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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 1999.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the period from ________ to ________.
Commission File Number 0-11348
SILICON VALLEY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2264681
(State of incorporation) (IRS Employer Identification No.)
101 METRO DRIVE, SUITE #400, SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices) (Zip Code)
(408) 441-6700
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of
April 30, 1999 was 33,024,986.
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SILICON VALLEY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Condensed Balance Sheets as of March 31,
1999 and September 30, 1998 3
Consolidated Condensed Statements of Operations for the
Quarters and Six Months Ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows for
the Six Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 23
SIGNATURES 26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $106,186 $121,575
Temporary investments 21,307 28,425
Accounts receivable (net of allowance for doubtful
accounts of $8,540 and $8,232 respectively) 77,744 121,562
Refundable income taxes 6,466 15,000
Inventories 220,668 212,975
Prepaid expenses and other assets 10,182 7,485
Deferred taxes 35,441 22,740
-------- --------
Total current assets 477,994 529,762
PROPERTY AND EQUIPMENT - NET 184,839 191,022
DEPOSITS AND OTHER ASSETS 7,540 6,070
INTANGIBLE ASSETS - NET 3,398 3,736
-------- --------
TOTAL $673,771 $730,590
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $17,769 $25,346
Accrued liabilities 103,265 130,532
Current portion of long-term debt 659 640
Income taxes payable 987 1,284
-------- --------
Total current liabilities 122,680 157,802
LONG-TERM DEBT 5,506 5,865
DEFERRED AND OTHER LIABILITIES 6,016 5,393
STOCKHOLDERS' EQUITY:
Common Stock - shares outstanding:
March 31, 1999: 32,991,585
September 30, 1998: 32,696,394 407,043 404,462
Retained earnings 135,358 160,384
Accummulated other comprehensive loss (2,832) (3,316)
-------- --------
Stockholders' equity 539,569 561,530
-------- --------
TOTAL $673,771 $730,590
======== ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
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SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 61,496 $ 195,872 $ 146,983 $ 384,579
COST OF SALES 47,326 118,358 108,783 232,677
-------- --------- --------- ---------
GROSS PROFIT 14,170 77,514 38,200 151,902
OPERATING EXPENSES:
Research, development and related engineering 21,651 25,560 37,652 46,629
Marketing, general and administrative 20,094 39,469 39,567 76,156
-------- --------- --------- ---------
OPERATING INCOME (LOSS) (27,575) 12,485 (39,019) 29,117
INTEREST AND OTHER INCOME-NET 1,325 1,829 2,790 3,311
INTEREST EXPENSE (200) (255) (574) (509)
-------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (26,450) 14,059 (36,803) 31,919
PROVISION (BENEFIT) FOR INCOME TAXES (8,456) 4,499 (11,777) 10,214
-------- --------- --------- ---------
NET INCOME (LOSS) $(17,994) $ 9,560 $ (25,026) $ 21,705
======== ========= ========= =========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.55) $ 0.30 $ (0.76) $ 0.67
======== ========= ========= =========
SHARES USED IN PER SHARE
COMPUTATIONS - BASIC 32,833 32,345 32,796 32,311
======== ========= ========= =========
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.55) $ 0.29 $ (0.76) $ 0.66
======== ========= ========= =========
SHARES USED IN PER SHARE
COMPUTATIONS - DILUTED 32,833 32,989 32,796 33,090
======== ========= ========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
4
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SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(25,026) $ 21,705
Reconciliation to net cash provided
by operating activities:
Depreciation and amortization 23,170 18,006
Amortization of intangibles 338 489
Deferred income taxes (12,701) (3,953)
Changes in assets and liabilities:
Accounts receivable 43,818 (16,684)
Inventories (7,693) (4,997)
Prepaid expenses (2,697) 540
Deposits and other assets (1,470) (695)
Accounts payable (7,577) (212)
Accrued and deferred liabilities (26,329) 4,192
Income taxes payable/refundable 8,237 454
-------- ---------
Net cash provided by (used in)
operating activities (7,930) 18,845
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of temporary investments (22,946) (5,186)
Maturities of temporary investments 30,233 20,575
Purchases of property and equipment (16,987) (47,150)
-------- ---------
Net cash used for investing activities (9,700) (31,761)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (340) (1,365)
Proceeds from borrowings -- 250
Sale of Common Stock 2,581 3,026
-------- ---------
Net cash provided by financing activities 2,241 1,911
-------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (3,208)
-------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (15,389) (14,213)
CASH AND EQUIVALENTS:
Beginning of period 121,575 129,689
-------- ---------
End of period $106,186 $ 115,476
======== =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
<PAGE> 6
SILICON VALLEY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been prepared
by the Company without audit and reflect all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management are necessary
to present fairly the financial position and the results of operations for the
interim periods. The statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. The interim
condensed consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1998. Results for fiscal 1999 interim periods are not necessarily
indicative of results to be expected for the fiscal year ending September 30,
1999.
The Company uses a 52-53 week fiscal year ending on the Friday closest to
September 30. Both fiscal 1999 and 1998 contain 52 weeks.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, after elimination of intercompany transactions
and balances.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated condensed financial statements
and accompanying notes. The Company regularly assesses those estimates and,
while actual results may differ, management believes that the estimates are
reasonable.
2. INVENTORIES
Inventories are comprised of:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
--------- -------------
(In thousands)
<S> <C> <C>
Raw materials $ 92,027 $103,738
Work-in-process 122,041 103,362
Finished goods 6,600 5,875
-------- --------
$220,668 $212,975
======== ========
</TABLE>
3. NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," effective October 1, 1997, which replaces prior earnings
per share (EPS) reporting and requires dual presentation of basic and diluted
EPS.
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Basic net income (loss) per share is computed by dividing net income by the
weighted average number of common shares outstanding.
The quarter ended March 31, 1999 was a loss period, therefore common stock
equivalents would be anti-dilutive and were not included in the calculation of
diluted net loss per share. Options to purchase 3,700,000 shares of common stock
at prices ranging from $4.66 to $32.69 per share were outstanding at March 31,
1999 but were not included in the computation of diluted EPS. Diluted net income
per share includes an additional 644,000 shares at the quarter ended March 31,
1998 to reflect the potential dilution from shares issuable upon the assumed
exercise of dilutive stock options.
4. REVENUE RECOGNITION
The Company recognizes revenue when the buyer accepts and takes title to the
equipment, generally upon shipment. During the quarter ended December 31, 1998,
the Company recognized approximately $20,000,000 of net sales to one customer
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 (none during the quarter ended March 31, 1999). At
March 31, 1999, the Company was storing a total of approximately $7,500,000 of
such equipment from this customer with shipment dates ranging through July 1999.
5. COMPREHENSIVE INCOME (LOSS)
In the first quarter of fiscal 1999, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income. Components of comprehensive income (loss) include net income (loss),
unrealized gains (losses) on investments and foreign currency translation
adjustments. The adoption of SFAS No. 130 requires additional disclosure but
does not impact the Company's consolidated financial position, results of
operation or cash flows. For the three and six month periods ended March 31,
1999 and 1998, the components of total comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income (loss) $(7,032) $12,145 $(25,026) $21,705
Unrealized gain on Investments -- -- 169 --
Cumulative translation adjustment 392 (2,819) 315 (2,616)
-------- -------- -------- --------
Other comprehensive income (loss) 392 (2,819) 484 (2,616)
-------- -------- -------- --------
Total comprehensive income (loss)
$(6,640) $ 9,326 $(24,542) $19,089
======== ======== ======== ========
</TABLE>
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes annual and
7
<PAGE> 8
interim reporting standards for a Company's business segments and related
disclosures about its products, services, geographic areas and major customers.
This statement is required to be adopted in the Company's annual consolidated
financial statements for the fiscal year ending September 30, 1999. The Company
believes that the application of SFAS No. 131 will not have a material effect on
the consolidated 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 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
consolidated financial statements.
7. RESTRUCTURING AND RELATED CHARGES
During the fourth quarter of fiscal 1998, the Company recorded restructuring and
related charges of $33,680,000. The charge included 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 included severance
compensation and benefit costs.
Changes to the restructuring accrual in fiscal 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
200-APS
Severance Inventory and Other
and Purchase Customer Exit
Benefits Commitments Obligations Costs Total
-------- ------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at
September 30, 1998 $3,006 $ 1,832 $2,293 $ 201 $7,332
Incurred to date (1,581) (1,832) (1,073) (201) (4,687)
------- ------- ------- ------- -------
Balance at
March 31, 1999 $1,425 $ -- $1,220 $ -- $2,645
======= ======= ======= ======= =======
</TABLE>
The Company expects to make cash payments of approximately $2,145,000 related to
the restructuring for the remaining six months of fiscal 1999, with the
remaining $500,000 in cash payments to occur in fiscal 2000. Substantially all
employee terminations will be completed by July 1999.
