foreign
currency exchange rates would not have a material impact on the Company's
results of operations.
The Company has investments in marketable debt securities that are subject
to interest rate risk. However, due to the short-term nature of the Company's
debt investments the impact of interest rate changes would not have a material
impact on the value of such investments.
The Company is also exposed to interest rate risk on its fixed rate debt
obligations. At September 30, 1998 fixed rate debt obligations totaled
$6,505,000. The fixed rate obligations range between 8.25% to 12% with a
weighted average of 8.35% and maturity dates between April 1999 and February
2007. Due to the relatively insignificant principal balance of outstanding debt
obligations, the Company does not actively manage the risk associated with these
obligations. The impact of interest rate changes would not have a material
impact on the Company's results of operations.
EMPLOYEES
At September 30, 1998, the Company had 2,616 full-time employees and 44
part-time employees and contract personnel, including 531 in research and
development, 1,072 in manufacturing, 909 in marketing, sales and customer
service and support and 148 in administration. None of the Company's employees
are represented by a union. Management considers its relations with its
employees to be good.
The Company's future success is dependent upon its ability to attract and
retain qualified management, technical, sales and support personnel for its
operations. In particular, SVGL's future growth is very dependent on the
Company's ability to attract and retain key skilled employees, particularly
those related to the optical segment of its business. The 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.
15
<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........... 59 Chairman of the Board and Chief Executive Officer
William A. Hightower.............. 55 President and Chief Operating Officer
Russell G. Weinstock.............. 55 Vice President, Finance and Chief Financial Officer
Edward A. Dohring................. 65 Vice President, President, SVG Lithography Systems, Inc.
Steven L. Jensen.................. 49 Vice President, Worldwide Sales and Service
Jeffrey M. Kowalski............... 45 Vice President, President, Thermco Systems
Boris Lipkin...................... 51 Vice President, Corporate
Larry W. Sonsini.................. 57 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 and
announced his retirement effective December 31, 1998. 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. Lipkin became a Vice President of the Company in March 1995. From
August 1992 to March 1995 he was the Vice President and General Manager of the
Thin Film Systems business unit of Varian Associates.
Mr. Sonsini has been Secretary since November 1988. He was a member of the
Board of Directors of the Company from 1991 to 1997. Mr. Sonsini is a member of
the law firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel to the Company, and is the Chairman of the firm's Executive Committee.
Mr. Sonsini serves on the boards of directors of Lattice Semiconductor
Corporation, Novell, Inc., and PIXAR.
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located in San Jose, California in
36,000 square feet of office space. This space is under a lease that expires in
2006 and has a current base rental of approximately $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.
16
<PAGE> 18
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 2004. 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.
Tinsley owns two facilities in Richmond, California. The first consists of
approximately three acres of land and a building totaling 56,000 square feet.
The second consists of two acres of land currently under development for future
expansion of the Company's precision optical components. In addition, Tinsley
occupies two warehouses in Richmond, California with leases that expire in 1999
with a monthly base rent of approximately $5,600.
Tinsley, which owns Century Precision Optics, has two facilities in North
Hollywood, California. The first facility consists of approximately 21,000
square feet with a base monthly rent expense of approximately $21,300 under a
lease expiring in 2004. The second facility consists of approximately 5,000
square feet with a base monthly rent expense of approximately $4,000. This lease
is on a month to month basis.
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.
On or about August 12, 1998, Fullman International and Fullman Company
(collectively, "Fullman") initiated a lawsuit in the United States District
Court for the District of Oregon alleging a cause of action for fraudulent
transfer in connection with a settlement the Company had previously entered into
resolving its claims against a Thailand purchaser of the Company's equipment. In
its complaint against the Company, the plaintiff, another creditor of the
Thailand purchaser, alleges damages of approximately $11,500,000 plus interest.
The Company has successfully moved to transfer the case to the United States
District Court for the Northern District of California.
While the outcome of such litigation is uncertain, the Company believes it
has meritorious defenses to the claims and intends to conduct a vigorous
defense. However, an unfavorable outcome in this matter could have a material
adverse effect on the Company's financial condition.*
In addition to the above, the Company, from time to time, is party to
various legal actions arising out of the normal course of business, 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, 1998.
17
<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, 1998, at page 32
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, 1998, at page 32
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, 1998, at pages 33
to 46 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, 1998, at pages 13
to 31, 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 27, 1996, October 3, 1997, and October 2, 1998. For convenience,
this Report and the Company's Consolidated Financial Statements refer to all
such fiscal years as ending at September 30. Fiscal 1996 and fiscal 1998 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.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file its definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on February 23, 1999, pursuant to Regulation
14A of the Securities Exchange Act of 1934 (the "Proxy Statement"), not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Executive Officers. See the section entitled "Executive Officers of the
Registrant" in Part I, Item 1 of this Report.
(b) Directors. The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
18
<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
section entitled "Stock Ownership of Certain Beneficial Owners and Management"
in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company included in
the Company's Annual Report to Stockholders for the fiscal year ended September
30, 1998, are incorporated by reference:
Independent Auditors' Report.
Consolidated Balance Sheets at September 30, 1998 and 1997.
Consolidated Statements of Operations for the Years Ended September 30,
1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997 and 1996.
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> 21
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
10.46 First Amendment to Credit Agreement, dated October 23, 1998,
by and among the Registrant, ABN Amro Bank, N.V. as Agent
and certain Lenders with respect thereto.
10.47 Retirement Agreement, dated as of November 16, 1998, by and
between the Registrant and Edward A. Dohring.
13.1 Selected data from Annual Report to Stockholders for fiscal
year ended September 30, 1998.
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, (vii) SVG Thailand, Inc., a
Delaware corporation and (viii) SVG Korea, Inc., a Korean
corporation. SVG Lithography Japan Co., Ltd., a Japanese
corporation, Silicon Valley Group 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"),
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>
- ---------------
(b) REPORTS ON FORM 8-K. None
(c) EXHIBITS. See (a) above.
(d) FINANCIAL STATEMENT SCHEDULES. See (a) above.
20
<PAGE> 22
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, 1997 and 1998, and for each of
the three years in the period ended September 30, 1998, and have issued our
report thereon dated October 26, 1998; such consolidated financial statements
and report are included in your 1998 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 26, 1998
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
December 30, 1998 SILICON VALLEY GROUP, INC.
By: /s/ PAPKEN S. DER TOROSSIAN
------------------------------------
Papken S. Der Torossian
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Papken S. Der Torossian and Russell G.
Weinstock, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this report on Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ PAPKEN S. DER TOROSSIAN Chairman of the Board, December 30, 1998
- ----------------------------------------------------- Chief Executive Officer
Papken S. Der Torossian and Director (Principal
Executive Officer)
/s/ WILLIAM A. HIGHTOWER President Chief December 30, 1998
- ----------------------------------------------------- Operating Officer and
William A. Hightower Director
/s/ RUSSELL G. WEINSTOCK Vice President, Finance December 30, 1998
- ----------------------------------------------------- and Chief Financial
Russell G. Weinstock Officer (Principal
Financial and Accounting
Officer)
/s/ WILLIAM L. MARTIN Director December 30, 1998
- -----------------------------------------------------
William L. Martin
/s/ NAM P. SUH Director December 30, 1998
- -----------------------------------------------------
Nam P. Suh
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ LAWRENCE TOMLINSON Director December 30, 1998
- -----------------------------------------------------
Lawrence Tomlinson
/s/ KENNETH M. THOMPSON Director December 30, 1998
- -----------------------------------------------------
Kenneth M. Thompson
</TABLE>
23
<PAGE> 25
SILICON VALLEY GROUP
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS AND END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
----------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED 9/30/96:
Allowance for Doubtful Accounts................ $ 4,156 $ 2,044 $ (122) $ 6,078
Product Warranty Reserves...................... 32,603 64,068 (53,772) 42,899
YEAR ENDED 9/30/97:
Allowance for Doubtful Accounts................ 6,078 7,725 (7,009) 6,794
Product Warranty Reserves...................... 42,899 42,320 (41,685) 43,534
YEAR ENDED 9/30/98:
Allowance for Doubtful Accounts................ 6,794 3,273 (1,835) 8,232
Product Warranty Reserves...................... 43,534 64,138 (58,729) 48,943
</TABLE>
- ---------------
(1) Write-offs of uncollectible accounts and costs incurred for warranty
repairs.
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
10.46 First Amendment to Credit Agreement, dated October 23, 1998,
by and among the Registrant,
ABN Amro Bank, N.V. as Agent and certain Lenders with
respect thereto.
10.47 Retirement Agreement, dated as of November 16, 1998, by and
between the Registrant and
Edward A. Dohring.
13.1 Selected data from Annual Report to Stockholders for fiscal
year ended September 30, 1998.
23.1 Consent of Deloitte & Touche, independent auditors.
27 Financial Data Schedule.
</TABLE>
<PAGE> 27
[SVG LOGO]
[Recycled logo]
Printed on recycled paper
<PAGE> 1
EXHIBIT 10.46
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
October 23, 1998, is entered into by and among:
(1) SILICON VALLEY GROUP, INC., a Delaware corporation ("Borrower");
(2) Each of the financial institutions listed in Schedule I to the
Credit Agreement referred to in Recital A below (collectively, the
"Lenders"); and
(3) ABN AMRO BANK N.V., acting through its San Francisco
International Branch, as agent for Lenders (in such capacity, "Agent").
RECITALS
A. Borrower, the Lenders and Agent are parties to a Credit Agreement
dated as of June 30, 1998 (the "Credit Agreement").
B. Borrower has requested the Lenders and Agent to amend the Credit
Agreement in certain respects.
C. The Lenders and Agent are willing so to amend the Credit Agreement
upon the terms and subject to the conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower, the Lenders and Agent hereby agree as follows:
1. DEFINITIONS, INTERPRETATION. All capitalized terms defined above and
elsewhere in this Amendment shall be used herein as so defined. Unless otherwise
defined herein, all other capitalized terms used herein shall have the
respective meanings given to those terms in the Credit Agreement, as amended by
this Amendment. The rules of construction set forth in Section I of the Credit
Agreement shall, to the extent not inconsistent with the terms of this
Amendment, apply to this Amendment and are hereby incorporated by reference.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to the satisfaction of the
conditions set forth in Paragraph 4 below, the Credit Agreement is hereby
amended as follows:
(a) Subparagraph 5.03(b) is hereby amended to read in its entirety as
follows:
<PAGE> 2
(b) Fixed Charge Coverage Ratio. Borrower shall not permit its
Fixed Charge Coverage Ratio for any period set forth below to be less
than the ratio set forth opposite such period below:
The quarter ending on
July 2, 1999 2.00;
The consecutive two-quarter
period beginning on April
3, 1999 and ending on
October 1, 1999 2.50;
The consecutive three-quarter
period beginning on April
3, 1999 and ending on
December 31, 1999, and
each consecutive four-
quarter period ending
on the last day of each
quarter thereafter 3.50.
(b) Subparagraph 5.03(d) is hereby amended to read in its entirety as
follows:
(d) Tangible Net Worth. Borrower shall not permit its
Tangible Net Worth on the last day of any fiscal quarter (such
date to be referred to in this Subparagraph 5.03(d) as a
"determination date") which occurs on or after October 2, 1998
(such date to be referred to in this Subparagraph 5.03(d) as the
"base date") to be less than the sum on such determination date
of the following:
(i) Five Hundred Twenty Eight Million Seven Hundred
Seventy Seven Thousand Dollars ($528,777,000);
plus
(ii) Eighty percent (80%) of the sum of Borrower's
consolidated quarterly net income (ignoring any quarterly
losses) for each fiscal quarter after the base date through
and including the fiscal quarter ending on the determination
date;
plus
(iii) Seventy-five percent (75%) of the Net Proceeds of
all Equity Securities issued by Borrower and its
Subsidiaries (to Persons other than Borrower or its
Subsidiaries) during the period commencing on the base date
and ending on the determination
2
<PAGE> 3
date;
3
<PAGE> 4
plus
(iv) Seventy-five percent (75%) of the principal amount
of all debt securities of Borrower and its Subsidiaries
converted into Equity Securities of Borrower and its
Subsidiaries during the period commencing on the base date
and ending on the determination date.
minus
(v) The lesser of (A) the aggregate amount paid by
Borrower (including reasonable expenses incurred in
connection therewith) to repurchase up to one million shares
of its common stock during the period commencing on the base
date and ending on the determination date and (B)
$10,000,000.
