-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FZHP/kmiK/l2dq7kiNx5QfJ0dGlUv1iCG6DYf1iMZOaaGfa+G50ThlS3u7r9PwW2 ShZxSadGEgpl8xWNcttC9g== 0000891618-96-003172.txt : 19961227 0000891618-96-003172.hdr.sgml : 19961227 ACCESSION NUMBER: 0000891618-96-003172 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON VALLEY GROUP INC CENTRAL INDEX KEY: 0000712752 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942264681 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11348 FILM NUMBER: 96686242 BUSINESS ADDRESS: STREET 1: 101 METRO DRIVE STREET 2: SUITE 400 CITY: SAN JOSE STATE: CA ZIP: 95110 BUSINESS PHONE: 4084675910 MAIL ADDRESS: STREET 1: 101 METRO DRIVE STREET 2: SUITE 400 CITY: SAN JOSE STATE: CA ZIP: 95110 10-K405 1 FORM 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996.* [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER: 0-11348 SILICON VALLEY GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2264681 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 101 METRO DRIVE, SUITE 400, SAN JOSE, 95110 CALIFORNIA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 441-6700 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by persons other than those who may be deemed affiliates of the Registrant, as of November 29, 1996, was approximately $636,778,000. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the Registrant's Common Stock as of November 29, 1996 was 30,177,634. * See Part II, Item 8 of this report for information regarding Registrant's fiscal year. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the parts of this Form 10-K indicated: Proxy Statement for Annual Meeting of Stockholders to be held on February 20, 1997........................................ Part III Annual Report to Stockholders for fiscal year ended September 30, 1996.................................................... Parts II & IV
================================================================================ 2 PART I ITEM 1. BUSINESS. The information in this report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to certain risks and uncertainties, including those discussed below and set out in the Annual Report incorporated by reference herein, that could cause actual results to differ materially from those described herein. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. Forward looking statements are indicated by an asterisk (*) following the sentence in which such statement is made. The Company undertakes no obligation to publicly release the results of any revisions to these forward looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Silicon Valley Group, Inc. (the "Company" or "SVG") designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. The fabrication of integrated circuits involves repeating a complex series of process steps to a semiconductor wafer. The three broad categories of wafer processing steps are deposition, photolithography and etching. The Company has three principal product groups which focus primarily on photolithography, photoresist processing, and deposition for oxidation/diffusion and low pressure chemical vapor deposition ("LPCVD"). The Company's products incorporate proprietary technologies and unique processes, and focus on providing process and product technologies and productivity enhancements to its customers. The Company supports its products through a network of worldwide service and technical support organizations. The Company works closely with its existing and potential customers. As evidence of the Company's commitment to its customers, in February 1995 the Company entered into a business relationship with Intel, Motorola and Texas Instruments (the "Investors") pursuant to which such companies made an equity investment in the Company. The Company manufactures and markets its photolithography exposure products through its majority owned subsidiary, SVG Lithography Systems, Inc. ("SVGL"), its photoresist processing products through its Track Systems Division ("Track") and its oxidation/diffusion and LPCVD products through its Thermco Systems Division ("Thermco"). INDUSTRY BACKGROUND Continuous improvements in semiconductor process and design technologies have led to the production of smaller, more complex and more reliable devices at a lower cost per function. As performance has increased and size and cost have decreased, the demand for semiconductors has expanded beyond the primary market in computer systems to include applications in telecommunications systems, automotive products, consumer goods and industrial automation and control systems. Semiconductor content as a percentage of system cost has also increased. In addition, the demand for electronic systems has expanded geographically, particularly in the Pacific Rim. The Company believes that these longterm trends will continue and will be accompanied by a growing demand for semiconductor production equipment that can produce advanced integrated circuits in high volumes with a low cost of ownership.* The rapid development of advanced semiconductor applications requires semiconductor manufacturers to continually improve their core technology and manufacturing capabilities to remain competitive within the industry. As a consequence, semiconductor manufacturers demand increasingly sophisticated, cost effective processing equipment from semiconductor equipment suppliers. The increasing diversity and complexity of semiconductor products, the demands of technological change and the costs associated with keeping pace with industry developments have contributed to the emergence of cooperative development and manufacturing alliances both between semiconductor manufacturers and between semiconductor manufacturers and semiconductor equipment suppliers. The Company believes it is essential to have customer alliances to provide access to valuable product and process technologies. These factors result in customers concentrating their business with a small number of key suppliers. 1 3 STRATEGY The Company's objective is to strengthen its position as a leading worldwide semiconductor equipment supplier that offers a broad line of technologically advanced products. The Company's strategy incorporates the following key elements: - Technological Innovation. The Company is committed to developing new products, improving processes and enhancing existing products through substantial investment in research and development. SVG designs and manufactures sophisticated semiconductor manufacturing systems for advanced fabrication facilities. Its products incorporate proprietary technologies in photolithography, control software, optics and particulate control and unique processes focusing on providing process and product technologies and productivity enhancements to customers. Additionally, the Company works with universities and laboratories to leverage new concepts for its advanced projects. - Customer Collaboration. The Company's objective is to strengthen its position as a leading worldwide semiconductor equipment supplier by offering a broad line of technologically advanced products. SVG works closely with its existing and potential customers, industry consortia and research institutions to improve current products and processes and to define new product development opportunities. These efforts enable the Company to participate in the development of new technologies, to influence the design of new fabrication processes and to position itself as a principal supplier for volume equipment orders. The Company believes that cooperative working relationships with leading semiconductor manufacturers are critical to ensuring that its products are designed in conjunction with the development of the semiconductor manufacturers' advanced process requirements. - Continuous Improvement. The industry requires that equipment suppliers provide cost effective products that are based on extendable technology. Cost of ownership and the ability to satisfy customer delivery requirements are critical ingredients in the selection process for advanced equipment. SVG is responding by expanding its facilities and deploying capital for manufacturing and test equipment to respond to the requirements of the semiconductor industry. Additionally, the Company is implementing programs to increase the effectiveness of its material procurement, reduce manufacturing cycle times and improve production methods and processes to gain additional efficiencies. - Expanding Worldwide Customer Service and Support. The Company's customers are concentrating their business with a smaller number of key suppliers and demanding higher levels of support and service from these suppliers as the semiconductor fabrication process becomes increasingly complex. The Company has responded to this trend by making substantial investments in its global service and support capabilities. SVG LITHOGRAPHY SYSTEMS, INC. (SVGL) SVGL designs, manufactures, markets and services advanced photolithography exposure systems. Photolithography is one of the most critical and expensive steps in integrated circuit fabrication, representing approximately one-third of the fabrication cost. Consequently, integrated circuit manufacturers focus on obtaining advanced photolithography equipment to help them produce critical layers for increasingly complex devices reliably, efficiently and cost-effectively. In the photolithography step of the fabrication process, the integrated circuit patterns are projected through masks, or reticles, onto the silicon wafers. As semiconductors have become more complex, the patterns have become finer, with line widths as narrow as 0.25 micron (approximately 10 millionths of an inch) in many of today's more advanced integrated circuits. As the patterns become finer, photolithography exposure systems must be capable of projecting the patterns through the masks with ever finer resolution. The resolution capability of a photolithography exposure system is a function of its depth of focus, numerical aperture (a measure of its light gathering characteristics) and the wavelength of the light used in pattern projections. With the advancement of photolithography technology has come a trend toward the reduction in wavelength from G-line (436 nanometer) to I-line (365 nanometer) to Deep UV (248-193 nanometer) and the increase in numerical aperture from 0.2 to 0.6. 2 4 Historically, there have been two major approaches to photolithography exposure systems: full field scanners and conventional refractive systems. The full field scanners project a full scale mask image onto full wafers while the refractive systems (steppers) sequentially expose small sections of a wafer in a stepped sequence of exposures, but do so by reducing the size of a mask image by several fold (typically 5 times). Thus, scanners offer large exposure fields while steppers offer masks that are easier to make and have a lower cost. These strengths are combined in the step and scan system. Micrascan. The Company believes that its Micrascan photolithography exposure system provides the greater resolution required for current advanced logic and memory devices and for succeeding generations of complex, fine geometry integrated circuits through its use of Deep UV lamp and laser light sources and overcomes the throughput, yield and line-width limitations of steppers by combining the elements of both steppers and scanners into the Micrascan's "step and scan" technology.* The Micrascan combines advantages of scanning projection aligners and steppers by scanning a portion of the wafer, then "stepping" to another portion of the wafer and repeating the process as necessary. Each scan has the capability to expose a large segment of the wafer. The large exposure field enables Micrascan to fabricate larger devices in a single scan than steppers, thus avoiding the necessity of "stitching" a circuit together through two different exposures. In addition, Micrascan continuously modifies the position of the wafer surface during the scan to keep the wafer in the optimal focal plane, thereby providing Micrascan a larger usable depth of focus field than steppers. The larger the usable depth of focus field is, the more tolerant of variations in the wafer surface the equipment will be. The Company believes Micrascan's greater tolerance of wafer surface variations can reduce the number of defective devices on a wafer, thereby contributing to higher yields.* It further believes that scanning across the field instead of exposing the entire field at one time also enables Micrascan to achieve greater uniformity of resolution across the entire exposure field and contributes to higher yields.* The Company believes that SVGL has substantial technological expertise and process knowledge in developing Deep UV step and scan photolithography systems. SVGL has developed internal capability to design and fabricate optical lenses, mirrors and coatings. This includes a combination of purchased and proprietary optical metrology using phase measuring interferometry to precisely measure and test the optical elements it produces. Micrascan incorporates both mirrors and lenses in its optical system, which the Company believes allows for a higher power optical projection system, is less sensitive to environmental variants and accommodates the use of light sources with broader spectral bandwidth (than refractive optics), with the additional benefits of reduced running cost and increased reliability.* In addition to the optical system technology described above, SVGL has developed certain proprietary mechanical systems incorporated in the Micrascan to control the alignment of the wafer and the reticules prior to and during the wafer exposure step. These alignment systems contribute to the Micrascan's ability to scan the exposure field at speeds of 50mm per second or greater with no significant loss of resolution, thereby increasing the throughput capability of the machine. The Company believes that many of the more complex semiconductor devices currently under development, such as the most advanced microprocessors and DRAMs, will benefit from the larger exposure field scanned by the Micrascan.* In addition, these more complex devices feature increasingly narrow line widths, which require greater resolution in exposing the photoresist. The Company believes that as these larger and more complex logic and memory devices move from development and pre-production to production, the technical advantages of Deep UV step and scan systems over existing I-Line and Deep UV steppers will provide a greater incentive to semiconductor manufacturers to purchase step and scan systems rather than steppers in order to achieve more precise line-width control, higher yields and faster throughput. Although certain companies are currently using the Micrascan II in production, the Company believes that manufacturers will not begin volume production of advanced devices which will benefit most from the utilization of Deep UV step and scan technology until late 1997 or 1998. The Company believes the SVGL Micrascan II series of photolithography systems, capable of printing .30 micron line widths, are currently the most technically advanced step-and-scan machines shipping in multiple quantities to global semiconductor manufacturers.* However, competitive equipment capable of producing .25 micron line widths using step-and-scan technology 3 5 is currently available in limited quantities. The Micrascan II systems which the Company is now shipping in volume sell for up to approximately $5,300,000, depending upon configuration. The Micrascan systems capable of printing .25 micron line widths which the Company expects to begin shipping in the first half of fiscal 1997 sell for up to approximately $7,200,000, depending upon configuration. Uncertain Development of Market for Micrascan Products. The development of a market for the Company's Micrascan photolithography products will be highly dependent on the continued trend towards finer line widths in integrated circuits and the ability of lithography manufacturers to keep pace with this trend through either enhanced technologies or improved processes. The market for the Company's Micrascan photolithography products has developed more slowly than the Company anticipated at the time the Company acquired SVGL in May 1990. From its inception in fiscal 1990, through the end of fiscal 1996, SVGL sold an aggregate of 83 Micrascan systems, of which 38 were shipped in fiscal 1996. At September 30, 1996, SVGL had a sales order backlog of 38 Micrascan units for shipment. In addition to the systems included in backlog, SVGL had orders for 18 systems which had scheduled delivery dates outside the twelve month backlog window, including orders for seven advanced technology 193 nanometer Micrascan systems currently under development. While such orders are encouraging, they are not necessarily indicative of industry-wide acceptance of the Micrascan technology. The Company and many industry observers initially believed that I-Line steppers, the most advanced photolithography exposure equipment in widespread production use at the time the Company acquired SVGL, could not be modified to be capable of fabricating complex semiconductor devices with line widths of less than 0.5 micron, such as 64 and 256 megabit dynamic random access memories ("DRAMs"). Since 1990, however, stepper manufacturers have extended the capability of their I-Line steppers to 0.5 micron or finer line widths and customers can purchase Deep UV steppers to produce product at .25 micron line widths. The Company believes that as a result of such enhancements, manufacturers of complex devices continued to use steppers for fabricating such devices. The Company believes that as devices increase in size and complexity and require finer line widths, the technical advantages of Micrascan systems as compared to steppers will enable semiconductor manufacturers to achieve finer line widths, higher yields and increased throughput.