8. SUBSEQUENT EVENTS
On April 30, 1999 the Company signed a definitive agreement to acquire certain
assets and assume certain liabilities of the Semiconductor Equipment Group
("SEG") of Watkins-Johnson. The closing of the transaction is subject to
completion of Hart-Scott-Rodino review and other customary conditions to
closing. At the closing date, the Company will make a preliminary payment to
Watkins-Johnson in the amount of approximately $6,000,000 and
8
<PAGE> 9
assume liabilities of approximately $40,000,000. These amounts are based upon
certain values of assets and liabilities at December 31, 1998 and subsequently
will be adjusted to reflect the changes in business activity through the date of
closing. In connection with this transaction the Company is negotiating an
arrangement with a third party to acquire SEG's manufacturing location in Scotts
Valley, California and lease it to the Company.
On May 5, 1999 Intel Corporation ("Intel") made a $15,000,000 equity
investment in the Company in the form of a purchase of 15,000 shares of newly
issued non-voting Series 1 Convertible Preferred Stock ("Series 1 Preferred").
The Series 1 Preferred investment is convertible into 1,111,111 shares of the
Company's Common Stock subject to adjustments for events of dilution in certain
circumstances such as stock splits or dividends. Intel has the option to
convert, at any time, it's Series 1 Preferred into shares of the Company's
Common Stock.
In connection with the Series 1 Preferred investment, Intel and the Company
entered into an agreement for the development of 157-nanometer lithography
technology. This agreement obligates the Company, among other things, to develop
and sell to Intel a predetermined number of initial development tools. Intel has
agreed to provide advance payments for the development and manufacture of these
machines based on predetermined milestones. Under certain conditions, the
Company is obligated to dedicate a certain amount of 157-nanometer unit
production output to Intel. The Company is required to use the proceeds from the
Series 1 Preferred investment and funds received under this development
agreement for the development of technology for use on 157-nanometer lithography
equipment.
SILICON VALLEY GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
certain risks and uncertainties, including those discussed below, as well as
risk factors included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998, 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
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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 precision optical
components.
The semiconductor industry into which the Company sells its products is highly
cyclical and has, historically, experienced periodic downturns that have had a
severe effect on the semiconductor industry's demand for semiconductor
processing equipment. As a result of the Asian economic crisis which began in
1997, 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 first quarter of fiscal 1998 and has continued to impact the Company
through the second quarter of fiscal 1999. The slowdown in demand resulted in
the Company experiencing lower new customer orders, customer deferrals of
scheduled equipment delivery dates and, to a lesser extent, customer order
cancellations. Customer orders with scheduled delivery dates are referred to by
the Company as bookings. Second quarter fiscal 1999 bookings of $165,710,000
showed improvement over first quarter fiscal 1999 bookings of $87,286,000,
fourth quarter fiscal 1998 bookings of $65,936,000 and second quarter fiscal
1998 bookings of $100,442,000. However, second quarter fiscal 1999 bookings were
lower than fourth quarter fiscal 1997 bookings of $214,987,000. Last year's
lower bookings, order rescheduling and cancellations, have caused sales during
the first half of fiscal 1999 to decline from the corresponding period of the
prior year. A continued decrease in sales could result in further reductions in
the Company's gross margin and net income during the third and fourth quarters
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.*
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 fourth quarter fiscal
1998 reductions in the Company's workforce for approximately 950 employees.
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 two
largest customers accounted for 40% and 17% of net sales. During the first half
of fiscal 1999, this trend continued with these two customers accounting for 51%
and 7% 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 continue to
have an adverse effect on Track product 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, or delays in the
introduction of newly developed products and product
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<PAGE> 11
enhancements will further exacerbate the adverse effect the customer order
rescheduling and cancellations discussed above will have on the Company's
business and results of operations.*
During the first quarter of fiscal 1999, the Company recognized net sales of
approximately $20,000,000 from one customer 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 (none in quarter
ended March 31, 1999). At March 31, 1999, the Company was storing a total of
approximately $7,500,000 of such equipment from this customer with shipment
dates ranging through July 1999.
Net sales for the fiscal quarter ended March 31, 1999 were $61,496,000, down 28%
from net sales for the preceding quarter of $85,487,000 and 69% below net sales
of $195,872,000 for the corresponding period of the prior fiscal year. The
decrease in net sales compared to the preceding quarter and the second quarter
of fiscal 1998 was principally the result of lower shipments of SVGL and Track
products. The decrease in SVGL product shipments is primarily the result of the
timing of customer requirements and a minor production delay.
During the first half of fiscal 1999 net sales of $146,983,000 declined 62% from
first half of fiscal 1998 net sales of $384,579,000. The decrease in net sales
between periods is due to reduced shipments of SVGL, Track and Thermco products.
During the second quarter of fiscal 1999 the Company had bookings of
$165,710,000, an increase of approximately 90% over the preceding fiscal
quarter's bookings of $87,286,000, and an increase of 65% over the second
quarter fiscal 1998 bookings of $100,442,000.
The Company includes in backlog only those orders to which a purchase order
number has been assigned by the customer, with all terms and conditions agreed
upon and for which delivery has been specified within twelve months. The
Company's backlog at March 31, 1999 totaled $360,143,000, significantly above
both the March 31, 1998 backlog of $288,598,000 and the backlog of $255,928,000
at December 31, 1998. At March 31, 1999, the backlog included orders for 54
Micrascan photolithography systems. Additionally, the Company had orders for 6
additional systems with scheduled delivery dates outside the twelve-month
backlog window.
Gross margin was 23% in the second quarter of fiscal 1999, compared to 28.1%
during the preceding quarter and 39.6% in the second quarter of fiscal 1998. The
decline in gross margin during the second quarter of fiscal 1999 compared to the
previous quarter of fiscal 1999 was primarily the result of lower margins on
SVGL and Track product shipments offset in part by improved margins on Thermco
products resulting from reduced manufacturing variances. Second quarter fiscal
1999 gross margin declined from the corresponding period of the prior fiscal
year due to reduced volumes of Track, Thermco and Lithography products.
For the first six months of fiscal 1999 gross margin was 26% compared to 39.5%
for the corresponding period of the prior fiscal year. The decline from the
year-earlier period is due primarily to reduced volumes of Track, Thermco and
Lithography products resulting in reduced factory utilization.
Research, development and related engineering ("R&D") expenses are net of
funding received from outside parties under development agreements. Such funding
is typically payable upon the attainment of one or more development milestones
that are specified in the agreement. Neither the spending, nor the
11
<PAGE> 12
recognition of the funding related to the development milestones is ratable over
the term of the agreements. For all the periods being compared, such funding was
primarily related to agreements between SVGL and certain customers for the
development of a 193-nanometer Micrascan system. (See "SVG Lithography Systems,
Inc. (SVGL)").
R&D expenses were $21,651,000 (35% of net sales) for the second quarter of
fiscal 1999, $16,001,000 (19% of net sales) for the preceding quarter and
$25,560,000 (13% of net sales) for the second quarter of fiscal 1998. For the
second and first quarters of fiscal 1999 and the second quarter of fiscal 1998,
development funding of $600,000, $2,277,000, and $3,136,000, respectively, was
recognized and offset against R&D expense. R&D expense increased over the first
quarter of fiscal 1999 primarily in the SVGL division due to higher spending on
the Company's 157-nanometer development program and lower development-funding
offset against R&D expense. The decrease in R&D expense from the second quarter
of fiscal 1998 is primarily attributed to reduced spending on the 200-APS Track
product resulting from its fourth quarter fiscal 1998 cancellation, reduced
sustaining activities on Thermco products offset in part by reduced development
funding having been offset against R&D expense.
R&D expense for the first six months of fiscal 1999 was $37,652,000 (26% of net
sales) compared to $46,629,000 (12% of net sales) for the same period of the
prior fiscal year. For the six month periods ended March 31, 1999 and 1998,
funding recognized under joint development agreements and offset against R&D
expenditures was $2,877,000 and $5,504,000, respectively. The reasons for the
period to period decrease correspond to the year over year discussion above.
Marketing, general and administrative expenses (MG&A) were $20,094,000 (33% of
net sales) for the second quarter of fiscal 1999 compared to $19,473,000 (23% of
net sales) for the preceding quarter and $39,469,000 (20% of net sales) for the
second quarter of fiscal 1998. During the first half of fiscal 1999, MG&A
expenses were $39,567,000 (27% of net sales) compared to $76,156,000 (20% of net
sales) for the comparable period of fiscal 1998. The increase in MG&A over the
preceding quarter was principally due to higher marketing and product support
costs offset in part by lower shipment related costs. The decrease in MG&A from
the year earlier periods is primarily due to lower shipment related costs and
reduced levels of employee headcount resulting from the reductions in force of
the fourth quarter of fiscal 1998.