(c) Subparagraph 5.03(e) is hereby amended to read in its entirety as
follows:
(e) Profitability.
(i) For the quarter ending October 2, 1998, Borrower shall
not permit its Adjusted Net Income to be a loss exceeding
$30,000,000.
(ii) During the period October 3, 1998 - April 2, 1999,
Borrower shall not permit (A) its Adjusted Net Income for any
quarter to be a loss exceeding $15,000,000 or (B) the sum of all
such quarterly losses (excluding any quarterly profits) to exceed
$25,000,000.
(iii) During the period April 3, 1999 - December 31, 1999,
Borrower shall not permit the sum of all quarterly losses based
upon its Adjusted Net Income (excluding any quarterly profits) to
exceed $5,000,000.
(iv) Thereafter, Borrower shall not permit (A) its Adjusted
Net Income for any quarter to be a loss exceeding $10,000,000,
(B) its Adjusted Net Income to be a loss in more than two
quarters in any consecutive four-quarter period (commencing with
the consecutive four-quarter period ending on March 31, 2000) or
(C) its Adjusted Net Income for any consecutive four-quarter
period (commencing with the consecutive four-quarter period
ending on March 31, 2000) to be a loss.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Agent and the Lenders that the following are true and correct on the
date of this Amendment and
4
<PAGE> 5
that, after giving effect to the amendments set forth in Paragraph 2 above, the
following will be true and correct on the Effective Date (as defined below):
(a) The representations and warranties of Borrower and its
Subsidiaries set forth in Paragraph 4.01 of the Credit Agreement and in the
other Credit Documents are true and correct in all material respects;
(b) No Default has occurred and is continuing; and
(c) Each of the Credit Documents is in full force and effect.
(Without limiting the scope of the term "Credit Documents," Borrower expressly
acknowledges in making the representations and warranties set forth in this
Paragraph 3 that, on and after the date hereof, such term includes this
Amendment.)
4. EFFECTIVE DATE. The amendments effected by Paragraph 2 above shall
become effective on October 23, 1998 (the "Effective Date"), subject to receipt
by Agent and the Lenders on or prior to the Effective Date of the following,
each in form and substance satisfactory to Agent, the Lenders and their
respective counsel:
(a) This Amendment duly executed by Borrower, the Required Lenders
and Agent;
(b) A Certificate of the Secretary of Borrower, dated the Effective
Date, certifying that the Restated Certificate of Incorporation and Bylaws
of Borrower, in the form delivered to Agent on the Closing Date, are in
full force and effect and have not been amended, supplemented, revoked or
repealed since such date;
(c) A nonrefundable amendment fee equal to 0.075% of each Lender's
Commitment to be paid to each Lender that executes this Amendment on or
before October 23, 1998; and
(d) Such other evidence as Agent or any Lender may reasonably request
to establish the accuracy and completeness of the representations and
warranties and the compliance with the terms and conditions contained in
this Amendment and the other Credit Documents.
5. EFFECT OF THIS AMENDMENT. On and after the Effective Date, each
reference in the Credit Agreement and the other Credit Documents to the Credit
Agreement shall mean the Credit Agreement as amended hereby. Except as
specifically amended above, (a) the Credit Agreement and the other Credit
Documents shall remain in full force and effect and are hereby ratified and
confirmed and (b) the execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power, or remedy of the Lenders or Agent, nor constitute a waiver of any
provision of the Credit Agreement or any other Credit Document.
5
<PAGE> 6
6. MISCELLANEOUS.
(a) Counterparts. This Amendment may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto
shall be deemed to constitute a complete, executed original for all
purposes.
(b) Headings. Headings in this Amendment are for convenience of
reference only and are not part of the substance hereof.
(c) Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of California without reference to
conflicts of law rules.
6
<PAGE> 7
IN WITNESS WHEREOF, Borrower, Agent and the Lenders have caused this Amendment
to be executed as of the day and year first above written.
BORROWER: SILICON VALLEY GROUP, INC.
By: /s/ Russell G. Weinstock
-----------------------------------------
Name: Russell G. Weinstock
---------------------------------------
Title Vice President of Finance and CFO
--------------------------------------
AGENT: ABN AMRO BANK, N.V.
By: /s/ Robin S. Yim
-----------------------------------------
Name: Robin S. Yim
---------------------------------------
Title: Group Vice President
--------------------------------------
By: /s/ Richard R. DaCosta
-----------------------------------------
Name: Richard R. DaCosta
---------------------------------------
Title: Vice President
--------------------------------------
LENDERS: ABN AMRO BANK, N.V.
By: /s/ Robin S. Yim
-----------------------------------------
Name: Robin S. Yim
---------------------------------------
Title: Group Vice President
--------------------------------------
By: /s/ Richard R. DaCosta
-----------------------------------------
Name: Richard R. DaCosta
---------------------------------------
Title: Vice President
--------------------------------------
COMERICA BANK-CALIFORNIA
By: /s/ Alan Jepsen
-----------------------------------------
Name: Alan Jepsen
---------------------------------------
Title: Vice President and Assistant Manager
--------------------------------------
7
<PAGE> 8
FLEET NATIONAL BANK
By: /s/ Mathew M. Glauninger
-----------------------------------------
Name: Mathew M. Glauninger
---------------------------------------
Title: Vice President
--------------------------------------
KEYBANK NATIONAL ASSOCIATION
By: /s/ Mary K. Young
-----------------------------------------
Name: Mary K. Young
---------------------------------------
Title: Assistant Vice President
--------------------------------------
WELLS FARGO BANK, N.A.
By: /s/ Karen Barone
-----------------------------------------
Name: Karen Barone
---------------------------------------
Title: Vice President
--------------------------------------
8
<PAGE> 1
EXHIBIT 10.47
RETIREMENT AGREEMENT
In recognition of your service to Silicon Valley Group, Inc. the Company would
like to recognize your retirement with the following exiting package, which will
be executed upon your signature on this general release:
This Agreement ("Agreement") is made as of the 16th day of November, 1998, by
and between Edward Dohring ("Dohring"), his assigns, his estate and his personal
representative (collectively referred to as "Dohring"), and the Silicon Valley
Group, Inc., and its subsidiary Silicon Valley Group Lithography, Inc. (jointly
referred to as "SVG" or as the "Company"), their successors or assigns.
In consideration of the mutual promises made herein, Dohring and SVG hereby
agree as follows:
1. Retirement.
(a) Retirement Date. Dohring's Retirement from the Company will occur
as of midnight December 31, 1998, (the "Retirement"). Following the retirement,
Dohring will be paid eighteen months salary ($450,000.00) as well as a bonus
equal to any bonus received over the 18 month period immediately preceding the
effective date of this Agreement, less legally required withholdings. Such
payments will commence on January 1, 1999, and will be paid bi-weekly
thereafter. In addition, Dohring will receive payment of the bonus monies in the
same manner and in the same time frame as he had in received such payments in
the past.
(b) Medical and dental coverage will be paid through July 31, 2000, and
Dohring will be eligible for COBRA benefits thereafter in accordance with
applicable laws.
(c) Dohring will remain employed in his current position with full
authority and compensation until the retirement date.
(d) All of Dohring's accrued vacation time will be distributed in a
lump sum payment after January 1, 1999 consistent with normal Company policy.
All of Dohring's accrued, but unused sick time will be relinquished as of the
retirement date, also consistent with established Company policy. Following
midnight, December 31, 1998, both Dohring and the Company agree that Dohring
will cease to accrue any further sick leave or vacation benefits.
(e) For a period of eighteen months following the retirement date the
Company will continue to pay Dohring his automobile allowance, said payments to
be made bi-weekly.
(f) For a period of eighteen months following the retirement date, the
Company will continue to enroll Dohring in the American Airlines Platinum Club.
<PAGE> 2
2. Benefits.
(a) Dohring shall have the right to his health and life insurance
benefits through July 31, 2000, there after individual coverage pursuant to
COBRA.
(b) Term Life Insurance, Annual Physical and Tax Preparation will be
continued for a period of 18 months from Retirement date.
(c) Dohring will have review and input privilege into press
announcement regarding his Retirement.
3. Relocation.
The company will pay relocation cost from Wilton, Connecticut to
Rochester, New York and related storage transfer costs in an amount not to
exceed $5,000.00.
4. No Defamation.
Dohring agrees that he will not, before or after the Retirement Date,
defame or disparage the Company, its products, its technologies or any other
aspect of its business or operations or any employee, officer, director or
consultant of the Company. The Company agrees that it will not defame or
disparage Dohring or any services performed by Dohring for the Company during
the course of his employment, before or after the retirement date.
5. Options.
Under the terms of the Company's Stock Option Plan, Dohring would be
entitled to exercise options for 133,385 shares as of December 31, 1998. The
Company will agree to extend the exercise period on these options through July
31, 2000, subject to approval of the SVG Board of Directors.
6. Waiver and Release of Claims.
(a) Dohring and the Company hereby waives and releases, and agrees not
to sue concerning, any and all claims and causes of action that he has, may have
or at any time has had, whether known or unknown, against the other and/or any
of their respective affiliates, employees, officers, or directors or parent or
Subsidiary corporations, successors, assigns or personal representatives for any
reason including, without limitation, any and all claims relating to or arising
from his employment relationship with SVG and the termination of that
relationship; any and all tort or other claims for wrongful discharge of
employment; any and all claims for breach of contract, both expressed and
implied; any and all claims arising out of any other laws or regulations
relating to
2
<PAGE> 3
employment or employment discrimination; and any attorneys' fees and
costs. This waiver shall include but not be limited to any and all claims and
causes of action pursuant to any local, state, or federal law, common or
statutory, including but not limited to Title VII of the Civil Rights Act of
1964, as amended, the Age Discrimination in Employment Act of 1967, the Employee
Retirement Income Security Act of 1974, Family Medical Leave Act, American with
Disabilities Act, as amended and any similar statutes arising under California
Law. There shall be excepted from this waiver any claims of Dohring to receive
the salary and benefits set forth in this Agreement.
(b) Dohring specifically acknowledges that he is waiving and releasing
any rights he may have under the Age Discrimination in Employment Act of 1967
("ADEA") and that this waiver and release is knowing and voluntary. Dohring and
the Company agree that this waiver and release does not apply to any rights or
claims that may arise under ADEA after the effective date of this Agreement.
Dohring acknowledges that the consideration given for this waiver and release is
in addition to anything of value to which Dohring was already entitled. Dohring
further acknowledges that he has been advised by this writing that (a) he should
consult with an attorney prior to executing this Agreement; (b) he has at least
twenty-one (21) days within which to consider this Agreement; (c) he has at
least seven (7) days following the execution of this Agreement to revoke the
Agreement; and (d) this Agreement shall not be effective until the revocation
period has expired.
7. Civil Code Section 1542.
Dohring and SVG each acknowledges that each is familiar with the
provisions of Section 1542 of the Civil Code of the State of California, which
section states as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
Dohring and SVG each hereby expressly waives any right each may have
under the above referenced code section, as well as under any statute or common
law principles of similar effect.
8. Indemnification
The Company agrees to insure and indemnify Dohring and hold him harmless
(including any and all costs of defense) from any threatened or actual claims,
suits or actions which are directed against him, or which involve him, in any
proceedings where such claims arise from Dohring's actions during his Employment
with the Company that were undertaken within the course and scope of his
authority as an employee.
3
<PAGE> 4
9. Proprietary Information.
(a) Dohring represents to the Company that Dohring has complied with
and will continue to comply with all of the terms of the Employment,
Confidential, Information and Invention Assignment Agreement which Dohring
entered into when Dohring became an employee of the Company. Dohring represents
that, in compliance with the Employment, Confidential, Information and Invention
Assignment Agreement, Dohring has reported all inventions conceived or made by
Dohring as required under such agreement. Dohring represents to the Company that
Dohring does not have in his possession, and has not failed to return to the
Company, any proprietary materials or other property belonging to the Company.