* The Company believes that advanced semiconductor manufacturers are beginning to require volume quantities of production equipment as advanced as the current and pending versions of Micrascans; however, it does not believe that substantial sales of such systems will begin until late calendar 1997 or 1998.* If manufacturers of traditional I-line or Deep UV steppers are able to further enhance existing technology to achieve finer line widths sufficiently to erode Micrascan's competitive and technological advantages, demand for the Micrascan technology may not develop as the Company expects.* While the recent volume of orders for Micrascan systems has been consistent and encouraging, they are not necessarily indicative of industry-wide acceptance of the Micrascan technology. Although SVGL has been profitable during fiscal 1996, the Company believes that with the costs associated with the continued development of multiple generations of Micrascan technology, the expansion of SVGL's manufacturing capacity, the additional manpower requirements related to the expanded capacity and customer support and the potential difficulties inherent in manufacturing initial quantities of the .25 micron Micrascan systems, there can be no assurance that SVGL will be able to operate profitably in the future.* Failure of SVGL to develop adequate production capability to supply a substantial number of systems in response to customer demand, or a delay in supplying such systems, could have a material adverse effect on the Company's ability to continue to operate profitably.* The Company believes that for SVGL to succeed in the long term, it must sell its Micrascan products on a global basis. The Japanese market (including fabrication plants operated outside Japan by Japanese semiconductor manufacturers) and the Korean market represent a substantial portion of the overall market for photolithography exposure equipment. To date, the Company has not been successful penetrating either of these markets. In April 1993, the Company entered into a letter of intent with Canon, Inc. ("Canon"), a major Japanese company, for the purpose of establishing a worldwide strategic alliance based on SVGL's Micrascan technology. The Company and Canon were unable to reach agreement and the letter of intent expired on November 30, 1994. Although Canon is contractually prohibited until April 2003 from manufacturing a specifically defined step and scan photolithography machine or disclosing related information, Canon could introduce a product that includes certain step and scan technology without violating this prohibition. As 4 6 a result of the expiration of the letter of intent, the Company believes that Canon has accelerated its previously suspended development of a step and scan photolithography product which will compete with Micrascan. The Company believes that its current customer base of semiconductor manufacturers in the U.S. and Europe, and the Korean companies that have purchased initial quantities of the product will order a sufficient number of units to establish the Micrascan as a competitive technology.* It is also possible that Japanese manufacturers may follow. In order for SVGL to become a viable competitor in the Lithography business, it must be able to continue the timely development, introduction and shipment of new technology systems into the marketplace. To accomplish this, it must not only maintain its product development effort, but it must also build an efficient manufacturing operation, capable of supplying systems in quantities sufficient to meet the requirements of multiple global customers. Additionally, it must develop a supplier infrastructure capable of providing timely, cost effective and quality components. In addition to the development and manufacturing of systems capable of meeting customer requirements, the Company must have a qualified global support and parts distribution function capable of servicing customers worldwide. There can be no assurance that SVGL will be successful in these endeavors. Micralign. SVGL also sells a family of scanning projection aligners known as "Micralign." The most advanced product in this family, the Micralign 700, is used primarily in the production of semiconductor devices with minimum feature sizes above 1.25 microns, or in the fabrication of less critical layers within more sophisticated semiconductor devices. Micralign products are a mature product family and sales of Micralign products have declined in recent years as steppers have supplanted projection. The Company anticipates that such sales will continue to decline.* A large installed base of Micralign systems exists throughout the world and a majority of SVGL's Micralign related revenues is derived from servicing that installed base and the sales of spare parts. The list price of the Micralign 700 is approximately $1,250,000. TRACK SYSTEMS DIVISION (TRACK) Track designs, manufactures, markets and services photoresist processing equipment which performs all the steps necessary to process semiconductor wafers prior to photolithography exposure, including cleaning, adhesion promotion and photoresist coating, and which performs all the steps required to treat wafers after photolithography exposure prior to etching, including developing and baking. As photoresist processing technology has evolved, SVG has developed increasingly advanced product lines for this market, which are capable of handling integrated circuits with line widths as narrow as 0.25 micron. Each product line includes the principal processing capabilities described above and is generally sold in customer-specified configurations that can include specially engineered features and capabilities. All of the Track products are available in fully automated cassette-to-cassette configurations either as stand-alone processing stations or as in-line integrated manufacturing systems. The equipment is modular in design to allow configuration to customer requirements. Each semiconductor manufacturer may require certain of the processing stations to effect its proprietary or specialized processes. SVG believes it is the only manufacturer to offer a cluster which integrates its photolithography and photoresist products. In addition, the Track 90-S product is designed to interface with all stepper products in the industry. Track offers four product lines, each corresponding to the development of successive generations of wafer processing technologies. In general, it has been the Company's experience that introduction of new Track products has been followed by lower order levels for older products. 200-APS. Introduced in July 1996, the 200-APS is designed for eight inch advanced fabrication processes for integrated circuits with line widths down to .18 micron, such as 256 megabit DRAMs. The system is smaller than the Company's 90-SE and potentially offers customers a lower cost-of-ownership through improvements in productivity such as a lower floorspace requirement, direct module-to-module robotic wafer-transfer, and reduced photoresist consumption. The 200-APS has improved process capabilities including improved wafer coating uniformities, highly precise wafer transport timing controls and proprietary photoresist dispense technologies. The Company expects to ship production units of the 200-APS during the second quarter of fiscal 1997.* Prices of the 200-APS will range from approximately $1,000,000 to $2,100,000. 5 7 90 Series. The 90 Series, the 90-S and the 90-SE photoresist processing systems are designed for use in fabrication processes for integrated circuits with line widths as narrow as 0.25 micron, such as is required for 64 megabit DRAMs. The 90 Series incorporates a proprietary wafer transfer system to increase throughput, features substantially improved contamination control specifications as compared to the Company's earlier products and provides features allowing it to interface with factory automation systems, such as those using automated guided vehicles. The 90 Series can process wafers up to eight inches in diameter. The 90-S and the more recent 90-SE offer improved cost of ownership through increased productivity and a smaller floor space requirement. Prices of the 90 Series range from approximately $650,000 to $1,500,000. 8800 Series. The 8800 Series is designed to meet market needs for photoresist contamination control and photoresist processing down to 0.8 micron line widths. The 8800 Series incorporates such automation features as beltless wafer handling, compatibility with low contamination wafer storage and movement techniques, advanced software and communications capabilities and certain process control improvements. The 8800 Series can process wafers from three to six inches in diameter. Prices of the 8800 Series range from approximately $350,000 to $750,000. 8600 Series. The 8600 Series is a belt-based wafer transport system capable of processing wafers with diameters of three to six inches and of supporting the needs of photoresist processing down to 1.0 micron line widths. The 8600 Series is typically purchased for expansion of current fabrication capacity. Prices of the 8600 Series range from approximately $200,000 to $400,000. THERMCO SYSTEMS DIVISION (THERMCO) Thermco designs, manufactures, markets and services large batch thermal products which address the oxidation/diffusion and LPCVD steps of the semiconductor fabrication process. Thermco products are used for a broad range of processing applications required in the fabrication of most semiconductor devices, including growing insulating layers on the wafers, diffusing dopants into the silicon structure and depositing insulating or conducting films on the wafer surface. Thermco's products incorporate proprietary technology the Company has developed in the areas of thermal control, gas handling, particle control and automated wafer handling. There are two major configurations of thermal processing equipment, commonly referred to as vertical and horizontal, corresponding to the orientation of their reaction chamber(s). Vertical processing systems represent an increasing portion of the market for oxidation/diffusion and LPCVD processing equipment. Vertical reactors generally consist of a single, fully automated cylindrical reaction chamber, individually controlled by a dedicated computer control system. Vertical systems generally provide greater process uniformity and lower particle contamination than do horizontal systems, due to improved thermal control and an increased ability to maintain environmental integrity, thereby achieving higher yields in wafer processing. Additionally, vertical systems provide more flexibility in manufacturing configurations. Horizontal thermal processing systems, which are typically much larger and less automated than vertical reactors, were the standard of the semiconductor processing equipment industry and are still used for a broad range of processes. Series 9000 Rapid Vertical Processor ("RVP"). Thermco's most recent vertical furnace, the RVP was introduced in 1996. It is based on the AVP platform, processes both eight inch and six inch wafers and meets sub-.50 micron technology requirements. The RVP features a proprietary and patented design that enables it to ramp up and ramp down temperatures anywhere between twice and ten times as fast as the AVP and offers faster throughput and tighter junction depth control for critical anneals. By utilizing the AVP platform, the Company believes that the RVP, which incorporates key features of the AVP, such as 16-cassette wafer handling and model based temperature control (MBTC), offers the high reliability of the established AVP product line. The typical price range of an RVP system is $1,100,000 to $1,500,000, depending on process configuration. Series 8000 Advanced Vertical Processor ("AVP"). Initially shipped in September 1992, the AVP is a vertical furnace designed to meet the eight and six inch wafer requirements of sub-.50 micron processing. The Series 8000 single tube systems include advanced process control, data acquisition software, advanced automation, a proprietary process chamber design and an option for atmospheric control within the wafer 6 8 handling area. Key features of the AVP system include storage capacity for sixteen 25-wafer cassettes (400 wafers), and model based temperature control (MBTC) for accurate wafer temperature regulation. The AVP system is designed to offer customers a low cost of ownership, through high productivity and a low square footage requirement. The typical price range of an AVP system is $700,000 to $1,000,000, depending on process configuration. Vertical Thermal Reactor ("VTR"). Thermco's VTR processes wafers from 100mm to 200mm in diameter. It operates under computer control, providing specialized process recipe introduction, cassette-to-cassette automation, monitoring of critical system functions and automated loading of wafers into the reaction chamber. In general, the VTR offers comparable reliability, lower contamination and better process uniformity than horizontal reactors. The VTR can be installed through-the-wall in a customer's clean room facility and is compatible with industry standard software interfaces. The VTR 7000PLUS offers improved process control, uniformity, reduced particle levels, higher throughput, internal storage capabilities and the industry's standard mechanical interface (SMIF). Typical prices for the Company's VTR products range from approximately $500,000 to $900,000. Horizontal Processing Systems. The typical horizontal system consists of four separately controlled cylindrical reaction chambers which are mounted horizontally, one directly above the other. Horizontal systems are a mature product family. Sales of these systems have been declining in recent years, as semiconductor manufacturers have increasingly installed vertical reactors in their newer fabrication facilities and the Company expects this trend to continue. However, the Company believes that manufacturers of less complex devices will continue to have some need for horizontal processing systems for the foreseeable future.* In addition, the existing installed base of horizontal processing systems enables the Company to generate revenues through the sale of spare parts and upgrades. Prices for horizontal systems range from approximately $400,000 to $900,000. CUSTOMERS The Company's customer base includes companies that manufacture semiconductor devices primarily for sale to others and companies that manufacture semiconductor devices primarily for internal use. Repeat sales to existing customers represent a significant portion of the Company's processing equipment sales. The Company believes that its installed customer base represents a significant competitive advantage.* By working closely with its established customer base, SVG is able to identify new product development opportunities. The Company's major customers during fiscal 1996 included the following: Advanced Micro Devices IBM Phillips Semiconductor Atmel Intel SGS-Thomson Cirrus Logic LSI Logic Samsung Hewlett-Packard Motorola Siemens Hyundai Newport Wafer Fab Submicron Technology
The Company relies on a limited number of customers for a substantial percentage of its sales. For fiscal 1995 Motorola, Intel, and SGS-Thomson represented 18%, 17% and 12%, respectively, of sales and the Company's largest five customers represented 60% of sales. In fiscal 1996, Intel, Motorola and IBM represented 31%, 10% and 7%, respectively, of sales and the Company's largest five customers represented 60% of sales. In fiscal 1995 and 1996, Intel represented 36% and 47%, respectively, of Track sales. Track operations were responsible for a substantial portion of the Company's profits in both periods. Further, in both fiscal 1995 and 1996, Intel was the largest customer for SVGL's Micrascan photolithography systems and represented 21% and 46%, respectively, of SVGL sales. The loss of a significant customer (and in particular the loss of Intel as a Track or SVGL customer), a delay in shipment due to customer rescheduling or any substantial reduction in orders by a significant customer, including reductions in orders due to market, economic or competitive conditions in the semiconductor industry, could adversely affect the Company's business and results of operations. 7 9 MARKETING, SALES AND SERVICE The Company markets and sells its products primarily to independent manufacturers of semiconductor devices and computer, telecommunications and other companies that manufacture semiconductor devices for their own use. The market for the Company's products is worldwide. The Company sells its products in the United States principally through its direct sales organization. The Company sells its products overseas through a direct sales staff, independent distributors and independent representatives in Europe, Israel and the Far East. The following table sets forth the Company's revenues by geographic area as a percentage of net sales for the last three fiscal years ended September 1996:
YEARS ENDED SEPTEMBER 30, ---------------------- 1994 1995 1996 ---- ---- ---- United States........................................... 58% 68% 65% Western Europe.......................................... 32 24 25 Far East................................................ 8 8 10 Other................................................... 2 -- --