The Company had an operating loss of $27,575,000 for the second quarter of
fiscal 1999 compared to an operating loss of $11,444,000 for the preceding
quarter and an operating profit of $12,485,000 for the second quarter of fiscal
1998. The increased operating loss over the previous quarter was primarily the
result of lower net sales at reduced gross margin and increased R&D
expenditures. In comparison to the second quarter of fiscal 1998, operating
profit declined due to significantly lower net sales at reduced gross margin
offset in part by lower expenses.
For the first six months of fiscal 1999 the Company had an operating loss of
$39,019,000 compared to operating income of $29,117,000 during the corresponding
period of the prior fiscal year. The reasons for the period to period decrease
correspond to the year over year discussion above.
Interest and other income for the second quarter of fiscal 1999 was $1,325,000
compared to $1,465,000 in the previous quarter of fiscal 1999 and $1,829,000
during the second quarter of the previous fiscal year. For the first six months
of fiscal 1999 interest and other income was $2,790,000 compared to $3,311,000
for the comparable period of fiscal 1998. The decrease in second quarter and
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first half fiscal 1999 interest and other income from the previous quarter and
the year earlier periods was primarily due to lower average cash balances
available for investment.
Interest expense was $200,000 during the second quarter of fiscal 1999, compared
to $374,000 in the preceding quarter and $255,000 in the second fiscal quarter
of 1998. During the first six months of fiscal 1999, interest expense was
$574,000 compared $509,000 during the first half of fiscal 1998.
The Company recorded a 32% income tax benefit for the first half of fiscal 1999
compared to a 50% tax benefit for fiscal 1998. Variations in the Company's
effective tax rate relate primarily to changes in the geographic distribution of
the Company's pretax income and certain tax free and tax advantaged interest
income.
The Company had a net loss of $17,994,000 ($0.55 diluted loss per share) for the
second quarter of fiscal 1999 compared to net income of $9,560,000 ($0.29
diluted earnings per share) for the second quarter of fiscal 1998 and a net loss
of $7,032,000 ($0.21 diluted loss per share) for the first quarter of fiscal
1999. For the first half of fiscal 1999, the Company had a net loss of
$25,026,000 ($0.76 diluted loss per share), compared to net income of
$21,705,000 ($0.66 diluted earnings per share) for the first six months of
fiscal 1998.
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 the loss of competitive position and could
reduce sales of existing products.* In addition, new product introductions could
contribute to quarterly fluctuations in operating
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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 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.*
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.
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Significant competitive factors include technology and cost of ownership, a
formula which includes such data as initial price, system throughput and
reliability and time to maintain or repair. Other competitive factors include
familiarity with particular manufacturers' products, established relationships
between suppliers and customers, product availability and technological
differentiation. Occasionally, the Company has encountered intense price
competition with respect to particular orders and has had difficulty
establishing new relationships with certain customers who have long-standing
relationships with other suppliers. The Company believes that outside Japan and
the Pacific Rim it competes favorably with respect to most of these factors.*
(See "Importance of Japanese and Pacific Rim Markets".)
Many of the Company's competitors are Japanese corporations. In light of the
recent economic downturn in certain Asian countries that represent significant
markets for such competitors, the Company believes that an oversupply of
equipment from certain Japanese competitors may cause 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 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
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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.*
Risks Associated with Acquisition of Watkins-Johnson Company's Semiconductor
Equipment Group. On April 30, 1999 the Company signed a definitive agreement to
purchase the Semiconductor Equipment Group ("SEG") from Watkins-Johnson. The
Company faces significant risks associated with the acquisition of SEG. The
acquisition is scheduled to close in the third quarter of fiscal 1999 and is
subject to a number of conditions to closing, including Hart-Scott-Rodino
review. There can be no assurance that the Company will close the acquisition or
realize the desired benefits of this acquisition.* Acquisitions inherently
entail numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention from
other business concerns, and potential loss of key employees of acquired
organizations.* In order to successfully integrate SEG, the Company must, among
other things, continue to attract and retain key personnel, integrate the
acquired products, technology and information systems from engineering, sales
and marketing perspectives, and consolidate functions and facilities, which may
result in future charges to streamline the combined operations. Difficulties
encountered in the integration of SEG may have a material adverse effect on the
Company. *
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 computer 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 not arise, or that the Company will
not 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
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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.*
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.*
Euro Conversion. On January 1, 1999, 11 of the 15 member countries of the
European Union established fixed conversion rates between each of their existing
sovereign currencies and the Single European Currency ("euro"). The
participating countries adopted the euro as their common legal currency on that
date, with a transition period through January 2002 regarding certain elements
of the Euro change. In January 1999, the Company implemented changes to its
internal systems to make them euro capable. The cost of system modifications to
date has not been material, nor are future system modifications expected to be
material.* The Company does not expect the transition to, or use of, the euro to
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 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 .10 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 industry 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 and below 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
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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 .10
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.*
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".)
SVGL - Need to Increase Manufacturing Capacity and System Output. The Company
believes that its ability to supply systems in volume will be a major factor in
customer decisions to commit to the Micrascan technology.* Based upon its
forecast of continued 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 demand will recover or, that if it
does, that the Company can manage these efforts successfully. Any failure to
successfully 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 Micrascan products on an industry-wide basis.* This
could result in the Company's operating results
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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 Micrascan system is significant. If SVGL is to be
successful in supplying increased quantities of Micrascan systems, it will not
only need to be able to build more systems, it will need to build them faster.*
SVGL will require additional trained personnel, 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.*
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
floor space. 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
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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.*
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 rights to future equipment are forfeited. At March 31, 1999, the Company had
received $20,000,000 in funding from Participants and had recognized $21,690,000
of the program's total $24,000,000 against research and development
expenditures. Three competitors of the Company have either announced the
development of or have shipped 193-nanometer products. 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 which 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.*
In May 1999, the Company entered into an agreement with Intel Corporation
("Intel") for the development of 157-nanometer lithography technology. This
agreement obligates the Company among
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other things to develop and sell to Intel a predetermined number of initial
development tools. Intel has agreed to provide advanced payments for the
development and manufacture of these machines, based upon predetermined
milestones. Separately, Intel has made a $15,000,000 investment in the Company
in the form of a purchase of Series 1 Convertible Preferred Stock (see Note 8 to
Consolidated Condensed Financial Statements). Under certain conditions, the
Company is obligated to dedicate a certain amount of its 157-nanometer unit
production output to Intel. The Company is required to use the proceeds from the
Series 1 Preferred investment and funds received under the development agreement
for the development of technology for use on 157-nanometer lithography
equipment. There can be no assurance that the Company will be successful in
developing 157-nanometer technology or will be able to manufacture significant
quantities of machines to satisfy its obligations to Intel or other customers.*
SVGL - Market Penetration. The Company believes that for SVGL to succeed in the
long term, it must expand its customer base and 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. Economic difficulties in certain
Asian economies, particularly Korea, may adversely effect 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.*
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.*
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, cash and cash equivalents and temporary investments totaled
$127,493,000, down $22,507,000 from the September 30, 1998 balance of
$150,000,000. The decrease was primarily attributable to the net loss during the
first half of fiscal 1999, the reduction of accrued liabilities and accounts
payable associated with lower business volumes and the purchase of capital
equipment, offset in part by a reduction of receivables caused by lower business
volumes, depreciation and amortization and the refund of income taxes.
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, and
coverage of certain charges and minimum net worth and prohibits the payment of
cash dividends. On May 14, 1999, certain of the covenants were amended, in part
to allow for the Company's second quarter fiscal 1999 net loss. The Company is
in compliance with the covenants as amended. At May 14, 1999, there were no
borrowings outstanding under the facility.
The Company believes that it has sufficient working capital and available bank
credit to sustain operations and provide for the expansion of its business for
the next twelve months.*
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PART II. OTHER INFORMATION
SILICON VALLEY GROUP, INC.
ITEM 1. 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 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Stockholders of the Company was held
on February 23, 1999 (the "Annual Meeting"). The vote of
holders of record of 32,819,438 shares of the Company's
Common Stock outstanding at the close of business on
December 29, 1998 was solicited by proxy pursuant to
Regulation 14A under the Securities Act of 1934.