(b) The Company acknowledges that nothing in this Agreement limits
Dohring's right to seek and accept employment of his choosing after the
retirement date, without restriction, so long as he adheres to all of the terms
and conditions of the Employment, Confidential, Information and Invention
Assignment Agreement referenced above.
10. Confidentiality.
Dohring shall not disclose the terms of this Agreement to anyone,
except for his legal advisors, tax advisors, administrative assistant's name (on
a confidential basis), and immediate family members (including significant
other's name), without the written consent of the company unless required to do
so by law.
11. Severability.
If any provision hereof becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Agreement shall continue
in full force and effect without such provision.
12. Notice and Mailings.
Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office with postage and fees prepaid, addressed to each
of the other parties thereunto entitled at the following addresses or at such
other addresses as a party may designate by ten days' advance written notice to
each of the other parties thereto:
(a) All notice and mailings to SVG, shall be addressed to:
Silicon Valley Group, Inc.
101 Metro Drive, Suite 400
San Jose, CA 95110
4
<PAGE> 5
(b) All financial reporting documents relating to Dohring and
attributable to the 1998 calendar year which concern the Internal
Revenue Service, the State of Connecticut, and/or any other
governmental entity should be addressed to:
Mr. Edward Dohring
(c) All other documents and payments relating to Dohring, regardless of
date, should be addressed to:
Mr. Edward Dohring
13. Counterparts.
This Agreement may be executed in counterparts, and each counterpart
shall have the same force and effect as an original and shall constitute an
effective, binding agreement on the part of each of the undersigned.
14. California Law.
This Agreement shall be construed and governed by the laws of the State
of California.
15. Effective Date.
This Agreement is effective seven (7) days after both Parties have
signed it.
16. Entire Agreement.
This Agreement represents the entire agreement and understanding
between the Company and Employee concerning Employee's Retirement from the
Company, and supersedes and replaces any all prior agreements and understandings
concerning Employee's relationship with the Company and his compensation by the
Company.
5
<PAGE> 6
17. No Oral Modifications.
This Agreement may only be amended in writing signed by Dohring and an
officer of the Company.
18. Dohring's Legal Expenses.
As urged by the Company, Dohring has sought out legal advise from the
counsel of his choice and, as a result, has incurred fees and costs. The Company
hereby agrees to reimburse Dohring for such expenses actually incurred, not to
exceed $5,000.00, which should be claimed on Dohring's final business expense
submission.
19. Final Business Expenses.
Dohring shall submit his final business expenses report not later than
January 31, 1999 and the Company shall promptly tender reimbursement to him
consistent with its normal practice.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
SILICON VALLEY GROUP, INC.
Dated: November 16, 1998 By /s/ William A. Hightower
---------------------------------------
William A. Hightower, President and COO
EDWARD DOHRING, an individual
Dated: November 25, 1998 /s/ Edward A. Dohring
-------------------------------------------
Edward A. Dohring
6
<PAGE> 1
EXHIBIT 13.1
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 (in thousands, except share and per share amounts) 1997 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $129,689 $ 121,575
Temporary investments 76,972 28,425
Accounts receivable (net of allowance for doubtful
accounts of $6,794 and $8,232 respectively) 145,794 121,562
Refundable income taxes -- 15,000
Inventories 228,453 212,975
Prepaid expenses and other assets 7,507 7,485
Deferred taxes 5,590 22,740
------------------------------
Total current assets 594,005 529,762
Property and equipment, net 150,985 191,022
Deposits and other assets 6,614 6,070
Intangible assets, net 4,413 3,736
------------------------------
Total $756,017 $ 730,590
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 43,707 $ 25,346
Accrued liabilities 127,449 130,532
Current portion of long term debt 1,848 640
Income taxes payable 515 1,284
------------------------------
Total current liabilities 173,519 157,802
Long term debt 6,515 5,865
Deferred and other liabilities 2,873 5,393
Commitments (See Notes 8, 12 and 13) -- --
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: 1997: 32,272,342;
1998: 32,696,394 399,663 404,462
Retained earnings 173,961 160,384
Minimum pension liability (274) (274)
Cumulative translation adjustment (240) (3,042)
------------------------------
Stockholders' equity 573,110 561,530
------------------------------
Total $756,017 $730,590
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE> 2
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30
(in thousands, except per share amounts) 1996 1997 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 657,337 $ 614,226 $ 608,625
Cost of sales
Cost of net sales 383,715 378,114 389,279
Restructuring charges -- -- 19,117
---------------------------------------------
Gross profit 273,622 236,112 200,229
Operating expenses:
Research, development and related
engineering 67,323 74,311 87,272
Marketing, general and administrative 119,238 134,642 130,615
Settlement of royalty obligation -- 32,582 --
Restructuring and related charges -- -- 14,563
---------------------------------------------
Operating income (loss) 87,061 (5,423) (32,221)
Interest and other income 13,504 10,639 6,082
Interest expense (756) (1,018) (1,018)
---------------------------------------------
Income (loss) before income taxes and
minority interest 99,809 4,198 (27,157)
Provision (benefit) for income taxes 34,984 1,514 (13,580)
Minority interest 726 92 --
---------------------------------------------
Net income (loss) $ 64,099 $ 2,592 $ (13,577)
---------------------------------------------
Net income (loss) per share--basic $ 2.09 $ 0.08 $ (0.42)
---------------------------------------------
Shares used in per share
computations--basic 30,657 31,635 32,438
---------------------------------------------
Net income (loss) per share--diluted $ 2.06 $ 0.08 $ (0.42)
---------------------------------------------
Shares used in per share
computations--diluted 31,122 32,414 32,438
---------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE> 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Minimum Cumulative
------------------------- Retained Pension Translation
(in thousands except shares) Shares Amount Earnings Liability Adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1995 26,244,853 $ 251,024 $ 107,718 $ (128) $ -- $ 358,614
Sale of Common Stock,
net of issuance costs 4,025,000 126,196 126,196
Warrants exercised, net 701,923 --
Stock options exercised 115,194 883 883
Employee stock purchase plan 112,178 954 954
Tax benefit of stock option transactions 496 496
Net income 64,099 64,099
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996 31,199,148 379,553 171,817 (128) -- 551,242
Stock issued in settlement of
royalty obligation 489,296 9,994 9,994
Stock options exercised 372,464 3,853 3,853
Employee stock purchase plan 216,709 3,753 3,753
Tax benefit of stock option
transactions 2,532 2,532
Cumulative translation
adjustment (240) (240)
Pension liability (146) (146)
Adjustment to conform TLI
fiscal year (5,275) (22) (448) (470)
Net income 2,592 2,592
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997 32,272,342 399,663 173,961 (274) (240) 573,110
Stock options exercised 158,254 866 866
Employee stock purchase plan 265,798 3,196 3,196
Tax benefit of stock option
transactions 737 737
Cumulative translation
adjustment (2,802) (2,802)
Net loss (13,577) (13,577)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1998 32,696,394 $ 404,462 $ 160,384 $ (274) $ (3,042) $ 561,530
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30 (in thousands) 1996 1997 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 64,099 $ 2,592 $ (13,577)
Reconciliation to net cash provided by
operating activities:
Depreciation and amortization 13,875 27,605 39,171
Settlement of royalty obligation -- 27,582 --
Amortization of intangibles 377 751 848
Deferred income taxes (5,562) 948 (17,150)
Adjustment to conform TLI fiscal year -- (470) --
Minority interest 726 92 --
Changes in assets and liabilities:
Accounts receivable (28,729) (14,250) 24,232
Refundable income taxes -- -- (15,000)
Inventories (59,177) (13,249) 15,478
Prepaid expenses 145 (120) 22
Deposits and other assets (278) (1,159) 373
Accounts payable (4,514) 7,481 (18,361)
Accrued liabilities 38,519 (9,204) 5,617
Income taxes payable 4,596 (3,416) 769
Minimum pension liability -- (146) --
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 23,589 25,037 22,422
- --------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of temporary investments,
held to maturity (88,647) -- --
Purchases of temporary investments,
available for sale (43,220) (109,872) (10,190)
Maturities of temporary investments,
held to maturity 102,380 -- --
Maturities of temporary investments,
available for sale -- 76,120 58,737
Purchases of property and equipment (68,836) (89,932) (79,208)
Purchase of minority interest in subsidiary -- (3,000) --
- --------------------------------------------------------------------------------------------
Net cash used for investing activities (98,323) (126,684) (30,661)
- --------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Sale of Common Stock 128,033 7,332 4,799
Proceeds from borrowing 599 6,462 250
Repayment of debt (1,285) (1,406) (2,108)
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 127,347 12,388 2,941
- --------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (177) (839) (2,816)
- --------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 52,436 (90,098) (8,114)
Cash and equivalents:
Beginning of year 167,351 219,787 129,689
- --------------------------------------------------------------------------------------------
End of year $ 219,787 $ 129,689 $ 121,575
- --------------------------------------------------------------------------------------------
Non-Cash Investing and Financing Activities:
Common Stock issued in settlement of
royalty obligation $ -- $ 9,994 $ --
- --------------------------------------------------------------------------------------------
Tax benefit of stock option transactions $ 496 $ 2,532 $ 737
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 5
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. An
extension of the current downturn or 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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company regularly assesses those estimates and, while
actual results may differ, management believes that the estimates are
reasonable.
PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the
accounts of the Company and its wholly-owned subsidiaries, after elimination of
intercompany transactions and balances.
The functional currency for the majority of the Company's subsidiaries is the
U.S. dollar, and for such subsidiaries, foreign exchange gains and losses are
included in net income and were not significant in any of the periods presented.
For two subsidiaries, the functional currency is the local currency, and for
these subsidiaries, remeasurement gains and losses are included in a separate
component of stockholders' equity. Certain receivables from two subsidiaries
have been classified as long term and the cumulative translation adjustments
related to these receivables are presented as a separate component of
stockholders' equity.
CASH EQUIVALENTS. Cash and 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.
17
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, 1997 or 1998. Any gains or losses on
sales of investments are computed by specific identification. No investments
were sold in 1996, 1997 or 1998.
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>
INTANGIBLE ASSETS. Intangible assets are amortized on a straight-line basis over
their estimated lives as follows: goodwill, twenty-five years; purchased
technology, six years.
REVENUE RECOGNITION. The Company recognizes revenue when the buyer accepts and
takes title to the equipment, generally upon shipment. Product warranty costs
are accrued in the period that sales are recognized. During the second half of
fiscal 1998, the Company recognized approximately $58,000,000 of net sales to
two customers who accepted and took title to the related equipment, and agreed
to normal payment terms, but requested that the Company store the equipment
until predetermined shipment dates. At September 30, 1998, the Company was
storing a total of $53,000,000 of such equipment with shipment dates ranging
through July 1999.
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 13).
NET INCOME (LOSS) PER SHARE. Effective October 1, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share"
(EPS), which requires a
18
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income or loss by the weighted average common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if other dilutive potential common shares were exercised or
converted into Common Stock.
For fiscal 1998, net loss per share was calculated using only the weighted
average number of common shares outstanding as the addition of potential common
shares would have been anti-dilutive. For fiscal 1996 and 1997, the difference
between the shares used in the computation of basic and diluted EPS results from
the inclusion of stock warrants and stock options issued to employees under
employee stock plans.
EMPLOYEE STOCK PLANS. The Company accounts for its stock option and employee
stock purchase plans in accordance with the provisions of the Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to apply the provisions of APB No. 25 for
purposes of determining net income or loss and has adopted the pro forma
disclosure requirements of SFAS No. 123 effective October 1, 1996 (see Note 11).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial
Accounting Standards Board ("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 its 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for derivatives used for hedging activities. It
requires that all derivatives be recognized either as an asset or liability, be
measured at fair value and that the results of such measurement be included
either in the income statement or in stockholders' equity, depending on the
nature of the transaction. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. The Company believes that the application of SFAS No. 133
will not have a material effect on the Company's financial statements.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior years'
Consolidated Financial Statements to conform to the fiscal 1998 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 1996 included 52 weeks, fiscal 1997 included
53 weeks and fiscal 1998 included 52 weeks.