Reliability, which is commonly measured in up-time and mean time between failure, and performance are increasingly important factors by which customers evaluate the potential suppliers of sophisticated processing systems. The Company believes that its field service and process support capabilities are major factor in its selection as an equipment supplier. Increasingly, semiconductor manufacturers are requiring seven-day, around the clock, on site or on call support. To meet this need, SVG continues to expand its field service organization, increase its technical and process support personnel, enhance its training programs and increase spare part inventories deployed at both customer sites and regional field depots. Service personnel are based in field offices throughout the United States, Western Europe, Japan and the Pacific Rim and increasingly on site at particularly large customer locations. The Company warrants its products against defects in design, materials and workmanship, generally for periods ranging from one to two years. BACKLOG At September 30, 1996 and 1995, the Company had backlog of approximately $395,000,000 and $391,000,000, respectively. The Company includes in backlog only those orders to which a purchase order number has been assigned by the customer and for which delivery has been specified within 12 months. Such orders are subject to cancellation by the customer with limited charges. Because of the possibility of customer changes in delivery schedules, cancellation of orders and potential delays in product shipments, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. During fiscal 1996, the Company experienced both customer initiated equipment delivery date delays and, to a lesser degree, customer purchase order cancellations, both of which had an adverse effect on operating results during the second half of the fiscal year and potentially may adversely effect operating results during the first half of fiscal 1997.* RESEARCH, DEVELOPMENT AND RELATED ENGINEERING The market served by the Company is characterized by rapid technological change. Accordingly, the Company's product and process development programs are devoted to the development of new systems and processes, including new generations of products for existing markets, enhancements and extensions of existing products and custom engineering for specific customers. The Company believes that its future success will depend, in part, upon its ability to successfully introduce and manufacture new and enhanced products and processes which satisfy a broad range of customer needs and achieve market acceptance. Accordingly, the Company works closely with semiconductor manufacturers, industry consortia, and research institutions to respond to the industry's evolving product and process requirements. The Company's research staff collaborates with key customers in order to evaluate designs, specifications and prototypes of the Company's new products. 8 10 The Company believes that in selecting a photolithography equipment manufacturer, customers look for a supplier with a long term product development strategy and the ability to fund that development since photolithography exposure equipment can represent a substantial portion of the equipment cost of a fabrication facility. Semiconductor manufacturers may be unwilling to rely on a relatively small supplier such as the Company for a critical element of the fabrication process if they believe that the Company does not have sufficient capital to implement its product development strategy. The Company depends in part on external sources to fund its photolithography development efforts. The agreements which are currently in effect are discussed in detail below. In September 1994, the Company and SEMATECH entered into a series of agreements whereby the Company sold SEMATECH warrants to purchase the Company's Common Stock and SEMATECH agreed, based upon the Company achieving certain performance milestones, to provide, through 1997, $22,000,000 of funding for the development of the Micrascan technology and to increase SVGL's manufacturing capability and capacity. As of September 30, 1996, the Company had recognized $17,250,000 of such SEMATECH funding. Additionally, under the agreements with SEMATECH, the Company was obligated to provide certain funds from its own resources. The Company has funded sufficient qualifying expenditures to fulfill its contractual obligations under its agreement with SEMATECH. In February 1995, the Company entered into an agreement with Intel Corporation, Motorola Inc., and Texas Instruments Incorporated (the "Investors"), under which the Investors made a $30,000,000 equity investment in the Company and received certain rights to purchase future generations of the Company's Micrascan products. The Company agreed to utilize the proceeds of the transaction for research and development related to its Micrascan technology and the expansion of its manufacturing capacity as well as working capital for its Micrascan products. The agreement with the Investors also obligated the Company to fund from its own resources not less than $25,000,000, including amounts it funded under the agreement with SEMATECH. The Company has fulfilled its funding obligation under the agreement with the Investors. During fiscal 1996, the Company entered into agreements with certain customers (the "Participants") whereby each Participant 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 development costs. The agreements call for each Participant to pay $1,000,000 of initial development funding and four subsequent payments of $1,000,000 upon the completion of certain development milestones. The Participants may withdraw from the development program without penalty, but payments made against completed development milestones are not refundable and all preferential rights to future equipment are forfeited. At September 30, 1996, the Company had received $5,000,000 in initial funding from four Participants and had received single unit orders for systems from two other customers. There can be no assurances that the Participants will remain in the program.* In the event that the Company did not receive the funding anticipated under the agreements, it would be required to replace the shortfall from its own funds or other sources. If the Company were required to use its own funds, its research and development expenses would increase and its operating income would be reduced correspondingly. The agreements with the Participants stipulate that if the Company receives funding for the development program in excess of $25,000,000, it will issue, ratably to the Participants, credits totaling such excess in the form of a cash discount which can be applied to the purchase of additional systems by each Participant. The Company anticipates that it will need to continue to make substantial research and development expenditures, particularly in its photolithography products, in order to remain competitive in the semiconductor equipment industry. There is no assurance that the Company will receive all funding which it currently anticipates or that it will be able to obtain future outside funding beyond that which it is currently receiving. If the Company were not able to secure additional external funding, its new product development and product enhancement efforts would either be impaired or would have an adverse effect on the Company's results of operations. 9 11 In connection with the Company's acquisition of SVGL in 1990, SVGL received an equity investment and research and development funding commitments for Micrascan from IBM and agreed to make future payments to IBM based on the ongoing operating results of SVGL. As part of a subsequent agreement with the Investors, IBM was also granted certain rights to purchase initial quantities of future generations of the Company's Micrascan products. The Company has historically devoted a significant portion of its personnel and financial resources to research and development programs. For fiscal years 1996, 1995, and 1994, total research and development expenditures were approximately $72,000,000, $53,000,000, and $32,000,000, respectively, of which approximately $5,000,000, $12,750,000, and $1,500,000, respectively, was funded by outside parties, primarily SEMATECH, and offset against research and development expenses. 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 trend toward consolidation in the semiconductor processing equipment industry has made it increasingly important to have the financial resources necessary to compete effectively across a broad range of product offerings, to fund customer service and support on a worldwide basis and to invest in both product and process research and development. Significant competitive factors include product performance, price and reliability, familiarity with particular manufacturers' products, established relationships between suppliers and customers, particulate contamination control and product availability. While the Company believes that outside Japan and the Pacific Rim it competes favorably with respect to most of these factors,* it has occasionally been subject to 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. Certain of the Company's existing and potential competitors have substantially greater name recognition, financial, engineering, manufacturing and marketing resources and customer service and support capabilities than the Company. In addition, Nikon, and to a lesser extent Canon, have long established relationships as suppliers of photolithography equipment to most of the semiconductor manufacturers. Although the Company has supplied Track and Thermco equipment to many of these customers, it has not previously sold meaningful quantities of Micrascan photolithography equipment to them. Accordingly, the recent shipment by Nikon of initial quantities of its .25 micron step and scan system or announced competitive product introductions by either ASM Lithography, Canon or some other supplier, may cause customers to delay purchases from the Company until such new products have been evaluated. The Company's competitors can be expected to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price/performance characteristics. There can be no assurance that the Company will be able to compete effectively in the future. The Company faces substantial foreign and domestic competition, including that from Tokyo Electron, Ltd. ("TEL") and DaiNippon Screen Mfg. Co., Ltd. in photoresist processing equipment and TEL and Kokusai Electric Co., Ltd. in oxidation/diffusion and LPCVD equipment. SVGL competes with other suppliers of photolithography exposure equipment, including manufacturers of steppers and projection aligners. SVGL's Micralign products are generally not competitive with steppers for fabrication of semiconductor devices with line widths smaller than 1.25 micron. In marketing Micrascan systems, SVGL faces competition from suppliers employing other technologies, principally I-Line and Deep UV steppers, including Nikon Corp., Canon and ASM Lithography. Certain stepper manufacturers have utilized techniques, such as the use of off-axis illumination and phase shift mask technology, to extend the capabilities of steppers beyond their previously estimated limits. Although the Company believes that its step and scan system will compete favorably with steppers employing these techniques,* the status of the development of such techniques is uncertain and the Company has experienced intense competition from such stepper manufacturers. The Company also anticipates the introduction of competing photolithography systems which utilize step and scan technology. Nikon has shipped initial quantities of a .25 micron step and scan photolithography system which utilizes a Deep UV light source, and ASM Lithography and Canon have announced similar products. Nikon, and to a lesser extent Canon, have long-established relationships as suppliers of photolithography equipment to 10 12 most of the semiconductor manufacturers. While the Company has supplied Track and Thermco equipment to many of these customers, it has not previously sold meaningful quantities of Micrascan photolithography equipment to them. The Japanese and Pacific Rim markets (including fabrication facilities operated outside these areas by Japanese and Pacific Rim semiconductor manufacturers) represent a substantial portion of the overall market for semiconductor equipment. To date, the Company has not been successful in securing a significant share of these markets. The Company believes that the Japanese companies with which it competes have a competitive advantage because their dominance of the Japanese and Pacific Rim semiconductor equipment market provides them with the sales and technology base to compete more effectively throughout the rest of the world. The Company is not engaged in any significant collaborative effort with any Japanese or Pacific Rim semiconductor manufacturers. As a result, the Company may be at a competitive disadvantage to the Japanese equipment suppliers which are engaged in such collaborative efforts with Japanese and Pacific Rim semiconductor manufacturers. In order to expand its market share in the Pacific Rim, the Company has begun investing in the staffing and facilities necessary to sell, service and support customers in the area through entities in Korea, Singapore and Thailand. There can be no assurance that the Company will be able to compete successfully in the future in Japan, the Pacific Rim or elsewhere in the world or that competitive pressures will not adversely affect the Company's results of operations. Further, certain of the Company's major customers are involved in joint ventures and alliances with companies from Japan and Europe. In some cases the non-U. S. portion of the collaboration is the deciding factor in the selection of equipment for the joint ventures. In those situations the Company may be at a competitive disadvantage, which could lead to a loss of market share in those geographic areas. A decision by any such major customers not to utilize the Micrascan would have an adverse effect on the Company. MANUFACTURING AND RAW MATERIALS The Company manufactures its products from standard components and from components manufactured by others according to the Company's design specifications. Track products are manufactured in San Jose, California. Thermco manufactures most of its products in Orange, California and has a limited manufacturing facility in Billingshurst, West Sussex, England. SVGL photolithography exposure products are manufactured in Wilton and Ridgefield, Connecticut. During fiscal 1996, the Company introduced new products in all three of its product groups for shipment in fiscal 1997. From time-to-time, the Company has experienced difficulty in ramping up production or effecting transitions to new products. There can be no assurance that the Company will not experience manufacturing problems as a result of capacity constraints or as a result of upgrading or expanding existing operations in an effort to increase production capacity. These issues could result in product delivery delays and a subsequent loss of future sales. The Company believes that protracted delays in delivering initial quantities of newly developed products to multiple customers could result in semiconductor manufacturers electing to install competitive equipment in their fabrication facilities. The inability to produce such products or any failure to achieve market acceptance could have a material adverse effect on the Company's business and results of operations. The Company believes that its ability to supply systems in volume will be a major factor in customer decisions to commit to SVGL'S Micrascan technology.* Based upon its forecast of continued high growth for photolithography equipment and potential future demand for advanced lithography products, the Company has implemented plans to increase SVGL'S production capacity under an extremely aggressive expansion schedule. During the first half of fiscal 1996, SVGL commenced certain facility and capital improvements and, on August 2, 1996, the Company, for approximately $21,200,000, purchased from The Perkin-Elmer Corporation a 248,000 square foot facility occupied by SVGL in Wilton, Connecticut and an additional 201,000 square foot building, which SVGL will also occupy, in Ridgefield, Connecticut. During fiscal 1997, it is the Company's intent to invest in significant further capital improvements related to the buildings purchased and the equipment required to expand the production capabilities of SVGL.