(b) The following persons were elected Directors of the Company
at the Annual Meeting:
23
<PAGE> 24
<TABLE>
<CAPTION>
Votes Withholding
Votes For Authority
--------- ---------
<S> <C> <C>
Papken S. DerTorossian 21,020,832 322,000
William A. Hightower 21,043,062 299,770
William L. Martin 21,025,881 316,951
Nam P. Suh 21,038,025 304,807
Lawrence Tomlinson 21,048,259 294,573
Kenneth M. Thompson 21,044,822 298,010
</TABLE>
(c) The Company's 1996 Stock Plan was amended to increase the number
of shares available for issuance thereunder by 1,500,000 shares
to an aggregate of 3,000,000 shares. The Stockholders' vote on
the amendment was 8,303,789 shares FOR; 6,393,492 shares AGAINST;
228,286 shares ABSTAINED from voting; and 6,417,265 shares were
NON-VOTES.
(d) The Company's 1996 Employee Stock Purchase Plan was amended to
increase the number of shares available for issuance thereunder
by 750,000 to an aggregate of 1,750,000 shares. The Stockholders'
vote on the amendment was 13,683,888 shares FOR; 1,013,837 shares
AGAINST; 227,842 shares ABSTAINED from voting; and 6,417,265
shares were NON-VOTES.
(e) The Company's 1996 Employee Stock Purchase Plan was amended to
provide for an annual increase, commencing on October 1, 1999, in
the number of shares reserved for issuance thereunder equal to
the lessor of: (i) 750,000 shares, (ii) 1.5% of the outstanding
shares of Common Stock of the Company or (iii) a number of shares
determined by the Board of Directors. The Stockholders' vote on
the amendment was 11,385,516 shares FOR; 3,277,272 shares
AGAINST; 261,679 shares ABSTAINED from voting; and 6,418,365
shares were NON-VOTES.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.2 Certificate of Designation of Series 1 Convertible
Preferred Stock of Silicon Valley Group, Inc.
10.48 Registration Rights agreement dated May 5, 1999 by and
among Silicon Valley Group, Inc., a Delaware corporation
and Intel Corporation, a Delaware corporation.
10.49 Second Amendment to Credit Agreement, dated May 14, 1999
by and among the Registrant, ABN Amro Bank, N.V. as
Agent and certain Lenders with respect thereto.
24
<PAGE> 25
27.0 Financial Data Schedule for the fiscal quarter ended
March 31, 1999.
(b) Reports on Form 8-K.
None.
25
<PAGE> 26
SILICON VALLEY GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILICON VALLEY GROUP, INC.
.................................
(Registrant)
Date: May 17, 1999 By: /s/ Papken S. Der Torossian
-----------------------------
Papken S. Der Torossian
Chief Executive Officer and
Chairman of the Board
Date: May 17, 1999 By: /s/ Russell G. Weinstock
-----------------------------
Russell G. Weinstock
Vice President Finance and
Chief Financial Officer
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
4.2 Certificate of Designation of Series 1 Convertible Preferred
Stock of Silicon Valley Group, Inc.
10.48 Registration Rights agreement dated May 5, 1999 by and among
Silicon Valley Group, Inc., a Delaware corporation and Intel
Corporation, a Delaware corporation.
10.49 Second Amendment to Credit Agreement, dated May 14, 1999 by and
among the Registrant, ABN Amro Bank, N.V. as Agent and certain
Lenders with respect thereto.
27.0 Financial Data Schedule for the fiscal quarter ended
March 31, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 4.2
CERTIFICATE OF DESIGNATION OF SERIES 1
CONVERTIBLE PREFERRED STOCK
OF
SILICON VALLEY GROUP, INC.
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
We, the undersigned duly authorized officers of SILICON VALLEY GROUP, INC., a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "Corporation"), in accordance with the provisions of
Section 103 thereof, and pursuant to Section 151 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of the Corporation, the Board of Directors of the
Corporation on April 30, 1999, adopted the following resolution creating a
series of 15,000 shares of Series 1 Convertible Preferred Stock, par value $0.01
per share:
RESOLVED, that pursuant to the authority vested in the Board of Directors of
this Corporation in accordance with the provisions of its Certificate of
Incorporation, a series of Series 1 Convertible Preferred Stock of the
Corporation be and it hereby is created, and that the designation and amount
thereof and the preferences and relative, optional and other special rights of
the shares of such series, and the qualifications, limitations or restrictions
thereof are as follows:
1. Designation of the Series; Rank. The shares of such series shall be
designated as Series 1 Convertible Preferred Stock (the "Series 1 Preferred
Stock") and the number of shares constituting such series shall be 15,000. The
Series 1 Preferred Stock shall rank on a parity with all the Common Shares, par
value $0.01 per share, of the Corporation (the "Common Shares"), with respect to
the payment of dividends and as to the distribution of assets upon liquidation,
dissolution or winding up. Subject to Section 3 hereof, the Board of Directors
may by resolution issue and designate additional series or classes of preferred
stock which may rank senior to, junior to, or on parity with the Series 1
Preferred Stock with respect to the payment of dividends, the distribution of
assets upon liquidation, dissolution or winding up, redemption rights and the
other rights, preferences and privileges of such preferred stock. Shares ranking
senior to, on a parity with, and junior to the Series 1 Preferred Stock as to
dividends or the distribution, of assets upon liquidation dissolution or winding
as the case may be, are hereinafter referred to as "Senior Stock," "Parity
Stock" and "Junior Stock", respectively.
2. Dividends and Distributions.
So long as any shares of Series 1 Preferred Stock remain outstanding, no
dividend shall be paid or declared and no distribution made on any Junior Stock
(other than a dividend payable in Junior Stock) unless in each case an
equivalent dividend per share is paid on the Series 1 Preferred Stock.
<PAGE> 2
Subject to the foregoing, and not otherwise, such dividends (payable in cash,
stock or otherwise) as may be determined by the Board of Directors may be
declared and paid on any Junior Stock from time to time out of any funds legally
available therefor.
3. Voting Rights.
(a) Except as otherwise may be required by law and as set forth in
Section 3(b) below, the holders of Series 1 Preferred Stock shall not be
entitled to vote with the holders of Common Shares on any matter submitted to a
vote of stockholders (whether at a meeting or by written consent).
(b) So long as any shares of Series 1 Preferred Stock are outstanding,
then, the consent of the holders of a majority of the shares of Preferred Stock
at the time outstanding, given in person or by proxy, either in writing without
a meeting or by vote at any meeting called for the purpose, shall be necessary
for effecting or validating:
(i) Any amendment, alteration or repeal of any of the provisions
of the certificate of incorporation, or of the by-laws, or any designation of
any new series of preferred stock, of the Corporation, which affects adversely
the voting powers, rights, preferences, privileges or powers of, or restrictions
provided for the benefit of, the holders of Series 1 Preferred Stock; provided,
however, that the amendment, alteration or repeal of the provisions of the
certificate of incorporation so as to authorize or create, or to increase the
authorized amount of any Junior Stock or Parity Stock shall not be deemed to
affect adversely the voting powers, rights or preferences of the holders of
Series 1 Preferred Stock;
(ii) The authorization, designation or creation of, or the
increase in the authorized amount of, any additional shares of Series 1
Preferred Stock, or shares of any class, or any security convertible into shares
of any class, ranking senior to the Series 1 Preferred Stock in the distribution
of assets on any liquidation, dissolution or winding up of the Corporation, in
the payment of dividends or in redemption rights; or
(iii) Any corporate or shareholder action which reclassifies any
outstanding shares of the Corporation into shares having a preference or
priority right to receive dividends or assets senior to the preference of the
Series 1 Preferred Stock.
4. Liquidation. Subject to the prior and superior rights of the holders of any
shares of any series of preferred stock ranking senior to the shares of Series 1
Preferred Stock with respect to liquidation preference, in the event of any
voluntary or involuntary dissolution, liquidation or winding up of the
Corporation (for the purposes of this Section 4, a "Liquidation"), the assets of
the Corporation available for distribution to its stockholders shall be
distributed to holders of Series 1 Preferred Stock and Common Shares on a
pro-rata basis based on the number of Common Shares
-2-
<PAGE> 3
which would have been issuable upon conversion of the Series 1 Preferred Stock,
pursuant to Section 5 below, as of the date of such distribution.
A sale of substantially all assets of the Corporation or a merger, consolidation
or other transaction as a result of which the stockholders of the Corporation as
of immediately prior to such transaction hold less than 50% of the voting
securities of the surviving entity shall be deemed to be a Liquidation of the
Corporation for the purpose of this Section 4.