19
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. TEMPORARY INVESTMENTS
Temporary investments at September 30 are comprised of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Municipal bonds $74,971 $25,425
Municipal notes 2,001 --
Auction rate preferreds -- 3,000
- --------------------------------------------------------------------------
Total $76,972 $28,425
- --------------------------------------------------------------------------
</TABLE>
All of the Company's temporary investments at September 30, 1998, mature within
one year.
NOTE 3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
September 30 (in thousands) 1997 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Inventories:
Raw materials $ 92,660 $ 103,738
Work-in-process 128,662 103,362
Finished goods 7,131 5,875
- --------------------------------------------------------------------------
Total $ 228,453 $ 212,975
- --------------------------------------------------------------------------
Property and equipment:
Land and improvements $ 11,494 $ 11,494
Buildings and improvements 45,470 74,822
Machinery and equipment 137,872 172,584
Furniture and fixtures 28,899 36,114
Leasehold improvements 24,360 24,220
- --------------------------------------------------------------------------
Total 248,095 319,234
Accumulated depreciation and amortization (97,110) (128,212)
- --------------------------------------------------------------------------
Property and equipment, net $ 150,985 $ 191,022
- --------------------------------------------------------------------------
Intangible assets:
Goodwill $ 6,019 $ 6,019
Purchased technology 1,000 1,000
- --------------------------------------------------------------------------
7,019 7,019
Accumulated amortization (2,606) (3,283)
- --------------------------------------------------------------------------
Total $ 4,413 $ 3,736
- --------------------------------------------------------------------------
Accrued liabilities:
Compensation $ 30,917 $ 28,792
Product warranty 43,534 48,943
Customer deposits and advances 42,608 31,452
Restructuring and related charges -- 7,332
Other 10,390 14,013
- --------------------------------------------------------------------------
Total $ 127,449 $ 130,532
- --------------------------------------------------------------------------
</TABLE>
20
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RESTRUCTURING AND RELATED CHARGES
During the fourth quarter of fiscal 1998, the Company recorded restructuring and
related charges of $33,680,000. The charge includes costs of $28,521,000
resulting from the termination of the Company's previously announced 200-APS
photoresist processing system (the "200-APS charge") and a provision of
$5,159,000 for reductions in the Company's workforce that includes severance
compensation and benefit costs for workforce reductions announced in July 1998
($2,696,000) and September 1998 ($2,463,000). These workforce reductions were
implemented in response to global weakness in the demand for semiconductor
capital equipment as well as the decision to terminate the 200-APS product.
The 200-APS charge consisted of: the write-off of 200-APS inventory and purchase
commitments, which has been classified as cost of sales; the write-off of fixed
assets that were employed in the 200-APS effort; costs to fulfill obligations to
customers utilizing 200-APS systems, including the cancellation of certain
receivables and the support of such systems through fiscal 2000; and certain
other costs related to exiting the 200-APS program.
Restructuring and related charges in fiscal 1998 (in thousands):
<TABLE>
<CAPTION>
200-APS
Inventory
Severance and Purchase Fixed Customer Other Exit
and Benefits Commitments Assets Obligations Costs Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Restructuring provision $ 5,159 $ 19,117 $ 3,213 $ 5,580 $ 611 $ 33,680
Incurred to date (2,153) (17,285) (3,213) (3,287) (410) (26,348)
- -----------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1998 $ 3,006 $ 1,832 $ -- $ 2,293 $ 201 $ 7,332
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company expects that during fiscal 1999 it will make cash payments of
approximately $6,832,000 related to the restructuring, with the remaining
$500,000 in cash payments to occur in fiscal 2000. Substantially all employee
terminations will be effective July 1999.
NOTE 5. SVG LITHOGRAPHY SYSTEMS, INC.
Through March 17, 1997, the Company owned 94% of SVG Lithography Systems, Inc.
(SVGL) and International Business Machines, Inc. (IBM) owned the remaining 6%.
The minority interest reflected in the Consolidated Statement of Operations
represented that share of SVGL's operating results which were attributable to
IBM. On March 18, 1997, the Company purchased IBM's 6% interest in SVGL for
$3,000,000. As a result, the Company now accounts for SVGL as a wholly-owned
subsidiary.
NOTE 6. SETTLEMENT OF ROYALTY OBLIGATION
Under the terms of a research and development agreement, SVGL owed IBM certain
royalties based on future operating results. On March 18, 1997, the Company
satisfied this royalty obligation to IBM in exchange for $5,000,000 in cash,
489,296 shares of Common Stock valued at $10,000,000 and $23,000,000 in SVGL
product. Of the $38,000,000 total, $32,582,000 related to products currently
under development and was recognized as an expense in the second quarter of
fiscal 1997, and $5,418,000 related to existing products and was recorded as a
prepayment which is being amortized to expense through fiscal year 2000 in
proportion to the related product sales. During fiscal 1996 the Company made
royalty payments pertaining to this agreement of $2,370,000.
21
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. DEBT ARRANGEMENTS
On June 30, 1998, the Company entered into an unsecured $150,000,000 bank
revolving line of credit agreement, which expires June 30, 2001. Advances under
the line bear interest at the Prime Rate or 0.65% to 1.50% over LIBOR. The
agreement includes covenants regarding liquidity, profitability, leverage,
coverage of certain charges and minimum net worth and prohibits the payment of
cash dividends. On October 23, 1998, certain of the covenants were amended, in
part to allow for the Company's fourth quarter fiscal 1998 net loss. The Company
is in compliance with the covenants as amended.
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 $5,791,000 at
September 30, 1998.
At September 30, 1998, TLI had outstanding, two loans and two special assessment
bonds, which bear interest at rates between 8.5% and 12% with maturity dates
through April 2007. At September 30, 1998, such instruments had an aggregate
remaining principal balance of $714,000.
Interest payments were $624,000 in 1996, $488,000 in 1997 and $655,000 in 1998.
NOTE 8. 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 $7,235,000 in 1996, $1,172,000 in 1997 and $1,623,000 in 1998.
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 $2,999,000 in 1996, $3,135,000 in 1997 and $3,407,000 in 1998.
In February 1997, the Company adopted a non-qualified deferred compensation plan
that allows a select group of management or highly compensated Employees and
Directors to defer a portion of their salary, bonus and other benefits. The plan
is unfunded and amounts due participants represent general obligations of the
Company. The Company may credit additional amounts to participants' account
balances, depending on the amount of the employee's contribution, up to a
maximum of 5% of an employee's annual salary and bonus. In addition, interest is
credited to the participants' account balances at 120% of the average Moody's
corporate bond rate. For 1998, participants' accounts will be credited at 8.71%.
Company contributions and related interest become 100% vested five years after
the plan year in which the contribution was made. During fiscal 1997 and fiscal
1998, the Company's expense was $609,000 and $878,000, respectively, and at
September 30, 1998, the Company's liability under the deferred compensation plan
was $3,573,000.
Additionally, the Company assumed unfunded salary continuation agreements with
certain key executives and employees of TLI. Under the terms of the agreement,
the Company has agreed to pay certain fixed amounts over a ten year period after
the employees reach the age of 65. Payments began vesting December 1990 and
become fully vested only if the participants remain employed by the Company
through the age of 65. The present value of these payments,
22
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
calculated using a discount rate of 6%, is being charged ratably to expense over
the vesting period. During fiscal 1996, 1997, and 1998 the Company had related
expenses of $17,000, $32,000, and $14,000, respectively, and at September 30,
1998, the Company's liability under these agreements was $625,000.
At September 30, 1998, 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, 1998, the aggregate potential payments under
these agreements would have been approximately $7,100,000.
The Company also assumed the defined benefit pension plan of Tinsley
Laboratories, Inc. The plan had previously been terminated during 1995 and the
Company is currently in the process of finalizing the termination process. At
both September 30, 1997 and September 30, 1998, the Company had recorded a
minimum pension liability of $274,000 within stockholders' equity, net of income
taxes, which is based upon the excess of the estimated accumulated benefit
obligation of $1,705,000 and $1,604,000, respectively, over the fair market
value of plan assets (primarily money market funds) of $1,431,000 and
$1,330,000, respectively. Upon finalization of the plan termination, the minimum
pension liability will be charged to the statement of operations.
NOTE 9. INCOME TAXES
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1997 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 32,735 $ (1,218) $ 478
State 6,090 1,433 1,252
Foreign 1,721 351 1,840
- ----------------------------------------------------------------------------
Total current 40,546 566 3,570
- ----------------------------------------------------------------------------
Deferred:
Federal (4,928) (293) (14,720)
State (634) 1,241 (2,430)
- ----------------------------------------------------------------------------
Total Deferred (5,562) 948 (17,150)
- ----------------------------------------------------------------------------
$ 34,984 $ 1,514 $(13,580)
- ----------------------------------------------------------------------------
</TABLE>
Domestic and foreign income before income taxes and minority interest is as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1997 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 95,186 $ 3,898 $(30,925)
Foreign 4,623 300 3,768
- ----------------------------------------------------------------------------
$ 99,809 $ 4,198 $(27,157)
- ----------------------------------------------------------------------------
</TABLE>
23
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective tax rate differs from the Federal statutory rate as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1997 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate $ 34,933 $ 1,469 $ (9,505)
State taxes, net of Federal effect 3,297 200 (1,178)
Foreign taxes at differing rates 197 268 (51)
FSC commission (2,164) (464) (1,437)
Change in valuation allowance (2,656) -- --
Tax exempt interest -- (2,284) (1,799)
Settlement of royalty obligation -- 1,500 --
Other 1,377 825 390
- ------------------------------------------------------------------------------------------------
Total $ 34,984 $ 1,514 $(13,580)
- ------------------------------------------------------------------------------------------------
</TABLE>
The items giving rise to deferred taxes were as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1997 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserves not recognized for tax purposes $ 11,757 $ 28,907
Net operating loss carryforwards of acquired companies 3,130 3,130
Accelerated depreciation 273 273
- -----------------------------------------------------------------------------------------------
Total deferred tax assets 15,160 32,310
Valuation allowance (9,297) (9,297)
- -----------------------------------------------------------------------------------------------
Total $ 5,863 $ 23,013
- -----------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, 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 1996, 1997 and 1998, the Company made income tax payments of $36,059,000,
$2,882,000 and $16,878,000, respectively.
NOTE 10. STOCKHOLDERS' EQUITY
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 1,750,000 shares of Common Stock at $13.625 per share. 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.
24
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON STOCK. 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.
NOTE 11. 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 up to five years.
Activity under the plans is as follows (shares in thousands):
<TABLE>
<CAPTION>
Shares Weighted Average
Under Option Exercise Price
- ------------------------------------------------------------------------
<S> <C> <C>
Balances, September 30, 1995 1,766 $ 15.72
Granted 1,519 19.21
Exercised (115) 7.67
Canceled (1,043) 26.89
- ------------------------------------------------------------------------
Balances, September 30, 1996 2,127 13.02
Granted 823 25.03
Exercised (372) 10.34
Canceled (117) 17.94
- ------------------------------------------------------------------------
Balances, September 30, 1997 2,461 16.97
Granted 1,121 21.64
Exercised (158) 5.47
Canceled (218) 20.24
- ------------------------------------------------------------------------
Balances, September 30, 1998 3,206 $ 18.93
- ------------------------------------------------------------------------
</TABLE>
25
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information concerning options outstanding and
exercisable as of September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.66 - $ 7.50 234,238 .67 $ 6.61 231,602 $ 6.63
$10.50 - $15.00 512,818 3.86 $ 11.87 305,481 $ 10.81
$ 16.13 747,086 4.79 $ 16.13 348,941 $ 16.13
$16.63 - $20.63 676,027 8.77 $ 20.22 68,750 $ 19.00
$21.25 - $32.69 1,036,239 7.23 $ 26.38 180,199 $ 26.25
- -------------------------------------------------------------------------------------------------
Total 3,206,408 5.97 $ 18.93 1,134,973 $ 14.54
- -------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, options to purchase 1,087,170 shares of Common Stock were
available for future grant. There were 549,750 and 732,024 options exercisable
as of September 30, 1996 and 1997, respectively with a weighted average exercise
price of $8.29 and $10.16, 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 1,495,730 had been issued at September
30, 1998. 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. The plan has
offering periods of twelve months, with a new twelve-month period beginning each
April 1 and October 1.