* Successful execution of this expansion will require the timely construction and equipping of facilities, the recruitment, training and 11 13 retention of a high quality workforce, and the achievement of satisfactory manufacturing results on a scale greater than it has attempted in the past. There can be no assurance the Company can manage these efforts successfully, which could result in product delivery delays and a subsequent loss of future revenues. In particular, the Company believes that protracted delays in delivering initial quantities of Micrascan products could result in semiconductor manufacturers electing to install competitive equipment in their advanced fabrication facilities, which could impede acceptance of the Micrascan products on an industry-wide basis. In addition, the Company's operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if net sales do not increase commensurately. Most raw materials and components not produced by the Company are available from more than one supplier. However, certain raw materials, components and subassemblies are obtained from single sources or a limited group of suppliers. Although the Company seeks to reduce its dependence on these sole and limited source suppliers and the Company has not experienced significant production delays due to unavailability or delay in procurement of component parts or raw materials to date, disruption or termination of certain of these sources could occur and such disruptions could have at least a temporary adverse effect on the Company's business and results of operations. Moreover, a prolonged inability to obtain certain components could have a material adverse effect on the Company's business and results of operations and could result in damage to customer relationships. The raw material for a proprietary component of the optical system for the Micrascan is available from only one supplier and SVGL's projected demand will require that supplier to expand its capacity. In exchange for investing the resources to expand its capacity, the supplier may first require the Company to enter into a long-term, non-cancelable purchase commitment. Additionally, the Company's Micrascan III photolithography system utilizes a laser manufactured by Cymer Laser and not currently available from alternative sources. While the Company does not currently foresee supply difficulties, Cymer is also supplying laser light sources for competitors who have introduced or are developing step and scan deep UV photolithography systems. PATENTS AND LICENSES The Company owns several domestic and foreign patents relating to the businesses of Track, Thermco and SVGL. Although the Company has historically relied and continues to rely on the technical and marketing competence and creative ability of its personnel, rather than patents, to maintain its competitive position, it has begun to pursue both domestic and foreign patent protection more aggressively. As is typical in the semiconductor equipment industry, the Company has from time to time received, and may in the future receive, communications from third parties asserting patents or copyrights on certain of the Company's products and technologies. At least one of the Company's customers has put the Company on notice that it has received a notice of infringement from Jerome H. Lemelson, alleging that equipment used in the manufacture of electronic devices infringes patents issued to Mr. Lemelson relating to "machine vision" or "barcode reader" technologies. The customer has put the Company on notice it intends to seek indemnification from the Company for any damages and expenses resulting from this matter if found liable or if the customer settles the claim. Although the Company has not received any recent communications on this subject, it cannot predict the outcome of this or any similar claim or its effect upon the Company, and there can be no assurance that any such litigation or claim would not have a material adverse effect upon the Company's financial condition or results of operations. ENVIRONMENTAL REGULATION To date, the Company has not encountered significant issues regarding the discharge of material into the environment or otherwise relating to the protection of the environment and therefore has not been required to spend significant amounts for capital or non-capital expenditures in order to comply with laws and regulations pertaining thereto. In August 1996, the Company purchased from The Perkin-Elmer Corporation ("Perkin-Elmer"), approximately 50 acres of land and a 201,000 square foot building thereon (the "Property"). At the time the Company purchased the Property, it was aware that certain groundwater and soil contamination was present 12 14 and that the Property was subject to a clean-up order being performed by Perkin-Elmer under the jurisdiction of the Connecticut Department of Environmental Protection. Agreements between the Company and Perkin-Elmer provide that Perkin-Elmer has sole responsibility for all obligations or liabilities related to the clean-up order. While the Company believes that it has been adequately indemnified, if for some reason Perkin-Elmer was unable to comply or did not comply with the clean-up order, the Company could be required to do so. The Company does not anticipate any material capital expenditures for environmental control facilities in 1997.* EMPLOYEES At September 30, 1996, the Company had 2,875 full-time employees and 197 part-time employees and contract personnel, including 587 in research and development, 1,357 in manufacturing, 974 in marketing, sales and customer service and support and 154 in administration. None of the Company's employees are represented by a union. Management considers its relations with its employees to be good. The Company's future success is dependent upon its ability to attract and retain qualified management, technical, sales and support personnel for its operations. In particular, SVGL's growth is very dependent on the Company's ability to attract and retain key skilled employees, particularly those related to the optical segment of its business. The competition for such personnel is intense. Some key positions in the Company are held by persons who have only recently been appointed to such positions. The Company's growth has increased its dependence on key management personnel. The loss of certain key people, the failure of key persons to perform in their current positions or the Company's inability to attract and retain new key employees could materially adversely affect the Company's performance. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE --------------------------------------- --- Papken S. Der Torossian................ 57 Chairman of the Board and Chief Executive Officer Russell G. Weinstock................... 53 Vice President, Finance and Chief Financial Officer Edward A. Dohring...................... 63 Vice President, President, SVG Lithography Systems, Inc. Steven L. Jensen....................... 47 Vice President, Worldwide Sales and Service Jeffrey M. Kowalski.................... 43 Vice President, President, Thermco Systems Division Boris Lipkin........................... 49 Vice President, Corporate John W. Mathews........................ 48 Vice President, Worldwide Service Robert J. Richardson................... 50 Vice President, New Business Development and Corporate Marketing Edmond R. Ward......................... 56 Vice President, Corporate Technology Larry W. Sonsini....................... 55 Secretary
Mr. Der Torossian became Chairman of the Board and Chief Executive Officer in July 1991. From February 1986 to July 1991 he was President and Chief Executive Officer, and has been a director of the Company since October 1984. Mr. Weinstock has been Vice President of Finance and Chief Financial Officer of the Company and Vice President of Finance and Chief Financial Officer of SVGL since July 1990. From April 1985 to July 1990, he was Corporate Controller and was promoted to Vice President in February 1990. Mr. Dohring became a Vice President of the Company in July 1992. He became President of SVG Lithography Systems, Inc. in October 1994. From June 1992 to October 1994, he was President of Track. 13 15 From April 1989 to June 1992, he was President of Rochester Instrument Systems, Inc., a manufacturer of measurement instruments for utilities and the semiconductor industry. Mr. Jensen became a Vice President of the Company in July 1992 and Vice President, Worldwide Sales in April 1992. From April 1991 to April 1992 he was Vice President, Marketing for Genus, Inc., a manufacturer of semiconductor equipment. From October 1990 to April 1991, Mr. Jensen was a Senior Vice President of Sales and Marketing for the Athens Corporation, a manufacturer of chemical reprocessing systems. Mr. Kowalski became a Vice President of the Company and President of Thermco in January 1995. From November 1992 to January 1995 he was the Vice President of Marketing of Thermco, as well as its Vice President of Technology from November 1993. Mr. Kowalski joined the Company in 1987 and prior to November 1992 held various management positions in its engineering organization. Mr. Lipkin became a Vice President of the Company in March 1995. From August 1992 to March 1995 he was the Vice President and General Manager of the Thin Film Systems business unit of Varian Associates. From 1978 to August 1992, Mr. Lipkin served in various management and engineering positions with International Business Machines. Mr. Mathews joined the Company in September 1993 and became a Vice President in October 1993. From November 1994 he has been Vice President, Worldwide Service. From September 1993 to November 1994 he was Vice President, Corporate Operations. From October 1992 to September 1993, Mr. Mathews was Vice President and General Manager of Acume Technologies, Inc. From November 1979 to October 1992 Mr. Mathews held various positions with KLA Instruments Corporation including Vice President and General Manager of its Technology Division from November 1989 to October 1992. Mr. Richardson became a Vice President of the Company in July 1992. He became Vice President, New Business Development and Corporate Marketing in March 1996. From October 1994 to March 1996 Mr. Richardson was Vice President, Corporate Marketing and President of Track. From June 1992 to October 1994 he was President of SVG Lithography Systems, Inc. From October 1988 to June 1992, he was President and General Manager of the Santa Cruz Division of Plantronics, Inc. Mr. Ward became a Vice President of the Company in July 1992, President of Thermco in April 1992 and Vice President, Corporate Technology in October 1993. From June 1990 to April 1992, he was Director of Thin Film Manufacturing for Alcoa Electronics Packaging, a division of Alcoa Corporation. Mr. Sonsini has been Secretary since November 1988. He has been a member of the Board of Directors of the Company since 1991. Mr. Sonsini is a member of the law firm of Wilson Sonsini Goodrich & Rosati, P.C., counsel to the Company, and is the Chairman of the firm's Executive Committee. Mr. Sonsini serves on the boards of directors of Lattice Semiconductor Corporation, Novell, Inc., PIXAR, and Pure Atria Corporation. ITEM 2. PROPERTIES. The Company's corporate headquarters are located in San Jose, California in 36,000 square feet of office space. This space is under a lease that expires in 2006 and has a current base rental of approximately $60,000 per month. The Company's Track Systems Division has two leased facilities in San Jose, California. The first is a 90,000 square foot, two-story building with a current monthly base rental of approximately $90,000 and a lease expiration of 2004. The second is also a two-story building consisting of approximately 83,000 square feet. The monthly base rental for this facility is approximately $79,000 under a lease expiring in 1998. In March 1996, the Company purchased approximately nine acres of land adjacent to one of the Track facilities in San Jose, California. Although the Company currently has no plans to develop the parcel, it provides the flexibility for future expansion of the Company's Track operations and its thermal processing lab. 14 16 The Thermco Systems Division has two facilities in Orange, California. The first facility consists of approximately 92,000 square feet with a base monthly rent expense of approximately $49,000 under a lease expiring in 1999. The second facility consists of approximately 77,000 square feet with a base monthly rental expense of approximately $43,500 under a lease expiring in 1999. SVGL owns two facilities in Fairfield County, Connecticut. The first consists of approximately 29 acres of land and buildings totaling approximately 248,000 square feet, located in Wilton, Connecticut. The second consists of approximately 50 acres of land and a 201,000 square foot building located in Ridgefield, Connecticut. The Company also leases storage and warehouse space near its headquarters in San Jose, office space near its Thermco facilities in Orange, sales and service offices in key locations throughout the United States, Western Europe and the Pacific Basin, and space for a limited manufacturing operation in the United Kingdom. ITEM 3. LEGAL PROCEEDINGS. The Company, from time to time, is party to various legal actions arising out of the normal course of business, none of which is expected to have a material effect on the Company's financial position or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of the Company's security holders during the fiscal quarter ended September 30, 1996. 15 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this Item is set forth in Registrant's Annual Report to Stockholders for the fiscal year ended September 30, 1996, at page 28 under the caption "Common Stock Prices", which information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is set forth in Registrant's Annual Report to Stockholders for the fiscal year ended September 30, 1996, at page 28 under the caption "Five-Year Selected Financial Data", which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is set forth in Registrant's Annual Report to Stockholders for the fiscal year ended September 30, 1996, at pages 29 to 36 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item is set forth in Registrant's Annual Report to Stockholders for the fiscal year ended September 30, 1996, at pages 12 to 27, which information is incorporated herein by reference. The Company observes a 52-53 week fiscal year ending on the Friday closest to September 30. Under this practice, the Company's last three fiscal years ended September 30, 1994, September 29, 1995, and September 27, 1996. For convenience, this Report and the Company's Consolidated Financial Statements refer to all such fiscal years as ending at September 30. Fiscal 1994, 1995, and 1996 each included 52 weeks. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. Not applicable. - --------------- With the exception of the information expressly incorporated by reference from the Annual Report to Stockholders into Parts II and IV of this Form 10-K, the Company's Annual Report to Stockholders is not to be deemed filed as part of this report. 16 18 PART III Certain information required by Part III is omitted from this Report in that the Registrant will file its definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 20, 1997, pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy Statement"), not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the Proxy Statement is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Executive Officers. See the section entitled "Executive Officers of the Registrant" in Part I, Item 1. (b) Directors. The information required by this Item is incorporated by reference to the section entitled "Election of Directors" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the section entitled "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the section entitled "Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to the section entitled "Certain Transactions" in the Proxy Statement. 17 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. The following consolidated financial statements of the Company included in the Company's Annual Report to Stockholders for the fiscal year ended September 30, 1996, are incorporated by reference: Independent Auditors' Report. Consolidated Balance Sheets at September 30, 1996 and 1995. Consolidated Statements of Income for the Years Ended September 30, 1996, 1995 and 1994. Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. 2. SUPPLEMENTAL SCHEDULE. Independent Auditors' Report. Schedule II -- Valuation and Qualifying Accounts. Financial Statement Schedules, other than the schedule listed above, have been omitted because the required information is contained in the Consolidated Financial Statements and the Notes thereto, or because such schedules are not required or applicable. 18 20 3. EXHIBITS.
EXHIBIT NUMBER - ------------- 3.1(1) Certificate of Incorporation, as amended to date. 3.2(11) Bylaws. 3.3(10) Certificate of Designation of Series A Convertible, Redeemable Preferred Stock of Silicon Valley Group, Inc. dated July 31, 1992. 4.1(1) Article IV of the Certificate of Incorporation of the Registrant. 10.1(2) Lease Agreement, dated January 31, 1990, between Registrant and Orchard Investment Company Number 703 for premises located at 541 East Trimble Road, San Jose, California. 10.2(3) Lease Agreement, dated February 7, 1985, between Thermco Systems, Inc. and The Klokke Corporation, for premises located at 1482 N. Batavia Street, Orange, California. 10.3(2) Amendment to Lease Agreement, dated November 14, 1989 between Thermco Systems, Inc. and The Klokke Corporation for premises located at 1482 N. Batavia Street, Orange, California. 10.4(4) Lease Agreement, dated December 21, 1984, between Anicon, Inc. and Holvick de Regt Koering for premises located at 2240 Ringwood Avenue, San Jose, California. 10.5(4) Amendment to Lease Agreement, dated January 31, 1987, between Anicon, Inc. and ARSJ Properties for premises located at 2240 Ringwood Avenue, San Jose, California. 10.6(2) Fourth Amendment to Lease Agreement dated March 23, 1990 between Thermco Systems, Inc. and ARSJ Properties for premises located at 2240 Ringwood Avenue, San Jose, California. 10.7(3) Lease Agreement, dated July 1, 1985, between Thermco Systems, Inc. and LST Investments, for premises located at 1465 N. Batavia Street, Orange, California. 10.8(2) Amendment to Lease Agreement dated February 1, 1990, between Thermco Systems, Inc. and LST Investments for premises located at 1465 N. Batavia Street, Orange, California. 10.10(5)** 1982 Employee Stock Option Plan. 10.11(5)** 1984 Stock Option Plan. 10.12(5)** 1987 Stock Option Plan. 10.13(5)** Employee Stock Purchase Plan. 10.14(12)** Employment Agreement between Registrant and Papken Der Torossian, dated August 1, 1994. 10.15(12)** Employment Agreement between Registrant and Russell G. Weinstock, dated October 3, 1994. 10.16(6)** Silicon Valley Group, Inc. Cash or Deferred Profit Sharing Plan and Trust. 10.17(4) Letter Agreement, dated January 30, 1987, between Morgan Stanley Research Ventures and Registrant relating to epitaxial products. 10.18(4) Form of Indemnification Agreement. 10.19(4)** Standard form Stock Option Agreements. 10.20(7) Lease Agreement, dated December 21, 1987, between Registrant and D.J. and Virginia L. Brown dba Orchard Investment Company No. 306 for premises located at 2065 Junction Avenue, San Jose, California, and Supplemental Agreement thereto dated January 19, 1988. 10.21(7)** Forms of Option Acceleration Agreement.