The holder of any shares of Series 1 Preferred Stock shall not be entitled to
receive any payment owed for such shares under this Section 4 until such holder
shall cause to be delivered to the Corporation (i) the certificate(s)
representing such shares of Series 1 Preferred Stock and (ii) transfer
instrument(s) satisfactory to the Corporation and sufficient to surrender such
shares to the Corporation free of any adverse interest.
5. Conversion Rights.
(a) Optional Conversion. The holder of any share of Series 1 Preferred
Stock shall have the right, at such holder's option at any time to convert such
share into that number of shares of fully paid and non-assessable Common Shares
(calculated as to each holder to the nearest share) obtained by dividing $1,000
by the Conversion Price then in effect. The Conversion Price shall initially be
a per share price equal to $13.50, and shall be subject to adjustment as set
forth below.
(b) Automatic Conversion. On the later of (i) March 31, 2006 or (ii) if
such conversion would require a filing under the Hart-Scott-Rodino Antitrust Act
of 1976, as amended, the date on which the waiting period expires, including any
early termination (the "Automatic Conversion Date"), each share of Series 1
Preferred Stock which remains outstanding shall automatically, without any
action by the holder thereof, be converted into that number of shares of fully
paid and non-assessable Common Shares (calculated as to each holder to the
nearest share) obtained by dividing $1,000 by the Conversion Price in effect
immediately prior to such effective date.
(c) Procedure for Conversion. To exercise the optional conversion
privilege set forth in Section 5(a) hereof, the holder of shares of Series 1
Preferred Stock shall surrender the shares to be converted, accompanied by
instruments of transfer satisfactory to the Corporation and sufficient to
transfer the Series 1 Preferred Stock being converted to the Corporation free of
any adverse interest, at the principal offices of the Corporation or any of the
offices or agencies maintained for such purpose by the Corporation ("Conversion
Agent") and shall give written notice (by registered or certified mail,
overnight courier or hand delivery) to the Corporation or such Conversion Agent
that the holder elects to convert such shares. Such notice shall also state the
name or names, together with address or addresses, in which the certificate or
certificates for Common Shares which shall be issuable on such conversion shall
be issued. As promptly as practicable after the surrender of such shares of
Series 1 Preferred Stock as aforesaid, the Corporation or its Conversion Agent
shall issue and deliver to such holder, or on his written order, a certificate
or certificates for the number of full
-3-
<PAGE> 4
Common Shares issuable upon the conversion of such shares in accordance with the
provisions hereof. Balance certificates will be issued for the remaining shares
of Series 1 Preferred Stock in any case in which fewer than all of the shares of
Series 1 Preferred Stock represented by a certificate are converted. In the
event of an automatic conversion pursuant to Section 5(b) hereof, the
outstanding shares of Series 1 Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Corporation or its
Conversion Agent, and provided further that the Corporation shall not be
obligated to issue certificates evidencing the shares of Common Shares issuable
upon such automatic conversion unless and until the certificates evidencing such
shares of Series 1 Preferred Stock are either delivered to the Corporation or
its Conversion Agent as provided above, or the holder notifies the Corporation
or its Conversion Agent that such certificates have been lost, stolen or
destroyed and executes an agreement satisfactory to the corporation to indemnify
the Corporation from any loss incurred by it in connection with such
certificates.
Each conversion pursuant to Section 5(a) hereof shall be deemed to have been
effected immediately prior to the close of business on the date on which the
shares of Series 1 Preferred Stock shall have been so surrendered and such
notice shall have been received by the Corporation as aforesaid. Any conversion
pursuant to Section 5(b) hereof shall be deemed to have been effected
immediately prior to the close of business on the Automatic Conversion Date. In
each such case, the person or persons in whose name or names any certificate or
certificates for Common Shares shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the Common Shares
represented thereby at the effective date of such conversion, unless the stock
transfer books of the Corporation shall be closed on such date, in which event
such conversion shall be deemed to have been effected immediately prior to the
open of business on the next succeeding day on which such stock transfer books
are open, and such person or persons shall be deemed to have become such holder
or holders of record of the Common Shares at the open of business on such later
day. In each case of conversion pursuant to Section 5(a) hereof, the conversion
shall be at the Conversion Price in effect on the effective date of the
conversion as determined above. No payment or adjustment shall be made on
conversion for any dividends payable on the Common Shares delivered on
conversion.
(d) Adjustment of Conversion Price. The Conversion Price shall be
adjusted from time to time, in respect of any of the following events occurring
on or after the Closing Date (as defined below), as follows:
(i) In case the Corporation shall pay or make a dividend or other
distribution on any class of capital stock of the Corporation other than the
Series 1 Preferred Stock in Junior Stock and an equivalent dividend is not paid
on shares of Series 1 Preferred Stock, then the Conversion Price in effect at
the opening of business on the day following the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such Conversion Price by a
fraction, of which the numerator shall be the number of shares of Junior Stock
outstanding at the close of business on the date fixed for such determination
and the denominator shall be the sum of such number of shares and the total
number of shares
-4-
<PAGE> 5
constituting such dividend or other distribution, such reduction to become
effective immediately after the opening of business on the day following the
date fixed for such determination. For the purposes of this paragraph (i), the
number of shares of Junior Stock at any time outstanding shall not include
shares held in the treasury of the Corporation but shall include shares issuable
in respect of scrip certificates issued in lieu of fractions of shares of Junior
Stock. The Corporation will not pay any dividend or make any distribution on
shares of Junior Stock held in the treasury of the Corporation.
(ii) In case outstanding Common Shares shall be subdivided into a
greater number of Common Shares (other than any such subdivision which is
effected pursuant to a dividend or distribution for which adjustment to the
Conversion Price is made under paragraph (i) above), the Conversion Price in
effect at the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and conversely,
in case outstanding Common Shares shall each be combined into a smaller number
of Common Shares, the Conversion Price in effect at the opening of business on
the day following the day upon which such subdivision or combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
(iii) In case the Corporation shall reclassify (including any
reclassification upon a merger in which the Corporation is the surviving
corporation) shares of its Common Stock into securities which include securities
other than Common Stock, the Conversion Price shall be adjusted so that the
holder of the shares of Series 1 Preferred Stock shall receive, upon conversion
of the Series 1 Preferred Stock, the number of such securities that such holder
would have owned following the reclassification of the Common Stock into another
security, if conversion of the Series 1 Preferred Stock had occurred immediately
prior to the record date of such reclassification..
(iv) If, as a result of an adjustment made, the holder of any
share of Series 1 Preferred Stock thereafter converted shall become entitled to
receive shares of two or more classes of Common Shares of the Corporation (as
defined in paragraph (xi) below), the Board of Directors (whose determination
shall be conclusive and shall be described in a statement filed with any
Conversion Agent) shall determine for accounting purposes the allocation of the
adjusted Conversion Price between or among such classes of Common Shares.
(v) The Corporation shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issuance or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Corporation, but shall at all times
in good faith assist in the carrying out of all the provisions of this Section 5
and in the taking of all such action as may be necessary or appropriate in order
to protect the conversion rights of the Series 1 Preferred Stock against
impairment. The Corporation may in its sole discretion make such reductions in
the Conversion Price, in addition to those required by paragraphs (i), (ii) and
(iii)
-5-
<PAGE> 6
above, as it considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights shall not be
taxable to the recipient.
(vi) Whenever the Conversion Price is adjusted as herein
provided, (A) the Corporation shall promptly file with the Conversion Agent a
certificate of a firm of independent public accountants or the Chief Financial
Officer of the Corporation setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment and the manner of computing the same, and (B) a notice stating that
the Conversion Price has been adjusted and setting forth the adjusted Conversion
Price shall forthwith be given by the Corporation to the Conversion Agent and
mailed by the Corporation to each holder of record of shares of Series 1
Preferred Stock at their last address as the same appears on the books of the
Corporation.
(vii) In case, at any time after the date of issuance of the
Series 1 Preferred Stock (the "Closing Date"), (A) the Corporation shall declare
a dividend or other distribution on its Common Shares, other than in cash out of
earned surplus, (B) the Corporation shall authorize a distribution of assets or
property to all holders of its Common Stock, (C) the Corporation shall authorize
the issuance to all holders of its Common Stock of rights or warrants entitling
them to subscribe for or purchase any Common Shares or any other subscription
rights or warrants, (D) the Corporation shall reclassify its capital stock
(other than a subdivision or combination of its outstanding Common Shares), (E)
the Corporation shall effect any consolidation or merger for which approval of
any stockholders of the Corporation is required, (F) the Corporation shall
effect any sale, lease, exchange or other disposition of all or substantially
all the property and assets of the Corporation or (G) the Corporation shall
voluntarily or involuntarily effect any liquidation, dissolution or winding up
of Corporation, then the Corporation shall cause to be mailed to each transfer
agent for the Series 1 Preferred Stock and to the holders of record of the
outstanding shares of Series 1 Preferred Stock, at least twenty (20) days (or
ten (10) days in any case specified in clauses (A), (B) or (C) above) prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date as of which the holders of record of Common Shares to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (y)
the date on which such reclassification, consolidation, merger, sale, leased
exchange, disposition, liquidation, dissolution or winding up is expected to
become effective, and the date as of which it is expected that holders of record
of Common Shares shall be entitled to exchange their shares for securities or
other property, if any, deliverable upon such reclassification, consolidation,
merger, sale, lease, exchange, disposition, liquidation, dissolution or winding
up. The failure to give the notice required by this paragraph, or any defect
therein, shall not affect the legality or validity of any such dividend,
distribution, right, warrant, reclassification, consolidation, merger, sale,
lease, exchange, disposition, liquidation, dissolution or winding up, or the
vote on any action authorizing such.