Pro forma net income and earnings per share. The Company has elected to follow
APB Opinion 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
had accounted for its employee stock options (including shares under the
Employee Stock Purchase Plan) granted subsequent to September 30, 1995 under the
fair value method of that statement.
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1996, 1997 and 1998, respectively: risk free rates of
6.3%, 6.4% and 6.0%; a stock price volatility factor of 56%, 56% and 64%; an
expected option life of 2 years, 2 years and 7.2 months following vesting
26
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for Officer and Directors and 9 months, 9 months and 7.3 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 weighted average fair value of options granted during the fiscal
1996, 1997 and 1998 was approximately $7.79, $12.57 and $9.85 per share,
respectively. 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, 1997 and 1998, respectively:
risk-free rates of 5.5%, 5.8% and 6.0%, stock price volatility factor of 56%,
56% and 60%, and expected option life of one year. The weighted average fair
value of purchase rights granted in fiscal 1996, 1997 and 1998 was approximately
$9.26, $8.76 and $7.68 per share, respectively.
For purposes of pro forma disclosures required by SFAS 123, the estimated fair
value of the options is amortized to expense over the options' vesting period.
The Company's pro forma information follows (in thousands except for earnings
per share information):
<TABLE>
<CAPTION>
1996 1997 1998
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Proforma net income (loss) $61,960 $(3,738) $(21,116)
Proforma earnings (loss) per share--basic $ 2.02 $ (.12) $ (.65)
Proforma earnings (loss) per share--diluted $ 1.99 $ (.12) $ (.65)
- -----------------------------------------------------------------------------------
</TABLE>
For pro forma purposes in accordance with SFAS No. 123, the repricing of
employee stock options during 1996 is treated as a modification of the
stock-based award, with the original options being repurchased and new options
granted. Any additional compensation arising from the modification is recognized
over the remaining vesting period of the new grant. SFAS 123 is effective for
stock-based awards granted by the Company commencing October 1, 1995. All
stock-based awards granted before October 1, 1995, have not been valued and no
pro forma compensation expense has been recognized. However, any option granted
before October 1, 1995 that was repriced in 1996 is treated as a new grant
within 1996 and valued accordingly. In addition, because compensation expense is
recognized over the vesting period of the option, the initial impact on pro
forma income may not be representative of pro forma compensation expense in
future years.
NOTE 12.COMMITMENTS
Future minimum lease payments for operating leases for the years ended September
30 (primarily facilities) are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 5,128
2000 3,882
2001 3,337
2002 3,291
2003 3,177
Thereafter through 2010 3,970
- -------------------------------------------------------------------
Total $22,785
- -------------------------------------------------------------------
</TABLE>
Rent expense was $9,024,000, $7,009,000 and $7,006,000 in 1996, 1997 and 1998,
respectively.
27
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has an option to purchase the land and buildings at one of their
track facilities for approximately $10,000,000, which expires, on or about,
December 11, 1998. The Company is in the process of determining whether they
will execute this option or extend their current operating lease.
NOTE 13. 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 $30,288,000 in 1996, $40,227,000 in 1997 and
$12,842,000 in 1998 relating to such product development and recognized
$4,994,000, $7,968,000 and $11,997,000, respectively, in related funding.
During fiscal 1996, the Company entered into agreements with certain customers
(the Participants) whereby each agreed to assist in funding the Company's
development of an advanced technology 193-nanometer Micrascan system. In
exchange for such funding the Participants receive the right to purchase one
such system and in addition, receive a right of first refusal (ratable among
such participants) to all such machines manufactured during the first two years
following the initial system shipments. For each initial system ordered, each
Participant agreed to fund $5,000,000 in such development costs. The agreements
call for each Participant to pay $1,000,000 of initial development funding and
four subsequent payments of $1,000,000 upon the completion of certain
development milestones. The participants may withdraw from the development
program without penalty but payments made against completed development
milestones are not refundable and all preferential rights to future equipment
are forfeited. As of September 30, 1998, the Company had received $20,000,000 in
funding from six Participants, of which $19,765,000 had been recognized and
offset against research and development expenditures. 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.
NOTE 14. 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 30% of sales in 1996, 36% of sales in 1997, and 40%
of sales in 1998; a second customer accounted for 7% of sales in 1996, 22% of
sales in 1997 and 17% of sales in 1998; and a third customer accounted for 10%
of sales in 1996, 6% of sales in 1997 and 13% of sales in 1998.
28
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
September 30 (in thousands) 1996 1997 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales:
North America:
Unaffiliated customers:
North America $431,571 $442,422 $393,579
Europe 131,570 87,312 163,482
Far East 50,340 53,287 12,810
Other 203 126 96
Inter-region transfers 29,004 26,264 28,156
Europe 27,629 21,044 28,958
Far East 16,024 10,035 9,700
Eliminations (29,004) (26,264) (28,156)
- --------------------------------------------------------------------------------------
Consolidated net sales $657,337 $614,226 $608,625
- --------------------------------------------------------------------------------------
Operating Income (Loss):
North America $ 82,941 $ (2,414) (34,309)
Europe 3,964 (1,718) 3,630
Far East 1,241 591 79
Eliminations (1,085) (1,882) (1,621)
- --------------------------------------------------------------------------------------
Consolidated operating income (loss) $ 87,061 $ (5,423) $(32,221)
- --------------------------------------------------------------------------------------
Identifiable Assets:
North America $707,023 $731,158 $701,129
Europe 37,934 28,361 38,883
Far East 8,351 6,827 10,213
Eliminations (9,051) (10,329) (19,635)
- --------------------------------------------------------------------------------------
Consolidated assets $744,257 $756,017 $730,590
- --------------------------------------------------------------------------------------
</TABLE>
NOTE 15. ACQUISITION OF TINSLEY LABORATORIES, INC.
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. in a stock
for stock transaction whereby approximately 1,091,000 shares of the Company's
Common Stock were exchanged for all outstanding shares of TLI Common Stock. TLI
designs, manufacturers and sells precision optical components, assemblies and
systems to customers in a variety of industries and research endeavors. The
transaction was accounted for as a pooling of interests for financial reporting
purposes. All prior periods have been restated to include TLI financial results.
29
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the merger, TLI used a calendar year end. The Company's restated
financial statements combine the fiscal 1996 results of the Company with the
calendar 1996 results of TLI. Both companies have been accounted for on a
September fiscal year for 1997 and 1998. TLI's results of operations for the
quarter ended December 31, 1996, that are not material to the consolidated
companies, have been included in the combined financial statements for both
fiscal 1996 and fiscal 1997, with the adjustment to conform the fiscal periods
reflected as an adjustment to retained earnings in the first quarter of fiscal
1997.
The following table illustrates the combination of TLI and the Company for
periods prior to the effective date of the merger:
<TABLE>
<CAPTION>
(In thousands) 1996 1997
- ----------------------------------------------------
<S> <C> <C>
Net Sales:
Silicon Valley Group $639,928 $594,957
TLI 17,409 19,269
- ----------------------------------------------------
Combined net sales $657,337 $614,226
- ----------------------------------------------------
Net Income:
Silicon Valley Group $ 63,221 $ 1,487
TLI 878 1,105
- ----------------------------------------------------
Combined net income $ 64,099 $ 2,592
- ----------------------------------------------------
</TABLE>
NOTE 16. 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>
1998
Net sales $ 188,707 $ 195,872 $ 116,385 $ 107,661
Gross profit 74,388 77,514 38,088 10,239
Income (loss) before income taxes 17,860 14,059 (11,357) (47,719)
Net income (loss) 12,145 9,560 (6,817) (28,465)
Net income (loss) per share--basic 0.38 0.30 (0.21) (0.87)
Net income (loss) per share--diluted 0.37 0.29 (0.21) (0.87)
1997
Net sales $ 128,022 $ 145,881 $ 166,079 $ 174,244
Gross profit 48,754 54,554 62,746 70,058
Income (loss) before income taxes
and minority interest 5,661 (24,294) 10,012 12,819
Net income (loss) 3,584 (15,982) 6,562 8,428
Net income (loss) per share--basic 0.11 (0.51) 0.21 0.26
Net income (loss) per share--diluted 0.11 (0.51) 0.20 0.25
- ------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Silicon Valley Group, Inc.:
We have audited the accompanying consolidated balance sheets of Silicon Valley
Group, Inc. and its subsidiaries as of September 30, 1997 and 1998, and the
related consolidated statements of operations, Stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1998. 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, 1997 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1998, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP [DELOITTE & TOUCHE LLP LOGO]
San Jose, California
October 26, 1998
31
<PAGE> 20
FINANCIAL INFORMATION
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended September 30,
(in thousands, except per share amounts) 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 332,891 $ 475,141 $ 657,337 $ 614,226 $ 608,625
Income (loss) before income
taxes and minority interest 27,411 61,696 99,809 4,198 (27,157)
Net income (loss) 17,110 39,263 64,099 2,592 (13,577)
Preferred stock dividend 1,190 537 -- -- --
Net income (loss)
per share--basic $ .90 $ 1.66 $ 2.09 $ 0.08 $ (0.42)
Shares used in per share
computations--basic 19,113 23,627 30,657 31,635 32,438
Net income (loss)
per share--diluted $ .87 $ 1.61 $ 2.06 $ 0.08 $ (0.42)
Shares used in per share
computations--diluted 19,587 24,326 31,122 32,414 32,438
Balance Sheet Data:
Working capital $ 174,509 $ 328,128 $ 466,637 $ 420,486 $ 371,960
Total assets 284,515 513,665 744,257 756,017 730,590
Long-term debt and
capital leases 3,418 2,015 1,718 6,515 5,865
Stockholders' equity 193,363 358,614 551,242 573,110 561,530
Other Data:
Backlog $ 213,121 $ 400,324 $ 404,889 $ 437,668 $ 254,130
Number of employees 1,999 2,757 3,185 3,515 2,660
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Common Stock Prices
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market System under the symbol SVGI. The following table sets
forth the range of high and low sales prices of the stock during fiscal 1997 and
fiscal 1998 as reported by Nasdaq-NMS.
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
- --------------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $19-3/8 $15-3/8 $36-1/4 $18-3/8
Second Quarter 27-1/8 18-5/8 27-7/8 19
Third Quarter 26-3/8 18-1/2 21-1/2 15-3/4
Fourth Quarter 37-3/4 28-1/2 16-1/2 8
- --------------------------------------------------------------------------------------
</TABLE>
To date, the Company has not declared or paid dividends on its Common Stock. The
Board of Directors of the Company presently intends to retain all earnings for
use in the Company's business and therefore does not anticipate declaring or
paying any cash dividends in the foreseeable future. The Company's revolving
credit facility prohibits the payment of cash dividends on Common Stock. As of
November 27, 1998, there were 1,269 holders of record of the Common Stock.
32
<PAGE> 21
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, 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 photolithography exposure SVGL
products, photoresist processing Track products, oxidation/diffusion and LPCVD
Thermco products and certain Tinsley precision optical components.
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI").
(See "Liquidity and Capital Resources") The transaction has been accounted for
as a pooling of interests for financial reporting purposes. All amounts
discussed below have been retroactively restated to reflect the inclusion of
TLI.