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EXHIBIT NUMBER - ------------- 10.22(7) Purchase Agreement, dated November 9, 1988, between Registrant, Anicon, Inc., SVG Europe, Ltd., SVG Halbleiter Anlagen GmbH, and SVG International Service, Inc.; and Sunbeam Holdings, Inc., Sunbeam Electric (Holdings) Ltd., Thermco Systems, Inc., and Gryphon Products, Inc. *10.23(8) Development Agreement between IBM and SVGL dated May 15, 1990. *10.24(8) Agreement dated as of May 15, 1990 between International Business Machines Corporation ("IBM") and SVGL relating to the purchase and sale of Micrascan Systems, as modified by IBM and SVGL on June 18, 1992 and June 19, 1992. *10.25(8) Development Agreement between SEMATECH, Inc. and SVGL dated May 15, 1990. *10.26(8) Chemical Supply and Technology Transfer Agreement between IBM and SVGL dated as of June 11, 1990. *10.27(8) Stockholders' Agreement dated May 15, 1990 among Registrant, SVGL, IBM and The Perkin-Elmer Corporation ("Perkin-Elmer"). *10.28(9) Asset Transfer and Common Stock Purchase Agreement dated as of May 15, 1990 among Registrant, IBM, Perkin-Elmer and SVGL. 10.29(8) Lease Agreement dated May 15, 1990 between SVGL and Perkin-Elmer for premises located at 77 Danbury Road, Wilton, Connecticut. 10.30(10) Series AA Convertible, Redeemable Preferred Stock Purchase Agreement dated July 31, 1992 between the Company and The Perkin-Elmer Corporation. 10.31(12) Credit Agreement by and among Registrant, SVG Lithography Systems, Inc., certain banks named therein and ABN AMRO Bank, N.V., as agent, dated October 7, 1994. *10.32(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography Systems, Inc. dated September 30, 1994. 10.33(12) Warrants to Purchase Common Stock of Registrant issued to SEMATECH, Inc., dated as of September 30, 1994. *10.34(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography Systems, Inc. dated as of October 24, 1994. *10.35(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography Systems, Inc. dated as of October 24, 1994. *10.36(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography Systems, Inc. dated as of December 22, 1994. *10.37(12) Development Agreement between SEMATECH, Inc., Registrant and SVG Lithography Systems, Inc. dated as of December 22, 1994. 10.38(13) Business Agreement dated as of February 21, 1995, among the Company, SVG Lithography Systems, Inc., Intel Corporation, Motorola Inc. and Texas Instruments Incorporated. 10.39(13) Series B Convertible Redeemable Preferred Stock Purchase Agreement dated as of February 21, 1995, among the Company, Intel Corporation, Motorola, Inc. and Texas Instruments Incorporated. 10.40(13) Registration Rights Agreement dated as of February 21, 1995, among the Company, Intel Corporation, Motorola Inc. and Texas Instruments Incorporated. 10.41 Credit Agreement dated as of December 7, 1995 among Silicon Valley Group, Inc., SVG Lithography Systems, Inc. and the Banks named therein and ABN AMRO Bank, N.V., as Agent.
20 22
EXHIBIT NUMBER - ---------- 13.1 Selected data from Annual Report to Stockholders for fiscal year ended September 30, 1996. 21.1 Registrant's wholly-owned subsidiaries are (i) Silicon Valley Group, K.K., a Japanese corporation, (ii) SVG International Service, a California corporation ("SVG International"), (iii) Silicon Valley Group FSC Incorporated, a Barbados corporation, (iv) SVG Israel, Inc., a Delaware corporation and (v) SVG Thailand, Inc., a Delaware corporation. SVG Europe Limited, a United Kingdom corporation ("SVG Europe"), SVG France, S.A.R.L., a French corporation, Silicon Valley Group Deutschland GmbH, a German corporation, SVG Systems (Asia) Pte. Ltd., a Singapore corporation and Thermco Systems (Far East) Limited, a Hong Kong corporation are wholly-owned by SVG International. UK Systems Limited, an English corporation, is wholly-owned by SVG Europe. The Registrant owns 94% of SVG Lithography Systems, Inc., a Delaware corporation ("SVGL"). SVGL's wholly-owned subsidiaries are (i) SVG Lithography Japan Co., Ltd., a Japanese Corporation, (ii) SVG Lithography (Europe) B.V., a Netherlands Corporation, (iii) SVG Lithography Systems Korea, Inc., a Delaware corporation, (iv) SVG France S.A.R.L., a French corporation, and (v) SVG Lithography Systems FSC, Inc., a Barbados corporation. 23.1 Consent of Deloitte & Touche LLP, independent auditors. 24.1 Power of Attorney (see page 39). 27 Financial Data Schedule.
- --------------- * Confidential treatment granted as to a portion of this exhibit. ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report. (1) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1988. (2) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1990. (3) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1989. (4) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1987. (5) Incorporated by reference to Registrant's registration statement filed under the Securities Act of 1933 on Form S-8 and Form S-3, file no. 33-31298. (6) Incorporated by references to Registrant's quarterly report on Form 10-K for the fiscal year ended September 30, 1986. (7) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1988. (8) Incorporated by reference to Registrant's quarterly report on Form 10-Q dated June 30, 1990. (9) Incorporated by reference to Registrant's report on Form 8-K dated May 15, 1990. (10) Incorporated by reference to Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1992. (11) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1993. 21 23 (12) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1994. (13) Incorporated by reference to Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 1995. (b) REPORTS ON FORM 8-K. None (c) EXHIBITS. See (a) above. (d) FINANCIAL STATEMENT SCHEDULES. See (a) above. 22 24 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Silicon Valley Group, Inc. San Jose, California We have audited the consolidated financial statements of Silicon Valley Group, Inc. as of September 30, 1996 and 1995, and for each of the three years in the period ended September 30, 1996, and have issued our report thereon dated October 24, 1996; such consolidated financial statements and report are included in your 1996 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Silicon Valley Group, Inc., listed in Item 14(a)2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California October 24, 1996 23 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SILICON VALLEY GROUP, INC. December 26, 1996 By: /s/ Papken S. Der Torossian ------------------------------------ Papken S. Der Torossian, Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Papken S. Der Torossian and Russell G. Weinstock, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------- --------------------------- ------------------ /s/ PAPKEN S. DER TOROSSIAN Chairman of the Board, December 26, 1996 - ------------------------------------- Chief Executive Officer and Papken S. Der Torossian Director (Principal Executive Officer) /s/ RUSSELL G. WEINSTOCK Vice President, Finance and December 26, 1996 - ------------------------------------- Chief Financial Officer Russell G. Weinstock (Principal Financial and Accounting Officer) /s/ WILLIAM A. HIGHTOWER Director December 26, 1996 - ------------------------------------- William A. Hightower /s/ WILLIAM L. MARTIN Director December 26, 1996 - ------------------------------------- William L. Martin /s/ NAM P. SUH Director December 26, 1996 - ------------------------------------- Nam P. Suh /s/ LAWRENCE TOMLINSON Director December 26, 1996 - ------------------------------------- Lawrence Tomlinson /s/ LARRY W. SONSINI Secretary and Director December 26, 1996 - ------------------------------------- Larry W. Sonsini
24 26 SILICON VALLEY GROUP, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS(1) OF PERIOD - ------------------------------------------ ---------- ---------- ----- ------------- --------- YEAR ENDED 9/30/94: Allowance for Doubtful Accounts......... $ 1,401 $ 1,528 $-- $ (299) $ 2,630 Product Warranty Reserves............... 14,986 18,663 -- (15,324) 18,325 YEAR ENDED 9/30/95: Allowance for Doubtful Accounts......... 2,630 2,026 -- (549) 4,107 Product Warranty Reserves............... 18,325 35,830 -- (21,552) 32,603 YEAR ENDED 9/30/96: Allowance for Doubtful Accounts......... 4,107 2,018 -- (122) 6,003 Product Warranty Reserves............... 32,603 64,068 -- (53,772) 42,899
- --------------- (1) Write-offs of uncollectible accounts and costs incurred for warranty repairs. 27 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT - ----------- ---------------------------------------------------------------------------------- 13.1 Selected data from Annual Report to Stockholders for fiscal year ended September 30, 1996. 23.1 Consent of Deloitte & Touche, independent auditors. 27 Financial Data Schedule.
28 [LOGO] EX-13.1 2 ANNUAL REPORT TO STOCKHOLDERS DATED 9-30-96 1 Exhibit 13.1 TABLE OF CONTENTS
Consolidated Balance Sheets 12 Consolidated Statements of Income 13 Consolidated Statements of Stockholders' Equity 14 Consolidated Statements of Cash Flows 15 Notes to Consolidated Financial Statements 16 Independent Auditors' Report 27 Financial Information 28 Management's Discussion and Analysis of Financial Condition and Results of Operations 29
ELEVEN SVG 2 CONSOLIDATED . . . . . . . . . . . . . BALANCE SHEETS
September 30, 1995 1996 - ----------------------------------------------------------------------------------------------------- (in thousands, except share and per share amounts) ASSETS CURRENT ASSETS: Cash and equivalents $166,790 $218,841 Temporary investments 13,733 43,220 Accounts receivable (net of allowance for doubtful accounts of $4,107 and $6,003, respectively) 122,849 151,011 Inventories 153,973 213,229 Prepaid expenses and other assets 7,389 7,227 Deferred taxes 3,455 9,295 -------- -------- Total current assets 468,189 642,823 PROPERTY AND EQUIPMENT, NET 27,619 81,577 DEPOSITS AND OTHER ASSETS 2,097 2,312 INTANGIBLE ASSETS, NET 2,820 2,665 -------- -------- TOTAL $500,725 $729,377 ======== ======== Liabilities and Stockholders' Equity CURRENT LIABILITIES: Current portion of capital lease obligations $ 885 $ 437 Accounts payable 40,219 35,556 Accrued liabilities 99,427 137,526 Income taxes payable 2,177 5,649 -------- -------- Total current liabilities 142,708 179,168 CAPITAL LEASE OBLIGATIONS 654 217 DEFERRED LIABILITIES 3,140 3,338 COMMITMENTS (See Notes 6, 9, 13 and 14) -- -- MINORITY INTEREST 3,976 4,705 STOCKHOLDERS' EQUITY: Convertible Redeemable Preferred Stock -- $0.01 par value, shares authorized: 1,000,000; none outstanding -- -- Common Stock -- $0.01 par value, shares authorized: 100,000,000; shares outstanding: 1995: 25,233,170; 1996: 30,175,794 249,552 378,033 Retained earnings 100,695 163,916 -------- -------- Stockholders' equity 350,247 541,949 -------- -------- TOTAL $500,725 $729,377 ======== ========
See Notes to Consolidated Financial Statements Silicon Valley Group, Inc. TWELVE 3 CONSOLIDATED STATEMENTS . . . . . . . . . . . . OF INCOME
Years Ended September 30, 1994 1995 1996 - ----------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) NET SALES $ 319,922 $ 462,032 $ 639,928 COST OF SALES 195,511 278,553 371,636 --------- --------- --------- GROSS PROFIT 124,411 183,479 268,292 OPERATING EXPENSES: Research, development and related engineering 30,443 40,231 66,974 Marketing, general and administrative 67,517 90,859 115,827 --------- --------- --------- OPERATING INCOME 26,451 52,389 85,491 INTEREST AND OTHER INCOME 1,090 9,465 13,330 INTEREST EXPENSE (721) (620) (437) --------- --------- --------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 26,820 61,234 98,384 PROVISION FOR INCOME TAXES 10,191 22,045 34,437 MINORITY INTEREST (135) 194 726 --------- --------- --------- NET INCOME $ 16,764 $ 38,995 $ 63,221 ========= ========= ========= Preferred Stock dividend $ 1,190 $ 537 $ -- ========= ========= ========= NET INCOME PER SHARE $ 0.84 $ 1.57 $ 2.07 ========= ========= ========= Shares used in per share computations 18,538 24,850 30,554 ========= ========= =========
See Notes to Consolidated Financial Statements. THIRTEEN SVG 4 CONSOLIDATED STATEMENTS . . . . . . . . . . . . . OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Note Retained Shares Amount Shares Amount Receivable Earnings Total - ------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) BALANCES, SEPTEMBER 30, 1993 10,000 $17,000 15,142,875 $ 63,577 $(526) $ 46,946 $126,997 ------- ------- ---------- -------- ----- -------- -------- Sale of Common Stock, net of issuance costs 3,379,000 30,646 30,646 Sale of common stock warrants -- 8,204 8,204 Stock options exercised 240,334 1,597 1,597 Employee stock purchase plan 148,169 725 725 Preferred Stock dividend 106,898 1,190 (1,190) -- Repurchase of Common Stock in exchange for reduction of note receivable (50,000) (243) 526 (283) -- Tax benefit of stock option transactions 282 282 Net income 16,764 16,764 ------- ------- ---------- -------- ----- -------- -------- BALANCES, SEPTEMBER 30, 1994 10,000 17,000 18,967,276 105,978 -- 62,237 185,215 Sale of Series B Preferred Stock, net of issuance costs 14,943 29,800 29,800 Sale of Common Stock, net of issuance costs 3,192,606 87,636 87,636 Conversion of Series A Preferred Stock to Common Stock (10,000) (17,000) 1,000,000 17,000 -- Conversion of Series B Preferred Stock to Common Stock (14,943) (29,800) 1,494,300 29,800 -- Stock options exercised 520,256 4,454 4,454 Employee stock purchase plan 31,040 167 167 Preferred Stock dividend 27,692 592 (537) 55 Tax benefit of stock option transactions 3,925 3,925 Net income 38,995 38,995 ------- ------- ---------- -------- ----- -------- -------- BALANCES, SEPTEMBER 30, 1995 -- -- 25,233,170 249,552 -- 100,695 350,247 Sale of Common Stock, net of issuance costs 4,025,000 126,196 126,196 Warrants exercised, net 701,923 -- Stock options exercised 103,523 835 835 Employee stock purchase plan 112,178 954 954 Tax benefit of stock option transactions 496 496 Net income 63,221 63,221 ------- ------- ---------- -------- ----- -------- -------- BALANCES, SEPTEMBER 30, 1996 -- $ -- 30,175,794 $378,033 $ -- $163,916 $541,949 ======= ======= ========== ======== ===== ======== ========
See Notes to Consolidated Financial Statements. Silicon Valley Group, Inc. FOURTEEN 5 CONSOLIDATED STATEMENTS . . . . . . . . . . . . OF CASH FLOWS