(viii) In the event that at any time as a result of an adjustment
made, the holder of any share of Series 1 Preferred Stock thereafter converted
shall become entitled to receive any shares of the Corporation other than Common
Shares, thereafter the Conversion Price of such other shares so receivable upon
conversion of any share of Series 1 Preferred Stock shall be subject
-6-
<PAGE> 7
to readjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to Common Shares contained herein.
(ix) The Corporation will pay any and all documentary, stamp or
similar issue or transfer taxes payable in respect of the issue or delivery of
Common Shares on conversion of shares of the Series 1 Preferred Stock pursuant
hereto, provided, however, that the Corporation shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issue or
delivery of Common Shares in a name other than that of the holder of the shares
of Series 1 Preferred Stock to be converted and no such issue or delivery shall
be made unless and until the person requesting such issue or delivery has paid
to the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(x) The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Shares, for the purpose of issuance upon conversion of the Series 1
Preferred Stock, the maximum number of Common Shares then deliverable upon the
conversion of all shares of Series 1 Preferred Stock then outstanding. All
Common Shares issued upon conversion of the Series 1 Preferred Stock, or in
payment of dividends or of the redemption price therefor or otherwise thereon,
shall be newly issued and, when issued, shall be duly authorized, validly
issued, fully paid and nonassessable, and free and clear of any liens or
encumbrances.
(xi) For the purpose of this paragraph (d), the term "Common
Shares" shall include any shares of the Corporation of any class or series which
has no preference or priority in the payment of dividends or in the distribution
of assets upon any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation and which is not subject to redemption by the Corporation.
However, upon conversion of Series 1 Preferred Stock, the Corporation shall
issue Common Shares consisting only of shares of the class designated as Common
Shares, or shares of the Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or in the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation and which
are not subject to redemption by the Corporation, provided that if at any time
there shall be more than one such resulting class or series, the shares of each
such class and series then so issuable shall be substantially in the proportion
which the total number of shares of such class and series resulting from all
such reclassifications bears to the total number of shares of all such classes
and series resulting from all such reclassifications.
6. Status of Reacquired Shares of Series 1 Preferred Stock. Shares of Series 1
Preferred Stock issued and reacquired by the Corporation (including, without
limitation, shares of Series 1 Preferred Stock which have been converted into
Common Shares pursuant to Section 5 hereof) shall have the status of authorized
and unissued shares of preferred stock, undesignated as to series, subject to
later issuance.
-7-
<PAGE> 8
7. Listing of Common Stock. So long as any Series 1 Preferred Stock is
outstanding, the Company shall use commercially reasonable efforts to maintain
the listing of its Common Shares (or such other security as shall be issuable at
any time upon conversion of the Series 1 Preferred Stock in lieu of the Common
Shares, pursuant to the provisions of Section 5(c) hereof) on the Nasdaq
National Market or shall obtain the listing of its Common Shares (or such other
security) on a national securities exchange.
-8-
<PAGE> 9
IN WITNESS WHEREOF, SILICON VALLEY GROUP, INC. has caused its corporate seal to
be hereunto affixed and this certificate to be signed by its Vice President and
attested by its Secretary, on this ___ day of April, 1999.
SILICON VALLEY GROUP, INC.
By: ___________________________
Russell G. Weinstock
Vice President, Finance
ATTEST:
By: _________________________
Larry W. Sonsini
Secretary
-9-
<PAGE> 1
EXHIBIT 10.48
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made as of this
5th day of May, 1999 by and among Silicon Valley Group, Inc., a Delaware
corporation (the "Company"), and Intel Corporation, a Delaware corporation (the
"Purchaser").
Recitals
A. The Company and the Purchaser have entered into that certain Series 1
Convertible Preferred Stock Purchase Agreement dated as of the date hereof (the
"Purchase Agreement") pursuant to which the Company shall sell to the Purchaser
15,000 shares of its Series 1 Convertible Preferred Stock (the "Series 1
Preferred").
B. The obligation of the Purchaser to purchase the Series 1 Preferred
under the Purchase Agreement is conditioned upon, among other things, the
execution and delivery of this Agreement.
Agreement
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or
any successor agency.
"Exchange Act" shall mean the Securities and Exchange Act of
1934, as amended.
"Holder" shall mean each Purchaser and any transferee of
Registrable Securities who is entitled to registration rights hereunder.
"Restricted Securities" shall mean the securities of the Company
required to bear the legend set forth in Section 3 hereof (or any similar
legend).
"Registrable Securities" shall mean (i) shares of the Company's
Common Stock issued or issuable upon the conversion of the Series 1 Preferred;
(ii) shares of the Company's Common Stock or other securities issued or issuable
with respect to, or in exchange for or in replacement of the Series 1 Preferred
or the shares of the Company's Common Stock issued upon conversion of the Series
1 Preferred upon any stock split, stock dividend, recapitalization, or similar
event; provided, a security is not a Registrable Security after (a) it has been
registered and disposed of under the Securities Act, (b) it has been publicly
sold pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act, or (c) it is capable of being disposed of without volume
limitations pursuant to Rule 144(k) (or any similar provision then in force)
under the Securities Act.
<PAGE> 2
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the
Company in complying with Sections 6 and 9 hereof, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, fees and
disbursements of a single counsel for all Holders participating in the
registration, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration, but excluding all Selling
Expenses.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders as well as any fees and disbursements of any counsel to the Holders
other than counsel designated to represent all of the Holders in such
registration.
2. Restrictions on Transferability. The Restricted Securities shall not
be transferable except upon the conditions specified in this Agreement, which
conditions are intended to ensure compliance with the provisions of the
Securities Act. Each Holder of Restricted Securities will cause any proposed
transferee of the Restricted Securities held by such Holder to agree to take and
hold such Restricted Securities subject to the provisions and upon the
conditions specified in this Agreement.
3. Restrictive Legend. Each certificate representing (i) the Series 1
Preferred, (ii) shares of the Company's Common Stock issued upon conversion of
the Series 1 Preferred, and (iii) any other securities issued in respect, or in
exchange for, or in replacement of, of the Series 1 Preferred or Common Stock
issued upon conversion of the Series 1 Preferred upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event, shall be
stamped or otherwise imprinted with a legend in substantially the following form
(in addition to any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED IN THE ABSENCE OF SUCH REGISTRATION OR AN AVAILABLE
EXEMPTION THEREFROM. COPIES OF THE AGREEMENT COVERING THE
PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF
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<PAGE> 3
THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION.
provided, that no such certificate shall be required to bear the foregoing
legend (a) after the security evidenced thereby has been registered and disposed
of under the Securities Act, (b) after the security evidenced thereby has been
sold pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act, or (c) to the extent so provided by the opinion of counsel or
"No action" letter contemplated by Section 4.
4. Opinion regarding Proposed Transfers. The Holder of each certificate
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4. Prior to any proposed transfer
of any Restricted Securities, unless there is in effect a registration statement
under the Securities Act covering the proposed transfer, the Holder thereof
shall provide to the Company either (i) a written opinion of legal counsel who
shall be reasonably satisfactory to the Company, addressed to the Company and
reasonably satisfactory in form and substance to the Company's counsel, to the
effect that the proposed transfer of the Restricted Securities may be effected
without registration under the Securities Act (provided, however, that no
opinion shall be required for sales under Rule 144 unless the Company's transfer
agent requires such an opinion), or (ii) a "No Action" letter from the
Commission to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, whereupon the Holder of such
Restricted Securities shall be entitled to transfer such Restricted Securities
in accordance with the terms decribed in the opinion or "no action" letter
delivered by the Holder to the Company.