The semiconductor industry into which the Company sells its products is highly
cyclical and historically experienced periodic downturns that have had a
severe effect on the semiconductor industry's demand for semiconductor
processing equipment. As a result of the Asian economic crisis, an oversupply of
certain semiconductor products, the impact of low cost personal computers, and
various other factors, semiconductor manufacturers have reduced planned
expenditures and cancelled or delayed the construction of new fabrication
facilities. This slowdown in demand began to impact the Company during the
fourth quarter of calendar 1997 (the Company's first fiscal quarter of 1998) as
the Company experienced lower customer bookings ("bookings"), customer deferrals
of scheduled equipment delivery dates and, to a lesser extent, customer order
cancellations. For the four quarters of fiscal 1998 bookings were $137,253,000,
$100,442,000, $123,641,000 and $65,936,000, respectively. By comparison, during
the fourth quarter of fiscal 1997, the Company recorded bookings of
$214,987,000. As a result of such lower bookings, order rescheduling and order
cancellations, sales during the second half of fiscal 1998 were 42% below sales
during the preceding six months. Further, the Company believes that sales during
the first half of fiscal 1999 could be 10% to 15% lower than sales during the
second half of fiscal 1998, partly as a result of these lower bookings.* A
decrease in sales of this magnitude could result in further reductions in the
Company's gross margin and net income in the first half of fiscal 1999.* There
can be no assurance that the Company will not experience further customer
delivery deferrals, additional order cancellations or a prolonged period of
customer orders at reduced levels, any or a combination of which would have a
material adverse effect on the Company's business and results of operations.*
33
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In an effort to lessen the impact of these lower sales volumes, the Company took
several steps to reduce operating expenses, including a reduction in workforce,
temporary shutdowns and the restructuring of certain portions of the Company's
business. During the third quarter of fiscal 1998, the Company reduced its
workforce by approximately 200 employees and shut down the majority of its
operations for five days. During the fourth quarter of fiscal 1998, the Company
shut down the majority of its operations for ten additional days and recorded
restructuring and related charges of $33,680,000. The restructuring and related
charges include costs of $28,521,000 resulting from the termination of the
Company's previously announced 200-APS photoresist processing system (the
"200-APS charge") and a provision of $5,159,000 for the July and September 1998
announced reductions in the Company's workforce for approximately 950 employees.
The severance compensation and benefit costs for July 1998 were $2,696,000 for
approximately 660 employees and the September 1998 charge was $2,463,000 for
approximately 290 employees. The 200-APS charge consisted of the following
components: (i) the write-off of 200-APS inventory totaling $19,117,000; (ii)
the write-off of fixed assets with a net book value of $3,213,000 that were
employed in the 200-APS effort; (iii) costs totaling $5,580,000 to fulfill
obligations to customers committed to utilizing 200-APS systems, including the
cancellation of certain receivables and the support of such systems through
fiscal 2000; and (iv) certain other costs totaling $611,000 related to exiting
the 200-APS program. The cost of the 200-APS inventory write-off was classified
as cost of sales and the remaining restructuring costs were classified in
operating expenses as restructuring and related charges.
Historically, the Company has relied on a limited number of customers for a
substantial percentage of its net sales. In fiscal 1998, the Company's three
largest customers accounted for 40%, 17% and 13% of net sales. The Company
believes that, for the foreseeable future, it will continue to rely on a limited
number of major customers for a substantial percentage of its net sales.* As a
result of delays in delivering initial quantities of the subsequently terminated
200-APS Track product, one of the Company's largest Track customers has decided
to purchase systems with similar capabilities from another supplier, which the
Company expects will have an adverse effect on Track's sales in future periods.*
(See "Risks Inherent in the Company's Business--Rapid Technological Change;
Dependence on New Product Development"). The loss of any other significant
customer, further delays in shipments due to rescheduling or additional
reductions in orders by a significant customer, including reductions in orders
due to market, economic or competitive conditions in the semiconductor industry,
will further exacerbate the adverse effect the customer order rescheduling and
cancellations discussed above have had on the Company's business and results of
operations.*
FISCAL 1998 COMPARED TO FISCAL 1997
For fiscal 1998, net sales were $608,625,000, slightly below fiscal 1997 net
sales of $614,226,000. The decrease in net sales was due to lower shipments of
Thermco and Track products during fiscal 1998, offset in part by increased
shipments of the SVGL Micrascan photolithography product.
The Company's fiscal 1998 bookings were $427,272,000 (which represented a book
to bill ratio of 0.70 to 1), significantly below fiscal 1997 bookings of
$648,001,000 (which represented a book to bill ratio of 1.05 to 1). At September
30, 1998, the Company had a backlog of $254,130,000, a 42% decrease from the
September 30, 1997 backlog of $437,668,000. 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, 1998, the
34
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
backlog included orders for 34 Micrascan photolithography products. In addition
to the products included in backlog, the Company had 19 orders for SVGL
Micrascan photolithography products with scheduled delivery dates outside the
twelve-month backlog window.
During the second half of fiscal 1998, the Company recognized approximately
$58,000,000 of net sales to two customers who accepted and took title to the
related equipment, and agreed to normal payment terms, but requested that the
Company store the equipment until predetermined shipment dates. At September 30,
1998, the Company was storing a total of $53,000,000 of such equipment with
shipment dates ranging through July 1999.
For fiscal 1998, the Company's gross margin was 33%, significantly below the
fiscal 1997 gross margin of 38%. As discussed above, $19,117,000 of the fiscal
1998 restructuring charge for the write-off of 200-APS inventory has been
included in cost of sales. This restructuring charge accounted for 3% of the
year to year decrease in gross margin. Without taking into account the 200-APS
inventory charge, the fiscal 1998 gross margin was 36%, a decrease of 2% from
the fiscal 1997 gross margin. This decrease was primarily the result of lower
volumes and higher fixed costs for SVGL products during the second half of
fiscal 1998 and the overall effect of lower volumes of Thermco and to a lesser
degree, Track products.
Research, development and related engineering ("R&D") expenses are net of
funding received from outside parties under various development agreements. Such
funding is typically payable upon the attainment of one or more development
milestones that are specified in the agreement. Neither the spending, nor the
recognition of the funding related to the development milestones is ratable over
the term of the agreements. During fiscal 1996, the majority of development
funding was received by SVGL from the industry consortium of semiconductor
manufacturers, SEMATECH. In fiscal 1997 and fiscal 1998, the funding was
primarily related to agreements between the Company and certain customers for
the development of a 193 nanometer Micrascan system. (See "SVGL--Research and
Development Funding.")
R&D expenses were $87,272,000 (14% of net sales) during fiscal 1998, compared to
$74,311,000 (12% of net sales) during fiscal 1997. Such R&D amounts are net of
funding recognized under joint development agreements of $11,997,000 and
$7,968,000 during fiscal 1998 and fiscal 1997, respectively. The year to year
increase in R&D was primarily due to new product and process development,
particularly for SVGL products, the design and development of equipment capable
of processing the next generation 300mm wafer and costs associated with Track's
subsequently terminated 200-APS program.
During late fiscal 1996 and early fiscal 1997, the Company sold approximately
$20,000,000 in product to SubMicron Technology PCL ("SMT"), a newly established
semiconductor foundry in Thailand. SMT paid the Company approximately
$14,000,000 before encountering severe financial difficulties. During the third
quarter of fiscal 1997, the Company determined that the remaining receivable
from SMT was uncollectible. After reversing costs accrued for the installation
and warranty of the products sold to SMT, the Company recorded a net charge
against its fiscal 1997 operating results of approximately $4,000,000 (the "SMT
Charge").
During fiscal 1998, marketing, general and administrative ("MG&A") expenses were
$130,615,000 (21% of net sales), lower than fiscal 1997 MG&A of $134,642,000
(22% of net sales). The decrease in MG&A from the preceding year was primarily
due to the effect of the SMT Charge on fiscal 1997 MG&A.
35
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As discussed above, during the fourth quarter of fiscal 1998, the Company
recorded restructuring and related charges of $33,680,000, of which $14,563,000
was classified as operating expenses.
Under the terms of a research and development agreement, SVGL owed IBM certain
royalties based on future operating results. During the second quarter of fiscal
1997, the Company satisfied its obligation to IBM. See the discussion of the IBM
royalties in the comparison of fiscal 1997 to fiscal 1996 below.
For fiscal 1998, the Company had an operating loss of $32,221,000, compared to
an operating loss of $5,423,000 during fiscal 1997. In comparison to the
preceding year, the fiscal 1998 operating loss was the result of the
restructuring charges, lower gross margins on lower net sales and increased R&D
expenses, offset in part by the non-recurring royalty settlement during fiscal
1997.
Interest and other income was $6,082,000 during fiscal 1998 compared to
$10,639,000 for fiscal 1997. The year to year decrease in interest and other
income was primarily the result of lower interest income due to lower average
cash balances available for investment, foreign currency translation and
exchange losses, in large part due to the strength of the U.S. dollar during
fiscal 1998, and the absence of certain royalty income under an agreement which
expired during the fourth quarter of fiscal 1997.
Interest expense of $1,018,000 in fiscal 1998 was equivalent to fiscal 1997
interest expense of $1,018,000. Interest expense in fiscal 1998 and 1997 was
primarily associated with a $6,500,000 loan received from the Connecticut
Development Authority. (See Note 7 to the Consolidated Financial Statements).
The Company recorded a 50% benefit for income taxes for fiscal 1998, compared to
a 36% provision for fiscal 1997. Variations in the Company's effective tax rate
relate primarily to changes in the geographic distribution of its pretax income
and certain tax-free interest income. (See Note 9 to the Consolidated Financial
Statements).
The minority interest reflected in the Company's 1997 financial statements
represents that share of SVGL's operating results attributable at the time to
its minority stockholder, IBM. In March 1997, the Company purchased IBM's
interest in SVGL for $3,000,000. The Company now accounts for SVGL as a wholly
owned subsidiary.
For fiscal 1998 the Company had a net loss of $13,577,000 ($0.42 loss per
share--diluted), compared to net income of $2,592,000 ($0.08 per share--diluted)
for fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
For fiscal 1997, net sales were $614,226,000, a decrease of 7% from net sales of
$657,337,000 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 SVGL's Micrascan photolithography products, particularly
revenues from shipments of Micrascan III that began shipping in the first
quarter of fiscal 1997.
The Company's fiscal 1997 bookings were $648,001,000 (which represented a book
to bill ratio of 1.05 to 1), up slightly from fiscal 1996 bookings of
$661,902,000 (which represented a book to bill ratio of 1.01 to 1). At September
30, 1997, the Company had a backlog of $437,668,000, an 8% increase over the
September 30, 1996 backlog of $404,889,000.
36
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As of September 30, 1997, the Company had recognized net sales of approximately
$11,100,000 from two customers who accepted and took title to the related
equipment and agreed to normal credit payment terms, but requested that the
Company store the equipment until predetermined shipment dates.
For fiscal 1997, the Company's gross margin was 38%, significantly below the
fiscal 1996 gross margin of 42%. The decrease was primarily due to costs
associated with Track's subsequently terminated 200-APS product and reduced
shipments and manufacturing volumes of Thermco and Track products. 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 products
shipped, and increased manufacturing volumes and efficiencies related to
Micrascan products.
R&D expenses were $74,311,000 (12% of net sales) during fiscal 1997, compared to
$67,323,000 (10% 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 subsequently terminated 200-APS
program.
During fiscal 1997, MG&A expenses, which included the SMT Charge discussed
above, were $134,642,000 (22% of net sales), significantly above fiscal 1996
MG&A of $119,238,000 (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 for Track and Thermco products as a result of lower fiscal 1997
shipments. In comparison to the preceding fiscal year, MG&A was higher in fiscal
1997 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.
For fiscal 1997, the Company had an operating loss of $5,423,000, compared to
operating income of $87,061,000 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
with IBM discussed above.
Interest and other income was $10,639,000 during fiscal 1997 compared to
$13,504,000 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
37
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 $1,018,000 in fiscal 1997, an increase over fiscal 1996
interest expense of $756,000. The increased fiscal 1997 expense was primarily
the result of interest paid on a $6,500,000 loan received from the Connecticut
Development Authority in February 1997.
The Company recorded a 36% 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 9 to the Consolidated Financial Statements.)
The minority interest reflected in the Company's financial statements represents
that share of SVGL's operating results that were attributable at the time to its
minority stockholder, IBM. In March 1997, the Company purchased IBM's interest
in SVGL for $3,000,000. The Company now accounts for SVGL as a wholly-owned
subsidiary and there is no longer a minority interest. In fiscal 1997, minority
interest was recorded from the beginning of the fiscal year through the date the
Company purchased IBM's interest and represented a reduction from income of
$92,000. For fiscal 1996, minority interest represented a $726,000 reduction
from income.