Years Ended September 30, 1994 1995 1996 - ----------------------------------------------------------------------------------------------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 16,764 $ 38,995 $ 63,221 Reconciliation to net cash provided by (used for) operating activities: Depreciation and amortization 9,553 9,216 13,075 Amortization of intangibles 773 285 155 Deferred income taxes 1,681 (831) (5,562) Minority interest (135) 194 726 Changes in assets and liabilities: Accounts receivable 6,108 (56,040) (28,162) Inventories 3,517 (69,256) (59,256) Prepaid expenses 1,617 (3,757) 162 Deposits and other assets (446) (313) (215) Accounts payable (2,857) 19,965 (4,663) Accrued and deferred liabilities 15,745 45,748 38,199 Income taxes payable 3,298 (3,266) 3,968 -------- -------- -------- Net cash provided by (used for) operating activities 55,618 (19,060) 21,648 -------- -------- -------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Purchases of temporary investments, held to maturity -- (13,733) (88,647) Purchases of temporary investments, available for sale -- -- (43,220) Maturities of temporary investments, held to maturity -- -- 102,380 Purchases of property and equipment (3,777) (21,410) (67,033) -------- -------- -------- Net cash used for investing activities (3,777) (35,143) (96,520) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of Common Stock 33,250 96,182 127,985 Sale of Preferred Stock -- 29,800 -- Collection of receivable from sale of common stock warrants -- 8,204 -- Borrowing under credit agreement 8,000 -- -- Repayment of debt (22,971) (799) (885) -------- -------- -------- Net cash provided by financing activities 18,279 133,387 127,100 -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 92 (223) (177) -------- -------- -------- Increase in cash and equivalents 70,212 78,961 52,051 Cash and equivalents: Beginning of year 17,617 87,829 166,790 -------- -------- -------- End of year $ 87,829 $166,790 $ 218,841 ======== ======== ========= NON-CASH INVESTING AND FINANCING ACTIVITIES: Subscription of common stock warrants $ 8,204 $ -- $ -- ======== ======== ========= Repurchase of Common Stock in exchange for reduction of note receivable $ 526 $ -- $ -- ======== ======== ========= Preferred Stock dividend paid in Common Stock $ 1,190 $ 592 $ -- ======== ======== ========= Preferred Stock Series A converted to Common Stock $ -- $ 17,000 $ -- ======== ======== ========= Preferred Stock Series B converted to Common Stock $ -- $ 29,800 $ -- ======== ======== ========= Tax benefit of stock option transactions $ 282 $ 3,925 $ 496 ======== ======== =========
See Notes to Consolidated Financial Statements. FIFTEEN SVG 6 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES Line of Business The Company designs, manufactures, and markets semiconductor wafer processing equipment used in the electronics industry. Certain Risks and Uncertainties The Company relies on a limited number of major customers for a substantial percentage of its net sales. The loss of or any substantial reduction or rescheduling of orders by any such customer could adversely affect the Company's business and results of operations. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and trade receivables. The Company places its cash equivalents and temporary investments in high-grade instruments which it places for safe keeping with high-quality financial institutions. Further, by policy, it limits the amount of credit exposure with any one counterparty and the amount of total investment through any one financial institution or in any one type of investment. The Company sells its systems to both domestic and international semiconductor manufacturers. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable. The write-off of uncollectible amounts has historically been insignificant. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, after elimination of intercompany transactions and balances. Foreign exchange gains and losses are included in net income and were not significant in any of the periods presented. Cash Equivalents Cash and equivalents consist of highly liquid investments with a maturity date at acquisition of three months or less. Cash and equivalents are stated at cost, plus any accrued interest, which approximates market value. Temporary Investments Temporary investments in debt and equity securities are classified as either available for sale or held to maturity. At September 30, 1995, all temporary investments were classified as held to maturity and were measured at amortized cost. At September 30, 1996, all temporary investments were classified as available for sale and measured at fair value. Net unrealized gains and losses, on investments available for sale, net of tax, are recorded as a separate component of stockholders' equity until realized. There were no significant differences between amortized cost and fair market value for investments, individually or in the aggregate, at either September 30, 1995 or 1996. Any gains or losses on sales of investments are computed by specific identification. No investments were sold in 1995 or 1996. Silicon Valley Group, Inc. SIXTEEN 7 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Property and Equipment For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
Years Land improvement 15 Buildings 40 Machinery and equipment 3 to 10 Furniture and fixtures 3 to 10 Leasehold improvements Lease term
Effective October 1, 1996, the Company will adopt Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Adoption of SFAS No. 121 is not expected to have a material effect on the Company's financial statements. Intangible Assets Intangible assets are amortized on a straight-line basis over their estimated lives as follows: goodwill, twenty-five years; purchased technology, six years. Revenue Recognition Sales are generally recognized upon shipment. Product warranty costs are accrued in the period that sales are recognized. Research, Development, and Related Engineering Research, development, and related engineering costs are expensed as incurred. Funds received under certain development funding agreements are recorded as a reduction to such expenses as earned. The Company's products include certain software applications that are integral to the operation of the product. The costs to develop such software have not been capitalized as the Company believes its current software development process is essentially completed concurrent with the establishment of technological feasibility of the software and/or development of the related hardware. (See Note 14.) Reclassifications Reclassifications have been made to the prior years' Consolidated Financial Statements to conform to the fiscal 1996 presentation. Net Income Per Share Net income per share is computed by dividing net income attributable to common stockholders by the weighted average number of common and common equivalent shares outstanding. Common equivalent shares reflect the dilutive effect of outstanding stock options, common stock warrants, and convertible Preferred Stock. Net income per share for 1994 was computed after deducting $1,190,000 of Series A Preferred Stock dividends from net income. There was no such deduction for 1995 as the effect was antidilutive. In March 1995, the Series A Preferred Stock was converted into Common Stock. There was no Preferred Stock outstanding in 1996. SEVENTEEN SVG 8 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS Fiscal Year The Company uses a 52 - 53 week fiscal year ending on the Friday closest to September 30. The accompanying financial statements have been shown as ending on September 30. Fiscal years 1994, 1995, and 1996 each included 52 weeks. 2. TEMPORARY INVESTMENTS Temporary investments at September 30 are comprised of the following:
1995 1996 Held to Maturity Available for Sale - ------------------------------------------------------------------- (in thousands) Municipal bonds $ 9,733 $10,272 Commercial paper -- 22,953 Certificates of deposit -- 9,995 Bankers acceptances 4,000 -- ------- ------- Total $13,733 $43,220 ======= =======
Of the Company's temporary investments at September 30, 1996, $42,154,000 mature within one year and $1,066,000 mature within two years. 3. INVENTORIES
September 30, 1995 1996 - ------------------------------------------------------------------- (in thousands) Inventories consist of: Raw materials $ 63,803 $103,993 Work-in-process 87,060 101,293 Finished goods 3,110 7,943 -------- -------- Total $153,973 $213,229 ======== ========
4. PROPERTY AND EQUIPMENT
September 30, 1995 1996 - ---------------------------------------------------------------------------------------- (in thousands) Property and equipment consist of: Land and improvements $ -- $ 6,348 Buildings -- 16,561 Machinery and equipment 56,963 86,559 Furniture and fixtures 13,944 19,185 Leasehold improvements 13,702 21,477 --------- --------- Total 84,609 150,130 Accumulated depreciation and amortization (56,990) (68,553) Property and equipment, net $ 27,619 $ 81,577 ========= =========
Silicon Valley Group, Inc. EIGHTEEN 9 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS 5. INTANGIBLE ASSETS
September 30, 1995 1996 - ----------------------------------------------------------------------- (in thousands) Intangible assets consist of: Goodwill $ 4,186 $ 4,186 Purchased technology 3,700 3,700 ------- ------- 7,886 7,886 Accumulated amortization (5,066) (5,221) ------- ------- Total $ 2,820 $ 2,665 ======= =======
6. SVG LITHOGRAPHY SYSTEMS, INC. The Company owns 94% of SVG Lithography Systems, Inc. (SVGL) and International Business Machines, Inc. (IBM) owns the remaining 6%. The minority interest reflected on the Consolidated Balance Sheets represents IBM's interest in the net assets of SVGL. At the time of its initial investment in SVGL, the Company committed to purchase up to an additional $23,200,000 of SVGL securities at a specified price at any time through May 15, 1997, based on certain financial needs of SVGL (the SVGL Calls). To the extent the SVGL Calls are not exercised, the Company has the option to purchase up to $15,000,000 of SVGL Common Stock under similar terms. 7. BANK LINE OF CREDIT AND CAPITAL LEASE OBLIGATIONS In December 1995, the Company entered into a three-year unsecured $75,000,000 bank revolving line of credit agreement. Advances under the line of credit bear interest at either the U.S. prime rate or the LIBOR rate plus 1%. The agreement includes covenants regarding working capital, profitability, leverage, coverage of certain charges, minimum net worth, capital expenditures, and prohibition of cash dividends. At September 30, 1996, the Company had capital lease obligations of $654,000 with principal payments of $437,000 and $217,000 due in 1997 and 1998, respectively. The capital lease obligations bear interest at rates ranging from 7-1/2% to 10% and are secured by equipment with an aggregate cost and accumulated depreciation of $3,347,000 and $3,231,000, respectively, at September 30, 1996 ($3,682,000 and $3,147,000, respectively, at September 30, 1995). Interest payments were $542,000 in 1994, $439,000 in 1995, and $410,000 in 1996. NINETEEN SVG 10 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS 8. ACCRUED LIABILITIES
September 30, 1995 1996 - ------------------------------------------------------------------------------------ (in thousands) Accrued liabilities consist of: Compensation $ 20,030 $ 23,179 Product warranty 32,603 42,899 Customer deposits and advances 33,368 58,020 Other 13,426 13,428 -------- -------- Total $ 99,427 $137,526 ======== ========
9. EMPLOYEE BENEFIT PLANS The Company's profit-sharing plan provides quarterly distributions to eligible employees as determined by the Board of Directors. Profit-sharing distributions were $1,793,000 in 1994, $3,557,000 in 1995, and $7,235,000 in 1996. Under the Company's Cash or Deferred Profit-Sharing Plan (401[k] Plan), the Company may make contributions, depending on the amount of the employee's contribution, up to a maximum of 3% of compensation. The Company's contributions were $1,549,000 in 1994, $2,059,000 in 1995, and $2,999,000 in 1996. At September 30, 1996, two officers of the Company had employment agreements that provide, in the event of disability, death, or termination meeting certain criteria, for severance payments based on a multiple of their then-current compensation. At September 30, 1996, the aggregate potential payments under these agreements would have been approximately $2,700,000. 10. INCOME TAXES The provision for income taxes consists of (in thousands):
Years Ended September 30, 1994 1995 1996 - ---------------------------------------------------------------------------------- Current: Federal $ 4,112 $ 17,857 $ 32,239 State 2,723 3,723 6,039 Foreign 1,675 1,296 1,721 -------- -------- -------- Total current 8,510 22,876 39,999 -------- -------- -------- Deferred: Federal 1,970 (758) (4,928) State (289) (73) (634) -------- -------- -------- Total deferred 1,681 (831) (5,562) -------- -------- -------- $ 10,191 $ 22,045 $ 34,437 ======== ======== ========
Silicon Valley Group, Inc. TWENTY 11 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS Domestic and foreign income before income taxes and minority interest are as follows (in thousands):
Years Ended September 30, 1994 1995 1996 - ------------------------------------------------------------------ Domestic $22,482 $53,731 $93,761 Foreign 4,338 7,503 4,623 ------- ------- ------- $26,820 $61,234 $98,384 ======= ======= =======
The effective tax rate differs from the Federal statutory rate as follows:
Years Ended September 30, 1994 1995 1996 - ------------------------------------------------------------------------- Statutory rate 35.0% 35.0% 35.0% State taxes, net of Federal effect 4.0 3.0 3.3 Foreign taxes at differing rates 0.6 (2.3) 0.2 Nondeductible goodwill amortization 0.2 0.1 -- FSC commission -- (1.5) (2.2) Change in valuation allowance -- -- (2.7) Other (1.8) 1.7 1.4 ---- ---- ---- Total 38.0% 36.0% 35.0% ==== ==== ====
The items giving rise to deferred taxes were as follows (in thousands):
September 30, 1995 1996 - ------------------------------------------------------------------------------------------- Deferred tax assets: Reserves not recognized for tax purposes $ 9,622 $ 15,462 Net operating loss carryforwards of acquired companies 5,780 3,130 -------- -------- Total deferred tax assets 15,402 18,592 Deferred tax liabilities, accelerated depreciation (2,455) (2,733) Valuation allowance (11,947) (9,297) -------- -------- Total $ 1,000 $ 6,562 ======== ========