5. Deferral of Filing. If the Company shall furnish to Holders
requesting registration of Registrable Securities pursuant to Section 9 below a
certificate signed by the President or Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, the filing of a registration statement at such time would materially
interfere with a proposed acquisition, disposition or other corporate
transaction involving the Company, the Company shall have the right to defer the
filing of such registration statement for a period of not more than 90 days
after receipt of the request of the Holders under Section 9 below. If the
Company shall furnish to any Holder a certificate signed by the President or
Chief Executive Officer of the Company stating material nonpublic information
exists regarding the Company and that in the good faith judgment of the Board of
Directors of the Company disclosure of such information in an amended
registration statement or Exchange Act filing so as to allow such Holder to
continue to make sales under a registration statement filed pursuant to Section
9 hereof would materially interfere with a material acquisition, disposition or
other corporate transaction involving the Company, such Holder will, upon
receipt of such notice, discontinue the sale of the Registerable Secutities
covered by such registration statement, until receipt of a further notice from
the Company that sales may be resumed pursuant to the existing prospectus
contained in such registration statement and/or receipt of an amended prospectus
supplied by the
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<PAGE> 4
Company, which notice and/or prospectus shall be supplied no later than 90 days
after receipt of the initial notice.
6. Company Registration.
(a) Notice of Registration. If the Company shall determine to
register any of its securities, either for its own account or the account of a
security holder or holders exercising their respective demand registration
rights, other than (i) a registration relating solely to employee benefit plans,
or (ii) a registration on any registration form which does not permit secondary
resales or does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Securities (including a registration statement solely for the
purpose of registering securities to be issued in a merger or like transaction,
including a Commission Rule 145 transaction), the Company will:
(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within ten (10) days after receipt of such written notice from
the Company, by any Holder or Holders. Notwithstanding any other provision of
this Section 6, if the Company or the managing underwriter advises the Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the number of shares of Registrable Securities that may
be included in the registration and underwriting shall be allocated among all
Holders requesting inclusion in the registration in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement, provided however, that
the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all shares held by officers, directors
and employees of the Company which are not Registrable Securities are first
entirely excluded from the Underwriting.
7. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Sections 6 and 9 hereof shall be borne by the Company. All Selling Expenses
relating to securities registered by the Holders shall be borne by the Holders
of such securities.
8. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. In addition, at its expense the Company will:
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<PAGE> 5
(a) Keep such registration, qualification or compliance effective
for a period of 180 days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs;
(b) Furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request;
(c) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(d) Use reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions;
(e) Cause all such Registrable Securities registered to be listed
on each securities exchange or system on which similar securities issued by the
Company are then listed; and
(f) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the underwriters of such offering.
9. Registration on Form S-3. In addition to the rights set forth in
Section 6 hereof, if a Holder or Holders request that the Company file a
registration statement on Form S-3 (or any successor thereto) for a public
offering of shares of Registrable Securities the reasonably anticipated
aggregate price to the public of which would exceed $5,000,000, and the Company
is a registrant entitled to use Form S-3 to register securities for such an
offering, the Company shall use its commercially reasonable efforts to cause
such shares to be registered for the offering on such form (or any successor
thereto). The Company shall not be obligated to take any action to effect any
registration statement pursuant to this Section 9 after the Company effected
three (3) such registration statements, and such registrations have been
declared or ordered effective. Further, the Company shall not be required to
file more than one (1) such registration statement during any twelve (12) month
period.
10. Lockup Agreement. In consideration for the Company agreeing to its
obligations under this Agreement, each Holder of Registrable Securities agrees,
in connection with any public offering of the Company's securities pursuant to
Section 6 upon request of the underwriters managing any underwritten offering of
the Company's securities, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included
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<PAGE> 6
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 90
days) from the effective date of such offering as the underwriters may specify
provided that all officers and directors of the Company shall have agreed to
similar restrictions on disposition of shares held by them. Each Holder agrees
that the Company may instruct its transfer agent to place stop transfer
notations in its records to enforce the provisions of this Section 10.
11. Indemnification.
(a) The Company will indemnify each Holder, each of its officers
and directors and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act or the Exchange Act applicable
to the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers and directors and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with information
furnished to the Company by such Holder or underwriter and stated to be
specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements
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<PAGE> 7
therein not misleading, and will reimburse the Company, such Holders, such
directors, officers, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with information furnished to the Company by such Holder and stated
to be specifically for use therein; provided, however, that the obligations of
such Holders hereunder shall be limited to an amount equal to the net proceeds
to each such Holder of Registrable Securities sold as contemplated herein.
(c) Each party entitled to indemnification under this Section 11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that (i) the failure of any Indemnified
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Agreement, except to the extent, but only to the
extent, that the Indemnifying Party's ability to defend against such claim or
litigation is impaired as a result of such failure to give notice and (ii) the
Indemnifying Party shall not assume the defense of matters as to which there is
a conflict of interest or separate and different defenses, but shall instead
pay, in all such instances, all reasonable legal fees and expenses incurred by
counsel (including local counsel) for the Indemnified Party. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation.
12. Information by Holder. Any Holder of Registrable Securities included
in any registration shall furnish to the Company such information regarding such
Holder and the distribution proposed by such Holder as the Company may request
and as shall be required in connection with any registration, qualification or
compliance referred to in this Agreement.
13. Transfer of Registration Rights. The right to cause the Company to
register securities granted to the Holders hereunder may be assigned to a
transferee or assignee who acquires at least 5,000 shares (as adjusted for stock
splits or similar events after the date hereof) of Series 1 Preferred (or Common
Stock issued on conversion of Series 1 Preferred), provided that the Company is
given written notice of such assignment prior to such assignment.
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<PAGE> 8
14. Governing Law. This Agreement and the legal relations among the
parties arising hereunder shall be governed by and interpreted in accordance
with the laws of the State of California. The parties hereto agree to submit to
the jurisdiction of the federal and state courts of the State of California with
respect to the breach or interpretation of this Agreement or the enforcement of
any and all rights, duties, liabilities, obligations, powers, and other
relations between the parties arising under this Agreement.
15. Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties regarding the subject matter
hereof. Except as otherwise expressly provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon, the successors, assigns,
heirs, executors and administrators of the parties hereto.
16. Notices etc.. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service,
addressed (a) if to the Purchaser, to the Purchaser's address set forth on the
signature page hereto, or at such other address as the Purchaser shall have
furnished to the Company in writing, or (b) if to any other holder of any
Registrable Securities, to such address as such holder shall have furnished the
Company in writing, or, until any such holder so furnishes an address to the
Company, then to and at the address of the last holder of such Securities who
has so furnished an address to the Company, or (c) if to the Company, to its
address set forth on the signature page of this Agreement the attention of the
Chief Financial Officer or at such other address as the Company shall have
furnished to the Holders, with a copy to Wilson Sonsini Goodrich & Rosati, 650
Page Mill Road, Palo Alto, California 94304, Attention: Aaron J. Alter.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the undersigned have executed this agreement as of
the date set forth above.
"COMPANY"
SILCON VALLEY GROUP, INC.
By:
--------------------------------
Russell G. Weinstock
Vice President, Finance
Telephone No.: (408) 441-6700
Facsimile No.: (408) 467-5867
Address: 101 Metro Drive, Suite 400
San Jose, California 95110
"PURCHASER"
INTEL CORPORATION
By:
---------------------------------
Arvind Sodhani
Vice President and Secretary
Telephone No.: (408) 765-1240
Facsimile No.: (408) 765-6038
Address: 2200 Mission College Boulevard
Santa Clara, CA 95052
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<PAGE> 10
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
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<PAGE> 1
EXHIBIT 10.49
EXECUTION VERSION
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of May 14, 1999, 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
Representative Office, 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, as amended by a First Amendment to Credit Agreement
dated as of October 23, 1998 (as so amended, 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) Paragraph 1.01 is amended as follows:
<PAGE> 2
(i) The definition of "Adjusted Net Income" set forth
therein is amended to read in its entirety as follows:
"Adjusted Net Income" shall mean, with respect to
Borrower for any period, the sum, determined on a
consolidated basis in accordance with GAAP where
applicable, of:
(a) The net income or net loss of
Borrower and its Subsidiaries for such period
after provision for income taxes;
plus
(b) To the extent deducted in
calculating such net income or net loss for such
period under clause (a) above, all
non-recurring, non-cash charges taken by
Borrower and its Subsidiaries during such period
in connection with acquisitions permitted by
Subparagraph 5.02(d) (including charges for the
write-off of in-process research and development
costs relating to such acquisitions); provided,
however, that the sum of all such charges so
added to net income or net loss in calculating
the Adjusted Net Income of Borrower during the
period from the date of this Agreement through
the Maturity Date shall not at any time exceed
the Acquisition Charge Cap at such time;
plus
(c) To the extent deducted in
calculating such net income or net loss for such
period under clause (a) above, all
Watkins-Johnson Charges taken by Borrower and
its Subsidiaries during such period; provided,
however, that the sum of all such charges so
added to net income or net loss in calculating
the Adjusted Net Income of Borrower during the
period from the date of this Agreement through
the Maturity Date shall not at any time exceed
Fifteen Million Dollars ($15,000,000).