Net income for fiscal 1997 was $2,592,000 ($0.08 per share--diluted), compared
to net income of $64,099,000 ($2.06 per share--diluted) for fiscal 1996.
RISKS INHERENT IN THE COMPANY'S BUSINESS
FLUCTUATIONS IN QUARTERLY RESULTS. The Company has, at times during its
existence, experienced quarterly fluctuations in its operating results. Due to
the relatively small number of systems sold during each fiscal quarter and the
relatively high revenue per system, customer order rescheduling or
cancellations, or production or shipping delays can significantly affect
quarterly revenues and profitability. The Company has experienced, and may again
experience, quarters during which a substantial portion of the Company's net
sales are realized near the end of the quarter.* Accordingly, shipments
scheduled near the end of a quarter, which are delayed for any reason, can cause
quarterly net sales to fall short of anticipated levels. Since most of the
Company's expenses are fixed in the short term, such shortfalls in net sales
could have an adverse effect on the Company's business and results of
operations.* The Company's operating results may also vary from quarter to
quarter based upon numerous factors including the timing of new product
introductions, product mix, level of sales, the relative proportion of domestic
and international sales, activities of competitors, acquisitions, international
events, currency exchange fluctuations, and difficulties obtaining materials or
components on a timely basis.* In light of these factors, the Company may again
experience variability in its quarterly operating results.*
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT DEVELOPMENT. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company believes that its future success will depend upon its ability to
continue to enhance its existing products and their process capabilities and to
develop and manufacture new products with improved process capabilities that
enable semiconductor manufacturers to fabricate semiconductors more
efficiently.* The Company is developing Track and Lithography products, and has
shipped limited quantities of Thermco products, capable of processing 300mm
wafers in anticipation of the industry's transition to this larger wafer
standard. Failure to successfully introduce these or any other new products in a
timely manner could result in
38
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
the loss of competitive position and could reduce sales of existing products.*
In addition, new product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence and
increase the potential for a decline in orders of existing products,
particularly if new products are delayed.*
From time-to-time, the Company has experienced delays in the introduction of its
products and product enhancements due to technical, manufacturing and other
difficulties and may experience similar delays in the future.* For example,
during fiscal 1996, the Company announced the subsequently terminated 200-APS
Track product. Initial shipments of the 200-APS were scheduled to commence
during the second quarter of fiscal 1997, and were delayed until the second
quarter of fiscal 1998. This delay, as well as industry developments, caused the
Company to implement a plan, which was announced on September 30, 1998, to
terminate future development and shipments of its 200-APS products, and to
concentrate its efforts on completing a new product which has been in
development for approximately one year. There can be no assurance that the
Company will not experience delays in development or manufacturing problems
related to its new product as a result of instability of the design of either
the hardware or software elements of the new technology, or be able to
efficiently manufacture the new product or other products.* 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.* For example, the Company's largest Track customer has decided to
secure deliveries from another source, a decision the Company believes is
primarily due to the delay and subsequent termination of the 200-APS. The
release into the market of a new technology Track product will not be
accomplished for a number of quarters.* As a result, competitors will increase
their market share, and it will be increasingly difficult for the Company to
regain market position.* The Company's inability to effect the timely production
of new products or any failure of these products to achieve market acceptance
could have a material adverse effect on the Company's business and results of
operations.*
Historically, the unit cost of the Company's products has been the highest when
they are newly introduced into production and cost reductions have come over
time through engineering improvements, economies of scale and improvements in
the manufacturing process.* As a result, new products have, at times, had an
unfavorable impact on the Company's gross margins and results of operations.
There can be no assurance that the initial shipments of new products will not
have an adverse effect on the Company's profitability or that the Company will
be able to attain design improvements, manufacturing efficiencies or
manufacturing process improvements over time.* Further, the potential
unfavorable effect of newly introduced products on profitability can be
exacerbated when there is intense price competition in the marketplace.*
COMPETITION. The semiconductor equipment industry is intensely competitive. The
Company faces substantial competition both in the United States and other
countries in all of its products. 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
39
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
Many of the Company's competitors are Japanese corporations. As a result of the
strength of the U.S. dollar in relation to the Japanese yen, the Company is at a
disadvantage when competing on the basis of price. 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.* To compete effectively in these
markets, the Company may be forced to reduce prices, which could cause further
reduction in net sales and gross margins and, consequently, have a material
adverse effect on the Company's financial condition and results of operations.*
IMPORTANCE OF THE JAPANESE AND PACIFIC RIM MARKETS. The Company's customers are
heavily concentrated in the United States and Europe. The Japanese and Pacific
Rim markets (including fabrication plants located in other parts of the world
which are operated by Japanese and Pacific Rim semiconductor manufacturers)
represent a substantial portion of the overall market for semiconductor
manufacturing equipment. To date, neither the Company's shipments into Japan nor
the Pacific Rim have been significant. The Company believes that the Japanese
companies with which it competes have a competitive advantage because their
dominance of the Japanese and Pacific Rim semiconductor equipment market
provides them with the sales and technology base to compete more effectively
throughout the rest of the world. The Company is not engaged in any significant
collaborative effort with any Japanese or Pacific Rim semiconductor
manufacturers. As a result, the Company may be at a competitive disadvantage to
the Japanese equipment suppliers 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.* Recent economic
difficulties in certain Asian countries, particularly Korea, as well as the
current extended downturn in demand for semiconductor manufacturing equipment,
will adversely affect the Company's ability to penetrate such markets.*
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 certain instances, the Company has encountered intense price
competition from foreign competitors who are suppliers to the non-U.S. member of
the JV. Further, in certain instances the Company has not secured the equipment
order when the non-U.S. member has had the responsibility for selecting the
equipment to be used by the JV in its U.S. operations. There can be no assurance
that as the Company's customers form additional alliances, whether in the U.S.
or in other parts of the world, that the Company will be successful in obtaining
equipment orders or that it will be able to obtain orders with sufficient gross
margin to generate profitable transactions, either of which could have an
adverse effect on the Company's results of operations.*
Throughout the Pacific Rim, the Company is attempting to compete with major
equipment suppliers having significant market share and established service and
support infrastructures
40
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
in place. Although the Company has invested in the staffing and facilities that
it believes are necessary to sell, service and support customers in the Pacific
Rim, it 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 in this region.* Further, due to
recent economic issues in certain Asian countries, particularly Korea, as well
as the current extended downturn in demand for semiconductor manufacturing
equipment, the Company's ability to penetrate such markets has been diminished.
Failure to secure customers in these markets would have an adverse effect on the
Company's business and results of operations.*
YEAR 2000. As the Year 2000 approaches, a universal issue has emerged regarding
how existing application software programs and operating systems can accommodate
date values. The Company has completed the modification of its internal-use
computer software for the Year 2000. The third party costs associated with such
modifications were not material and were expensed in fiscal 1998. The Company
does not segregate internal costs incurred to assess and remedy deficiencies
related to the Year 2000 problem or modifications to its products, however, the
Company has incurred approximately $124,000 with third parties to identify and
modify its internal-use computers systems. Although the company believes that
the solutions, which were extensively tested, have resulted in its internal-use
systems being Year 2000 compliant, there can be no assurance that unforeseen
problems that could disrupt operations will arise, or that the Company could be
required to expend further cost and effort to solve such problems.*
The Company has evaluated its products and identified those areas containing
date sensitive Year 2000 issues. The Company has informed its customers of ship
dates for Year 2000 compliant products and has made available for potential sale
the necessary modifications to bring previously shipped products into
compliance. The Company is in the process of contacting its suppliers and
service providers to ascertain their state of readiness and compliance for Year
2000 issues. The Company will continue to monitor their progress and compliance
for these issues. There can be no assurance, however, that the Company's
suppliers and service providers will timely provide the Company with products or
services which are Year 2000 compliant. Any failure to do so by such third
parties could have a material adverse impact on the Company's results of
operations.*
At this time the Company does not feel it is necessary to develop a contingency
plan. As risks are identified, plans will be developed and implemented as
required.
Although the Company believes its Year 2000 plans will be successful, there can
be no assurance that unforeseen problems will not happen which could have a
material adverse effect on the Company.*
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is
exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates. The Company attempts to minimize its currency
fluctuation risk by actively managing the balances of current assets and
liabilities denominated in foreign currencies. The Company does not use
derivative financial instruments. A 10% change in the foreign currency exchange
rates would not have a material impact on the Company's results of operations.
The Company has investments in marketable debt securities that are subject to
interest rate risk. However, due to the short-term nature of the Company's debt
investments the impact of interest rate changes would not have a material impact
on the value of such investments.
41
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company is also exposed to interest rate risk on its fixed rate debt
obligations. At September 30, 1998 fixed rate debt obligations totaled
$6,505,000. The fixed rate obligations range between 8.25% to 12% with a
weighted average of 8.35% and maturity dates between April 1999 and February
2007. Due to the relatively insignificant principal balance of outstanding debt
obligations, the Company does not actively manage the risk associated with these
obligations. The impact of interest rate changes would not have a material
impact on the Company's results of operations.
BUSINESS INTERRUPTION. The Company manufactures its Track products in San Jose,
California and substantially all of its Thermco products in Orange, California.