At September 30, 1996, approximately $7,900,000 of Federal loss carryforwards were available to offset future Federal taxable income generated by SVGL, through the year 2007, subject to certain limitations. The valuation allowance relates to the net deferred tax assets of SVGL. In 1994, 1995 and 1996, the Company made income tax payments of $4,753,000, $22,423,000, and $36,059,000, respectively. 11. STOCKHOLDERS' EQUITY Series A Convertible Redeemable Preferred Stock The Series A Convertible Redeemable Preferred Stock (Series A Preferred), all of which was owned by The Perkin-Elmer Corporation (Perkin-Elmer), had certain conversion and redemption provisions and bore mandatory quarterly dividends at a rate of 7% per annum, payable in either cash or shares of the Company's Common Stock. In satisfaction of the quarterly dividends, the Company issued 106,898 and 27,692 shares of Common Stock in 1994 and 1995, respectively. In March 1995, the Series A Preferred was converted into 1,000,000 shares of the Company's Common Stock. TWENTY ONE SVG 12 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS Series B Convertible Redeemable Preferred Stock In February 1995, the Company entered into a business agreement with Intel Corporation, Motorola Inc., and Texas Instruments Incorporated (the Investors) related to the Company's Micrascan photolithography products. As part of this agreement, the Investors purchased, in equal amounts, an aggregate of approximately $30,000,000 of the Company's newly issued Series B Convertible Preferred Stock (Series B Preferred). (See Note 14.) In accordance with the terms of its issuance, the Series B Preferred automatically converted into 1,494,300 shares of Common Stock as the result of a registration statement that was effective concurrent with a public offering of the Company's Common Stock in March 1995. Common Stock Warrants On September 30, 1994, as part of a series of agreements with SEMATECH, the Company sold warrants for $8,204,000 under which SEMATECH had the right to purchase, through September 30, 1998, 1,750,000 shares of Common Stock at $13.625 per share (see Note 14). The warrants were subject to a net exercise provision that permitted the holder to make a cashless exercise of the warrants based on the closing price of the Common Stock. In April 1996, SEMATECH exercised the warrants through the net issuance provision resulting in the issuance of 701,923 shares of Common Stock with no cash proceeds to the Company. Common Stock In fiscal 1994, the Company sold 3,379,000 shares of its Common Stock through an underwritten public offering. The net proceeds from the offering were $30,646,000, of which approximately $19,000,000 was used to repay debt outstanding under the Company's revolving line of credit. In March 1995, the Company sold 3,192,606 shares of its Common Stock through an underwritten public offering. The net proceeds from the offering were $87,636,000. As part of the same public offering, Perkin-Elmer sold 1,807,394 shares of Common Stock, which represented its entire investment in the Company and included 1,000,000 shares from the conversion of the Series A Preferred. In October 1995, the Company sold 4,025,000 shares of its Common Stock through an underwritten public offering. The net proceeds from the offering were approximately $126,200,000. Preferred Shares Purchase Rights In September 1996, the Company's Board of Directors adopted a plan for the distribution of one Preferred Shares Purchase Right (the Rights) to the holder of each outstanding share of the Company's Common Stock. The rights expire in September 2006 and are not exercisable until a person or group announces the acquisition of 15% or more of the Company's outstanding Common Stock, or the commencement of a tender or exchange offer for 15% or more of the Company's Common Stock. Each Right entitles its holder to purchase 1/1000 of one new share of the Company's Series A Participating Preferred Stock at an exercise price of $125, subject to certain antidilution adjustments. Additionally, a holder would be entitled, under certain circumstances, to purchase shares of Common Stock of the Company or, in other cases, of the acquiring company, having a market value of twice the exercise price of the Right. Under certain conditions, the Company may redeem the Rights for a price of $0.01 per Right or exchange each Right not held by the acquiror for one share of the Company's Common Stock. Silicon Valley Group, Inc. TWENTY-TWO 13 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS 12. STOCK OPTION AND PURCHASE PLANS Under the Company's stock option plans, the Board of Directors may, at its discretion, grant incentive or nonqualified stock options to employees and directors, and options are automatically granted annually to directors who are not employees of the Company. Options may be granted for a period not to exceed ten years from the date of grant, at prices at least equal to the fair market value of Common Stock at the grant date, and become exercisable generally over a period of four to five years. The Company accounts for stock options in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company intends to continue to apply the provisions of APB No. 25 for purposes of determining net income and to adopt the pro forma disclosure requirements of SFAS No. 123 upon implementation in fiscal 1997. Activity under the plans is as follows (in thousands, except per share amounts):
Shares Under Option Exercise Price Total - ----------------------------------------------------------------------------------------------- Balances, September 30, 1993 1,176 $ 4.63 - $11.12 $ 8,175 Granted 567 10.63 - 12.63 6,219 Exercised (240) 4.63 - 10.50 (1,597) Canceled (62) 4.63 - 12.44 (510) ------ ---------------- ------- Balances, September 30, 1994 1,441 4.63 - 12.63 12,287 Granted 737 19.56 - 44.50 19,496 Exercised (520) 4.63 - 22.63 (4,454) Canceled (126) 4.63 - 26.88 (1,558) ------ ---------------- ------- Balances, September 30, 1995 1,532 4.63 - 44.50 25,771 Granted 1,520 16.13 - 35.44 29,191 Exercised (104) 5.63 - 22.63 (835) Canceled (1,043) 5.63 - 44.50 (28,039) ------ ---------------- ------- Balances, September 30, 1996 1,905 $ 4.63 - $26.88 $26,088 ====== ================ =======
At September 30, 1996, options to purchase 428,068 shares were exercisable and options to purchase 155,660 shares of Common Stock were available for grant. In July 1996, the Company repriced 940,114 employee options to purchase shares with exercise prices between $19.63 and $44.25 to a new exercise price of $16.13. In September 1996, the Company repriced 30,000 director options to purchase shares with exercise prices between $19.56 and $44.50 to an exercise price of $18.06. Vesting periods, for all such options, recommenced at the date of repricing. Under the Company's Employee Stock Purchase Plan, 1,200,000 shares of Common Stock were reserved for issuance, of which 1,013,448 had been issued at September 30, 1996. The plan permits virtually all employees to purchase, through payroll deductions, Common Stock at 85% of the lower of the fair market value of the Common Stock on the first or last day of the offering period. One plan concludes its final two-year offering period March 31, 1997. The remaining plan has offering periods of twelve months, with a new twelve-month period beginning each April 1 and October 1. TWENTY-THREE SVG 14 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS During 1989, an officer of the Company exercised options to purchase shares of Common Stock in exchange for a ten-year, full-recourse note receivable. In May 1994, the Company repurchased 50,000 shares of Common Stock at $10.50 per share, the fair market value at the date of repurchase. The officer applied the proceeds of such repurchase to repay the $526,000 outstanding under such note. 13. COMMITMENTS At September 30, 1996, future minimum lease payments for operating leases (primarily facilities) are as follows (in thousands):
1997 $ 5,899 1998 5,201 1999 3,554 2000 1,796 2001 1,625 Thereafter through 2010 4,428 -------- Total $ 22,503 ========
Rent expense was $7,730,000, $7,907,000, and $8,801,000 in 1994, 1995, and 1996, respectively, including $2,378,000 and $2,219,000 paid in 1994 and 1995, respectively, to Perkin-Elmer, an investor in the Company through March 1995. 14. RESEARCH AND DEVELOPMENT AGREEMENTS The Company, primarily through SVGL, has obtained research and development funding agreements with outside parties under which the Company receives payments based on meeting specified product development milestones. The Company does not anticipate that such funding will cover the entire cost of the development efforts to which it pertains. Therefore, it is recorded as a reduction of research, development, and related engineering, in amounts approximating the percentage of costs incurred to date to the total estimated costs of such development efforts. The Company incurred costs of $3,129,000 in 1994, $13,877,000 in 1995, and $30,288,000 in 1996 relating to such product development and recognized $1,473,000, $12,767,000, and $4,994,000, respectively, in related funding. Under one research and development agreement, SVGL is obligated to pay IBM royalties of 15% of its operating income, subject to certain limitations. Royalty payments during 1995 and 1996 were approximately $354,000 and $2,370,000, respectively. No significant payments were required in 1994. On September 30, 1994, SEMATECH entered the first of a series of agreements with the Company to both assist in funding the Micrascan technology and to increase SVGL's manufacturing capability and capacity. The agreements with SEMATECH included the sale of warrants for $8,204,000 to purchase shares of the Company's Common Stock (see Note 11) and established certain milestones on which the funding is based. The proceeds from the sale of the warrants, received in October 1994, were utilized to increase SVGL's manufacturing capability and capacity to satisfy anticipated demand for the current and future versions of the Micrascan product. Additionally, over a three-year period, SEMATECH agreed to fund, upon SVGL's completion of certain milestones, approximately $22,000,000 for the future development of Micrascan technology and to increase capacity to build the Micrascan product. Through Silicon Valley Group, Inc. TWENTY-FOUR 15 NOTES TO CONSOLIDATED . . . . . . . . . . . . . FINANCIAL STATEMENTS September 30, 1996, the Company had recognized $17,250,000 of funding under the agreements. Under the agreements, the Company was obligated to fund from its own resources certain amounts to further the development of Micrascan technology, increase manufacturing capability and capacity for Micrascan products, and to fund related inventory costs. The Company has fulfilled these funding obligations. In February 1995, the Company entered into agreements with Intel Corporation, Motorola Inc., and Texas Instruments Incorporated (the Investors) related to the Company's Micrascan photolithography products under which the Investors purchased an aggregate of $30,000,000 of the Company's newly issued Series B Preferred (see Note 11) and received certain rights to purchase future generations of the Company's Micrascan products. In turn, the Company agreed to utilize the proceeds of the transaction for research and development related to its Micrascan technology and the expansion of its manufacturing capacity, as well as working capital for its Micrascan products. The agreement with the Investors also obligated the Company to fund, at any time over a five-year period, an amount such that the total it funded under the agreements with both SEMATECH and the Investors was not less than $25,000,000. The Company has fulfilled its contractual obligations under such agreements. As part of the agreement with the Investors, IBM was also granted certain rights to purchase initial quantities of future generations of the Company's Micrascan products. During fiscal 1996, the Company entered into agreements with certain customers (the Participants) whereby each agreed to assist in funding the Company's development of an advanced-technology 193-nanometer Micrascan system. In exchange for such funding, the Participants receive the right to purchase one such system and, in addition, receive a right of first refusal (ratable among such Participants) to all such machines manufactured during the first two years following the initial system shipments. For each initial system ordered, each Participant agreed to fund $5,000,000 in such development costs. The agreements call for each Participant to pay $1,000,000 of initial development funding and four subsequent payments of $1,000,000 upon the completion of certain development milestones. At September 30, 1996, the Company had received $5,000,000 in initial funding from four participants. The amount of such funding recognized as an offset of development spending in fiscal 1996 was insignificant. 15. GEOGRAPHIC SEGMENTS The Company's products are manufactured in the United States and are sold worldwide. The Company markets internationally through both its foreign-based sales and service operations and through outside distributors and sales representatives. One customer accounted for 31% of sales in 1996, 17% of sales in 1995, and 20% of sales in 1994, a second customer accounted for 10% of sales in 1996, 18% of sales in 1995, and 19% of sales in 1994, and a third customer was not significant in 1996, however, accounted for 12% of sales in 1995 and 11% of sales in 1994. The following table presents a summary of operations by geographic region. Inter-region transfers and eliminations represent transfers between domestic operations and international subsidiaries. Transfers and commission arrangements between geographic areas are at prices sufficient to recover a reasonable profit. Research, development and related engineering expenses and general corporate expenses are included in operating income from North American operations. TWENTY-FIVE SVG 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1994 1995 1996 - ---------------------------------------------------------------------------------------- (in thousands) Net Sales: North America: Unaffiliated customers: North America $ 186,093 $ 312,613 $ 417,021 Europe 73,808 68,536 129,947 Far East 24,395 24,259 49,175 Other 250 1,932 132 Inter-region transfers 21,214 35,407 29,004 Europe 28,082 41,519 27,629 Far East 7,294 13,173 16,024 Eliminations (21,214) (35,407) (29,004) --------- --------- --------- Consolidated net sales $ 319,922 $ 462,032 $ 639,928 ========= ========= ========= Operating Income: North America $ 21,884 $ 45,938 $ 81,371 Europe 4,326 7,027 3,964 Far East 545 822 1,241 Eliminations (304) (1,398) (1,085) --------- --------- --------- Consolidated operating income $ 26,451 $ 52,389 $ 85,491 ========= ========= ========= Identifiable Assets: North America $ 250,705 $ 469,436 $ 692,143 Europe 21,026 31,864 37,934 Far East 7,894 10,041 8,351 Eliminations (7,951) (10,616) (9,051) --------- --------- --------- Consolidated assets $ 271,674 $ 500,725 $ 729,377 ========= ========= =========
16. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1996 Net sales $158,280 $170,668 $167,858 $143,122 Gross profit 65,401 70,414 71,336 61,141 Income before income taxes and minority interest 25,520 27,356 27,542 17,966 Net income 16,481 17,653 17,596 11,491 Net income per share 0.54 0.58 0.58 0.38 1995 Net sales $ 85,971 $109,380 $127,722 $138,959 Gross profit 33,202 41,531 52,163 56,583 Income before income taxes and minority interest 8,355 11,623 18,904 22,352 Net income 5,330 7,487 12,044 14,134 Net income per share 0.25 0.33 0.45 0.52
TWENTY-SIX SILICON VALLEY GROUP, INC. 17 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF SILICON VALLEY GROUP, INC.: We have audited the accompanying consolidated balance sheets of Silicon Valley Group, Inc. and its subsidiaries as of September 30, 1995 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Silicon Valley Group, Inc. and its subsidiaries at September 30, 1995 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP [DELOITTE & TOUCHE LLP LOGO] - ---------------------------- San Jose, California October 24, 1996 TWENTY-SEVEN SVG 18 FINANCIAL INFORMATION FIVE-YEAR SELECTED FINANCIAL DATA
Years Ended September 30, 1992 1993 1994 1995 1996 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Income Statement Data: Net sales $ 192,457 $ 240,633 $ 319,922 $ 462,032 $ 639,928 Income before income taxes and minority interest 1,564 6,920 26,820 61,234 98,384 Net income (loss) (292) 4,485 16,764 38,995 63,221 Preferred Stock dividend 209 1,190 1,190 537 -- Net income (loss) per share (0.03) 0.22 0.84 1.57 2.07 Shares used in per share computations 14,754 15,277 18,538 24,850 30,554 Balance Sheet Data: Working capital $ 91,148 $ 107,975 $ 171,191 $ 325,481 $ 463,655 Total assets 180,777 212,284 271,674 500,725 729,377 Long-term debt and capital leases 1,652 2,338 1,510 654 217 Stockholders' equity 121,116 126,997 185,215 350,247 541,949
COMMON STOCK PRICES The Company's Common Stock is traded in the over-the-counter market on the Nasdaq National Market System under the symbol SVGI. The following table sets forth the range of high and low sales prices of the stock during 1995 and 1996 as reported by Nasdaq-NMS.