(ii) The definition of "EBITDA" set forth therein is
amended to read in its entirety as follows:
"EBITDA" shall mean, with respect to Borrower for
any period, the sum, determined on a consolidated basis in
accordance with GAAP, of the following:
(a) The net income or net loss of
Borrower for such period before provision for
income taxes;
plus
2
<PAGE> 3
(b) To the extent deducted in calculating
such net income or net loss for such period under
clause (a) above, the sum of (i) all Interest
Expenses of Borrower and its Subsidiaries
accruing during such period and (ii) all
depreciation and amortization expenses of Borrower
and its Subsidiaries accruing during such period;
minus
(c) To the extent added in calculating such
net income or net loss for such period under clause
(a) above, all interest income of Borrower and its
Subsidiaries accruing during such period;
plus
(d) To the extent deducted in calculating
such net income or net loss for such period under
clause (a) above, all non-recurring, non-cash
charges taken by Borrower and its Subsidiaries
during such period in connection with acquisitions
permitted by Subparagraph 5.02(d) (including
charges for the write-off of in-process research
and development costs relating to such
acquisitions); provided, however, that the sum of
all such charges so added to net income or net loss
in calculating the EBITDA of Borrower during the
period from the date of this Agreement through the
Maturity Date shall not at any time exceed the
Acquisition Charge Cap at such time;
plus
(e) For the purposes of calculating the
Fixed Charge Coverage Ratio of Borrower for any
period only, to the extent deducted in calculating
such net income or net loss for such period under
clause (a) above, all Watkins-Johnson Charges taken
by Borrower and its Subsidiaries during such
period; provided, however, that the sum of all such
charges so added to net income or net loss in
calculating the EBITDA of Borrower during the
period from the date of this Agreement through the
Maturity Date shall not at any time exceed Fifteen
Million Dollars ($15,000,000).
(iii) The definition of "Fixed Charge Coverage Ratio" set
forth therein is amended by changing the proviso at the end
thereof to read in its entirety as follows:
Provided, however, that, in calculating Borrower's Fixed
Charge Coverage Ratio for the consecutive two-quarter
period ending on October 1, 1999
3
<PAGE> 4
and the consecutive three-quarter period ending on December 31,
1999, the amounts to be used in clauses (a)(i), (a)(ii), (b)(i)
and (b)(ii) shall be the actual respective amounts for such
periods annualized.
(iv) A new definition of "Senior Debt/EBITDA", to read in
its entirety as follows, is added thereto in the appropriate
alphabetical order:
"Senior Debt/EBITDA Ratio" shall mean, with respect
to Borrower for any period, the ratio, determined on a
consolidated basis in accordance with GAAP, of:
(a) Borrower's Senior Indebtedness on
the last day of such period;
to
(b) Borrower's EBITDA for such period.
(v) The definition of "Tangible Net Worth" set forth
therein is amended to read in its entirety as follows:
"Tangible Net Worth" shall mean, with respect to
Borrower at any time, the remainder at such time,
determined on a consolidated basis in accordance with
GAAP, of:
(a) The sum of (i)the total assets of
Borrower and its Subsidiaries at such time plus
(ii) the after tax effect of the lesser of (A)
the sum of all Watkins-Johnson Charges taken by
Borrower and its Subsidiaries prior to such time
and (B) Fifteen Million Dollars ($15,000,000);
minus
(b) The sum (without limitation and
without duplication of deductions) of (i) the
total liabilities of Borrower and its
Subsidiaries, (ii) all reserves established by
Borrower and its Subsidiaries for anticipated
losses and expenses (to the extent not deducted
in calculating total assets in clause (a)
above), and (iii) all intangible assets of
Borrower and its Subsidiaries (to the extent
included in calculating total assets in clause
(a) above), including, without limitation,
goodwill (including any amounts, however
designated on the balance sheet, representing
the cost of acquisition of businesses and
investments in excess of underlying tangible
assets), trademarks, trademark rights, trade
name rights, copyrights, patents, patent rights,
licenses, unamortized debt
4
<PAGE> 5
discount, marketing expenses, organizational
expenses, non-compete agreements and deferred
research and development.
(vi) New definitions of "Watkins-Johnson Acquisition"
and "Watkins-Johnson Charges", to read in their entirety as
follows, are added thereto in the appropriate alphabetical
order:
"Watkins-Johnson Acquisition" shall mean the
acquisition of certain assets and liabilities of the
Watkins-Johnson Semiconductor Equipment Group, a division
of Watkins-Johnson Company.
"Watkins-Johnson Charges" shall mean, with respect
to any period, all non-recurring charges taken by Borrower
and its Subsidiaries during such period in connection with
the Watkins-Johnson Acquisition (including charges for the
write-off of in-process research and development costs,
consolidation, relocation and other charges relating to
such acquisition).
(b) Subparagraph 5.02(b) is amended by changing the reference to
"clause (xi) of Subparagraph 5.02(a)" set forth in clause (xiv) thereof
to "clause (xii) of Subparagraph 5.02(a)".
(c) Subparagraph 5.03(b) is hereby amended to read in its
entirety as follows:
(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 consecutive two -quarter
period beginning on April
3, 1999 and ending on
October 1, 1999 2.00;
The consecutive three-quarter
period beginning on April
3, 1999 and ending on
December 31, 1999 2.50;
The consecutive four-quarter
period beginning on April
3, 1999 and ending on
March 31, 2000 3.00;
Each consecutive four-quarter
period ending on the
last day of each quarter
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<PAGE> 6
thereafter 3.50.
(d) 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 March 31, 1999
(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 Thirteen Million Three Hundred
Thousand Dollars ($513,300,000);
plus
(ii) Eighty percent (80%) of the sum of:
(A) 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; and
(B) The after tax effect of the lesser
of (A) the sum of all Watkins-Johnson Charges
taken by Borrower and its Subsidiaries for each
fiscal quarter after the base date through and
including the fiscal quarter ending on the
determination date, and (B) Fifteen Million
Dollars ($15,000,000);
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 date;
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
6
<PAGE> 7
commencing on the base date and ending on the
determination date and (B) $10,000,000.
(e) Subparagraph 5.03(e) is hereby amended to read in its
entirety as follows:
(e) Profitability.
(i) For the quarter ending April 2, 1999, Borrower
shall not permit its Adjusted Net Income to be a loss
exceeding $19,000,000.
(ii) During the period October 3, 1998 - April 2,
1999, Borrower shall not permit the sum of its quarterly
losses based upon its Adjusted Net Income for each quarter
(excluding any quarterly profits) to exceed $26,000,000.
(iii) Borrower shall not permit its Adjusted Net
Income for the consecutive three-quarter period beginning
on April 3, 1999 and ending on December 31, 1999 to be a
loss.
(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 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 May 14, 1999 (the "Effective Date"), subject to receipt by
Agent and the Lenders on
7
<PAGE> 8
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 0.150% of each
Lender's Commitment, to be paid to each Lender that executes this
Amendment on or before May 14, 1999; 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.
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.
8
<PAGE> 9
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:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
AGENT: ABN AMRO BANK, N.V.
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
LENDERS: ABN AMRO BANK, N.V.
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
COMERICA BANK-CALIFORNIA
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
9
<PAGE> 10
FLEET NATIONAL BANK
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
KEYBANK NATIONAL ASSOCIATION
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
WELLS FARGO BANK, N.A.
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE SECOND QUARTER OF FISCAL 1999 AS FILED IN THE
COMPANY'S FORM 10Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 106,186
<SECURITIES> 21,307
<RECEIVABLES> 77,744
<ALLOWANCES> 8,540
<INVENTORY> 220,668
<CURRENT-ASSETS> 477,994
<PP&E> 333,377
<DEPRECIATION> 148,538
<TOTAL-ASSETS> 673,771
<CURRENT-LIABILITIES> 122,680
<BONDS> 0
0
0
<COMMON> 407,043
<OTHER-SE> 132,526
<TOTAL-LIABILITY-AND-EQUITY> 673,771
<SALES> 61,496
<TOTAL-REVENUES> 61,496
<CGS> 47,326
<TOTAL-COSTS> 47,326
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> (26,450)
<INCOME-TAX> (8,456)
<INCOME-CONTINUING> (17,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,994)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