Tinsley's optical components are manufactured in Richmond and North Hollywood,
California. These California facilities are located in seismically active
regions. SVGL's photolithography exposure products are manufactured in Wilton
and Ridgefield, Connecticut. If the Company were to lose the use of one of its
facilities as a result of an earthquake, flood or other natural disaster, the
resultant interruptions in operations would have a material adverse effect on
the Company's results of operations and financial condition.*
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 ("DUV")
step-and-scan photolithography products, capable of producing line widths of .18
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. The Company
believes DUV lithography will be required to fabricate devices with line widths
below 0.3 micron.* Semiconductor manufacturers can purchase DUV steppers to
produce product at .25 micron line widths. However, the Company believes that as
devices increase in complexity and size and require finer line widths, the
technical advantages of DUV step-and-scan products in the exposure of critical
layers, as compared to DUV steppers, will enable semiconductor manufacturers to
achieve finer line widths, higher yields and improved critical dimension
control.* The Company also believes that the transition to DUV step-and-scan
products for the exposure of critical layers will accelerate in calendar 1999
and that advanced semiconductor manufacturers are beginning to require volume
quantities of production equipment as advanced as the current and pending
versions of Micrascan to produce both critical and to some degree sub-critical
layers.* Currently, competitive DUV 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 products 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 products.* Further, if manufacturers of
step-and-scan products or manufacturers of DUV steppers are able to further
enhance existing technology to achieve finer line widths sufficiently to erode
the competitive and technological advantages of DUV step-and-scan products, or
other lithography manufacturers of step-and-scan products are able to supply
products in sufficient quantity that are technically equal or better than the
Micrascan, 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
42
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 products
capable of printing line widths finer than .18 micron and processing 300mm
wafers.* Any failure by the Company to develop the advanced technology required
by its customers at progressively lower costs of ownership could have a material
adverse impact on the Company's financial condition and results of operations.*
SVGL--NEED TO INCREASE MANUFACTURING CAPACITY AND SYSTEM OUTPUT. The Company
believes that its ability to supply products in volume will be a major factor in
customer decisions to commit to the Micrascan technology.* Based upon its
forecast of continued growth in demand, the transition from steppers to DUV
step-and-scan photolithography equipment and potential future demand for
advanced lithography products, the Company has been in the process of 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. Through the first half of fiscal 1998,
the Company has invested in significant capital improvements related to the
buildings purchased and the equipment required to expand the production
capabilities of SVGL. While the Company intends to continue certain of these
expansion activities, it may not invest in all of the metrology and other
equipment required to maximize manufacturing capacity until industry demand
recovers.* However, the Company plans to continue increasing capacity to produce
optical components, thus enabling it to quickly respond to customer
requirements. Once demand recovers, the timely equipping of facilities to
successfully complete the increase in capacity will require the continued
recruitment, training and retention of a high quality workforce, as well as the
achievement of satisfactory manufacturing results on a scale greater than SVGL
has attempted in the past. There can be no assurance that 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 current
and future Micrascan products could result in semiconductor manufacturers
electing to install competitive equipment in their advanced fabrication
facilities, which could impede acceptance of the Micrascan products on an
industry-wide basis.* 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, for any reason, do not
increase commensurately.*
The time required to build a Micrascan system is significant. If SVGL is to be
successful in supplying increased quantities of Micrascan products, it will not
only need to be able to build more products, 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 increases and shorten manufacturing cycle time.* To that end,
SVGL is continuing to develop its vendor supply infrastructure, and implement
manufacturing improvements.* Additionally, the Company believes that once
industry demand recovers, it must resume increasing its factory, field service
and technical support organization staffing and infrastructure to support the
anticipated customer requirements.* There can be no assurance that the Company
will not experience manufacturing difficulties or encounter problems in its
attempt to increase production and upgrade or expand existing operations.*
One of the most critical components of the Micrascan products is the projection
optics, which are primarily manufactured by SVGL. As part of its overall
investment in capacity, the
43
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Company has increased SVGL's optical manufacturing floorspace. The Company
believes that in order for SVGL to be a viable supplier of advanced lithography
products in the future, it must successfully reduce the cycle times required to
build projection optics.*
On November 26, 1997, the Company acquired TLI (See "Liquidity and Capital
Resources".) The primary reasons for the acquisition were TLI's technology and
expertise relating to aspherical lenses, a key component of SVGL's
photolithography products, the adaptation of certain of TLI's manufacturing
processes by SVGL and TLI's commencement of the fabrication of non-aspherical
lenses which are currently produced by SVGL. There can be no assurance that
TLI's manufacturing technology is scaleable, or that such expertise can be
transferred without substantial time or expense, if at all.* The inability of
SVGL to transfer this production technology for use in processes of a
substantially larger scale or the inability of TLI to manufacture non-aspherical
lenses for SVGL in sufficient quantities to realize efficiencies of scale could
adversely affect the Company's ability to realize any significant benefits from
the acquisition of TLI.*
The Company believes that protracted delays in delivering quantities of both
current and future generations of Micrascan products to multiple customers could
result in semiconductor manufacturers electing to install competitive equipment
in their advanced fabrication facilities, and could preclude industry acceptance
of the Micrascan technology and products.* In addition, the Company's operating
results could also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity and field service
and technical support activities if net sales do not increase commensurately.*
SVGL--SOLE SOURCE MATERIALS AND COMPONENTS. Most raw materials and components
not produced by the Company are available from more than one supplier. However,
certain raw materials, components and subassemblies are obtained from single
sources or a limited group of suppliers. Although the Company seeks to reduce
its dependence on these sole and limited source suppliers, and the Company has
not experienced significant production delays due to unavailability or delay in
procurement of component parts or raw materials to date, disruption or
termination of certain of these sources could occur and such disruptions could
have at least a temporary adverse effect on the Company's business and results
of operations.* Moreover, a prolonged inability to obtain certain components
could have a material adverse effect on the Company's business and results of
operations and could result in damage to customer relationships.*
The raw material for a proprietary component of the optical system for the
Micrascan is available from only one supplier. The supplier has expanded its
capacity to meet SVGL's projected long term requirements and has created and
stored agreed upon quantities of safety stock. There can be no assurance that
the supplier will be able to provide acceptable quantities of material required
by SVGL.* Additionally, a version of the Company's Micrascan III
photolithography system utilizes an Excimer laser that is manufactured in volume
by only one supplier, which until the first quarter of fiscal 1998 was the only
supplier the Company had determined could meet its specifications. SVGL has
recently qualified an additional source of lasers for its current and future
versions of Micrascan products, allowing the potential for the integration of
such lasers into its system configurations.* However, there can be no assurance
that its customers will be receptive to procuring products with lasers from this
supplier, or the supplier will be able to provide product of sufficient quantity
and quality. If these suppliers were unable to meet their commitments, SVGL
would be unable to manufacture the quantity of products
44
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
required to meet the anticipated future demand, which would have a material
adverse effect on the Company's business and results of operations.*
SVGL--RESEARCH AND DEVELOPMENT FUNDING. Historically, the Company has depended
on external funding to assist in the high cost of development in its
photolithography operation. Beginning in fiscal 1996, the Company entered into
agreements with certain customers (the "Participants") whereby each agreed to
assist in funding the Company's development of an advanced technology 193
nanometer Micrascan system. In exchange for such funding, each Participant
received the right to purchase one such system, and in addition, received a
right of first refusal (ratable among such Participants) to all such machines
manufactured during the first two years following the initial system shipments.
For each initial system ordered, each Participant agreed to fund $5,000,000 in
such development costs. The agreements call for each Participant to pay
$1,000,000 of initial development funding and four subsequent payments of
$1,000,000 upon the completion of certain development milestones. The
Participants may withdraw from the development program without penalty, but
payments made against completed development milestones are not refundable and
all preferential rights to future equipment are forfeited. At September 30,
1998, the Company had received $20,000,000 in funding from Participants, of
which $19,765,000 had been recognized and offset against research and
development expenditures. There can be no assurances that the 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 products by each Participant. There is no
assurance that the Company will receive all funding that it currently
anticipates or that it will be able to obtain future outside funding beyond that
which it is currently receiving, and any failure to do so could have a material
adverse impact on the Company's results of operations.*
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), the Taiwanese market and the Korean market
represent a substantial portion of the overall market for photolithography
exposure equipment. To date, the Company has not been successful penetrating any
of these markets. Recent economic difficulties in certain Asian economies,
particularly Korea, may adversely affect the Company's ability to penetrate such
markets.*
SVGL--FUTURE PROFITABILITY. If SVGL is to attain its objective of being a volume
supplier of advanced photolithography products, the Company believes that it
must expand its customer base to include additional customers from whom it
secures and successfully fulfills orders for production-quantities of Micrascan
products.* The Company believes that in light of the downturn in industry
demand, costs associated with the continued development of the Micrascan
technology, the expansion of SVGL's manufacturing capacity, the related increase
in manpower and customer support, and the potential difficulties inherent in
manufacturing sub-.25 micron Micrascan products, in particular the projection
optics required for these products, there can be no assurance that SVGL will be
able to operate profitably in the future.*
45
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LEGAL PROCEEDINGS
On or about August 12, 1998, Fullman International and Fullman Company
(collectively, "Fullman") initiated a lawsuit in the United States District
Court for the District of Oregon alleging a cause of action for fraudulent
transfer in connection with a settlement the Company had previously entered into
resolving its claims against a Thailand purchaser of the Company's equipment. In
its complaint against the Company, the plaintiff, another creditor of the
Thailand purchaser, alleges damages of approximately $11,500,000 plus interest.
The Company has successfully moved to transfer the case to the United States
District Court for the Northern District of California.
While the outcome of such litigation is uncertain, the Company believes it has
meritorious defenses to the claims and intends to conduct a vigorous defense.
However, an unfavorable outcome in this matter could have a material adverse
effect on the Company's financial condition.*
Notwithstanding the above, the Company, from time to time, is party to various
legal actions arising out of the normal course of business, none of which is
expected to have a material effect on the Company's financial position or
operating results.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, cash and cash equivalents and temporary investments
totaled $150,000,000, down $56,661,000 from the September 30, 1997 balance of
$206,661,000. The decrease was primarily due to a net loss, the purchase of
property, plant and equipment, the decline in accounts payable, lower deferred
and refundable income taxes which were offset in part by depreciation and
amortization and the reduction of accounts receivable and inventory.
On June 30, 1998, the Company entered into an unsecured $150,000,000 bank
revolving line of credit agreement that expires June 30, 2001. Advances under
the line bear interest at the Prime Rate or 0.65% to 1.50% over LIBOR. The
agreement includes covenants regarding liquidity, profitability, leverage,
coverage of certain charges and minimum net worth and prohibits the payment of
cash dividends. On October 23, 1998, certain of the covenants were amended, in
part to allow for the Company's fourth quarter fiscal 1998 net loss. The Company
is in compliance with the covenants as amended. At December 16, 1998, there were
no borrowings outstanding under the facility.
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. in
exchange for approximately 1,091,000 shares of the Company's Common Stock. TLI
designs manufactures and sells precision optical components, assemblies and
products to customers in a variety of industries and research endeavors. The
transaction has been accounted for as a pooling of interests for financial
reporting purposes.
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 next twelve months.*
46
<PAGE> 35
CORPORATE DIRECTORY
DIRECTORS
PAPKEN S. DER TOROSSIAN(3)
Chairman of the Board and
Chief Executive Officer
WILLIAM A. HIGHTOWER
President and Chief Operating Officer
WILLIAM L. MARTIN(1,2,3)
Retired Chief Executive Officer
Plantronics, Inc.
NAM P. SUH(3)
Cross Professor, Head of the Department
of Mechanical Engineering and
Director of the Manufacturing Institute
Massachusetts Institute of Technology
KENNETH M. THOMPSON(2)
Retired Vice President
Technology, Manufacturing and Engineering, Intel Corp.
LAWRENCE TOMLINSON(1,2)
Vice President and Treasurer
Hewlett-Packard
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Technical Advisory Committee Member
OFFICERS
PAPKEN S. DER TOROSSIAN
Chairman of the Board and
Chief Executive Officer
WILLIAM A. HIGHTOWER
President and Chief Operating Officer
RUSSELL G. WEINSTOCK
Vice President, Finance and
Chief Financial Officer
EDWARD A. DOHRING*
Vice President
President, SVG Lithography Systems, Inc.
STEVEN L. JENSEN
Vice President
Worldwide Sales and Service
*Retired on 12/31/98
JEFFREY M. KOWALSKI
Vice President
President, Thermco Systems
BORIS LIPKIN
Vice President
Corporate
LARRY W. SONSINI
Secretary
STOCKHOLDER INFORMATION
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
San Jose, California
STOCK TRANSFER AGENT
Chase Mellon Shareholder Services
San Francisco, California
GENERAL COUNSEL
Wilson Sonsini Goodrich & Rosati
Palo Alto, California
FORM 10-K
The Company's Annual Report to the Securities and Exchange Commission on Form
10-K will be furnished without charge to stockholders upon written request to:
SHAREHOLDER RELATIONS
Silicon Valley Group, Inc.
101 Metro Drive, Suite 400
San Jose, California 95110
Further information on the Company's activities, additional copies of this
report, the Form 10-K, or other financial materials may be obtained on the
Internet at: www.svg.com
ANNUAL MEETING OF STOCKHOLDERS
The Company's annual meeting will be held at 3:00 p.m. on Tuesday, February 23,
1999, at the Company's offices:
2240 Ringwood Avenue
San Jose, California 95131
SVG, Micrascan, and Thermco are registered trademarks and Micrascan
Step-and-Scan, 200-APS, 90-S, Series 8000 AVP, and Series RVP 9000 are
trademarks of Silicon Valley Group, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
Nos. 33-31298, 33-85020 and 333-39499 of Silicon Valley Group, Inc. on Forms
S-8 of our reports dated October 26, 1998 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, 1998.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Jose, California
December 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR FISCAL 1998 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, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 121,575
<SECURITIES> 28,425
<RECEIVABLES> 129,794
<ALLOWANCES> 8,232
<INVENTORY> 212,975
<CURRENT-ASSETS> 529,762
<PP&E> 319,234
<DEPRECIATION> 128,212
<TOTAL-ASSETS> 730,590
<CURRENT-LIABILITIES> 157,802
<BONDS> 0
0
0
<COMMON> 404,462
<OTHER-SE> 157,068
<TOTAL-LIABILITY-AND-EQUITY> 730,590
<SALES> 608,625
<TOTAL-REVENUES> 608,625
<CGS> 408,396
<TOTAL-COSTS> 408,396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,018
<INCOME-PRETAX> (27,157)
<INCOME-TAX> (13,580)
<INCOME-CONTINUING> (13,577)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,577)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