1995 1996 High Low High Low - ----------------------------------------------------------------------------------------------------------------------- First Quarter $21 1/4 $14 $38 1/2 $23 Second Quarter 30 3/4 18 3/8 30 5/8 18 1/4 Third Quarter 37 1/8 24 7/8 27 17 7/32 Fourth Quarter 49 3/8 32 5/8 19 3/8 15 3/8
To date, the Company has not declared or paid dividends on its Common Stock. The Board of Directors of the Company presently intends to retain all earnings for use in the Company's business and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. The Company's revolving credit facility prohibits the payment of cash dividends on Common Stock. As of November 29, 1996, there were 764 holders of record of the Common Stock. TWENTY-EIGHT SILICON VALLEY GROUP, INC. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Forward-looking statements are indicated by an asterisk (*) following the sentence in which such statement is made. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS The Company designs, markets, and services semiconductor processing equipment used in the fabrication of integrated circuits. The Company's products are used in photolithography for exposure and photoresist processing and in deposition for oxidation/diffusion and low-pressure chemical vapor deposition (LPCVD). The Company manufactures and markets its photolithography exposure products through its majority-owned subsidiary, SVG Lithography Systems, Inc. (SVGL); its photoresist processing products through its Track Systems Division (Track); and its oxidation/diffusion and LPCVD products through its Thermco Systems Division (Thermco). The semiconductor industry into which the Company sells its products is highly cyclical and has, historically, experienced periodic downturns that have had a severe effect on the semiconductor industry's demand for semiconductor processing equipment. During the first quarter of calendar 1996 (the Company's second fiscal quarter), the growth rate of the worldwide semiconductor industry, measured in terms of its book-to-bill ratio, declined. In the second half of fiscal 1996, the Company experienced lower customer order bookings (bookings), customer deferrals of scheduled equipment delivery dates, and to a lesser extent, customer order cancellations. The Company recorded bookings of $264,285,000 during the last six months of fiscal 1996, down from bookings of $378,793,000 in the first six months of fiscal 1996. As a result of such lower bookings, the Company believes that at least through the first half of fiscal 1997 shipments will be below second-half fiscal 1996 levels.* In addition, there can be no assurance that the Company will not experience further customer delivery deferrals, additional order cancellations, or a prolonged period of customers orders at reduced levels, any or a combination of which would further decrease earnings.* Prior downturns in the worldwide semiconductor industry have resulted in significant reductions in the Company's net sales, gross margin, and net income. Moreover, the Company expects that its operations as a whole will continue to be dependent on the current and anticipated demand for integrated circuits and products utilizing integrated circuits.* Any prolonged weakness in demand in the semiconductor industry is likely to have an adverse effect on the Company's business and results of operations.* Further, the Company believes, due in part to a large percentage of its customer base consisting of manufacturers of logic devices, that it will continue to rely on a limited number of major customers for a substantial percentage of its net sales.* During fiscal 1996, the Company's two largest customers accounted for 41% of the Company's net sales, the largest representing 31% of the total, compared to fiscal 1995 when three such customers accounted for 47%, with the largest customer representing approximately 18% of the total net sales during the period. The loss of a significant customer, further delays in shipments due to customer rescheduling, any additional reductions in orders by a significant customer, or any reduction or rescheduling activity of significance, including reductions in orders due to market, economic, or competitive conditions in the semiconductor industry, will adversely affect the Company's business and results of operations.* TWENTY-NINE SVG 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL 1996 COMPARED TO FISCAL 1995 During fiscal 1996, the Company's net sales of $639,928,000 were 39% higher than fiscal 1995 net sales of $462,032,000. Each of the Company's product groups, SVGL, Track, and Thermco, experienced sales increases over the preceding fiscal year, with the most significant increases resulting from increased shipments of SVGL's Micrascan photolithography systems and Track's photoresist processing systems. During fiscal 1996, the Company had bookings of $643,078,000 (which represented a book-to-bill ratio of 1.00 to 1), approximately level with fiscal 1995 bookings of $644,352,000 (which represented a book-to-bill ratio of 1.39 to 1). At September 30, 1996, the Company had a backlog of $394,589,000 compared to $391,439,000 at September 30, 1995. The Company includes in backlog only those orders to which a purchase order number has been assigned by the customer, with all terms and conditions agreed upon and for which delivery has been specified within twelve months. At September 30, 1996, the backlog included orders for 38 Micrascan photolithography systems. In addition to the systems included in backlog, SVGL had orders for 18 systems that had scheduled delivery dates outside the twelve-month backlog window, including orders for seven advanced-technology 193-nanometer Micrascan systems currently under development. (See SVGL.) During fiscal 1996, the Company's gross margins were 42% compared to gross margins of 40% in fiscal 1995. The increased gross margins were primarily the result of increased manufacturing volumes and efficiencies related to SVGL's Micrascan photolithography systems and a higher percentage of the Company's sales consisting of Track systems, which are typically the Company's highest gross margin products. Research, development and related engineering is net of funding received from outside parties under development agreements. Such funding is typically payable upon the attainment of one or more development milestones that are specified in the agreement. Neither the spending nor the recognition of the funding related to the development milestones is ratable over the term of the agreements. The majority of development funding has been received by SVGL from SEMATECH. (See "Fluctuations in Quarterly Results and Dependence on New Product Development.") Research, development and related engineering (R&D) was $66,974,000 (11% of net sales) during fiscal 1996, significantly above fiscal 1995 R&D of $40,231,000 (9% of net sales). During fiscal 1996 and fiscal 1995, development funding of $4,994,000 and $12,767,000, respectively, was recognized and offset against R&D. The increased fiscal 1996 R&D was primarily the result of new product development, particularly at SVGL, and additional costs incurred to support the increased level of shipments. SVGL's development costs increased significantly as expenditures associated with new Micrascan products increased and less outside development funding was recognized. During fiscal 1996, marketing, general and administrative expenses (MG&A) were $115,827,000 (18% of net sales), versus $90,859,000 (20% of net sales) during fiscal 1995. The year-to-year increase was primarily due to costs related to the higher level of shipments. Compared to the year-earlier period, the decrease in MG&A as a percentage of sales was due to the significant year-to-year sales growth. During fiscal 1996, operating income was $85,491,000 compared to operating income of $52,389,000 during fiscal 1995. The increase in operating income over the preceding fiscal year was the result of improved gross margins on higher sales offset in part by increased operating expenses. THIRTY SILICON VALLEY GROUP, INC. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and other income was $13,330,000 during fiscal 1996, significantly above the fiscal 1995 total of $9,465,000, principally due to interest earned on higher fiscal 1996 average cash balances, the result of the proceeds from underwritten public offerings of the Company's Common Stock in October and March 1995 being available for investment during all of fiscal 1996. The increase was offset in part by royalty income recorded in fiscal 1996 that was lower than the initial income recognized for the fourth quarter of fiscal 1995, upon the grant of the technology license. Interest expense was not significant during either fiscal 1996 or fiscal 1995. During fiscal 1996, the Company recorded a 35% provision for income taxes compared to a 36% provision for fiscal 1995. Variations in the Company's effective tax rate relate primarily to changes in the geographic distribution of its pretax income. (See Note 10 to the Consolidated Financial Statements.) The minority interest represents that share of SVGL's operating results attributable to its minority stockholder. During fiscal 1996 and fiscal 1995, the reductions for minority interest were $726,000 and $194,000, respectively. In comparison to the preceding fiscal year, the increased reduction for minority interest reflects the year-to-year improvement in SVGL's profitability. The Company's fiscal 1996 net income was $63,221,000 ($2.07 per share) compared to fiscal 1995 net income of $38,995,000 ($1.57 per share). The weighted average number of common and common equivalent shares outstanding used in the per share computations for fiscal years 1996 and 1995 were 30,554,000 and 24,850,000, respectively. The significant increase in the average outstanding shares was primarily due to the sale of 4,025,000 shares of Common Stock in an underwritten public offering in October 1995 and the effect of significant Common Stock issuances during the second quarter of fiscal 1995. (See "Fiscal 1995 Compared to Fiscal 1994" and Note 11 to the Consolidated Financial Statements.) FISCAL 1995 COMPARED TO FISCAL 1994 Net sales during fiscal 1995 were $462,032,000, a 44% increase over net sales of $319,922,000 during fiscal 1994. SVGL, Track and Thermco each recorded higher net sales in fiscal 1995. The most significant increase resulted from shipments of Thermco's vertical reactors. The strong demand for semiconductor capital equipment was reflected in the Company's fiscal 1995 product bookings of $644,352,000, up 68% from fiscal 1994 bookings of $383,216,000. At September 30, 1995, the Company had backlog of $391,439,000, up from backlog of $209,119,000 at September 30, 1994. The fiscal 1995 ending backlog included orders for 34 Micrascan photolithography systems. Gross margins were 40% in fiscal 1995 compared to 39% during fiscal 1994. The increased gross margins were primarily due to higher volumes in all of the operating groups and improvements related to Thermco's vertical reactors and SVGL's Micrascan II photolithography systems, offset in part by lower margins on Track's earlier technology and after-market products. Research, development and related engineering (R&D) was $40,231,000 (9% of net sales) during fiscal 1995 compared to $30,443,000 (10% of net sales) during fiscal 1994. The fiscal 1995 and 1994 R&D expenditures were net of funding received from outside parties under joint development agreements of $12,767,000 and $1,473,000, respectively. The majority of such funding was provided to SVGL by SEMATECH. The year-to-year increase in R&D was primarily due to new product development, costs incurred to support increased product shipments, and design improvements on the Series 8000 Advanced Vertical Processor (AVP) incurred by Thermco during the first half of fiscal 1995. THIRTY-ONE SVG 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Marketing, general and administrative expenses (MG&A) were $90,859,000 (20% of net sales) during fiscal 1995 compared to $67,517,000 (21% of net sales) during fiscal 1994. In comparison to the preceding year, the increase in MG&A was primarily related to the level of shipments and, to a lesser degree, additional administrative costs incurred in supporting the Company's operations. The decrease in MG&A as a percentage of net sales reflects the significant year-to-year increase in net sales. Fiscal 1995 operating income was $52,389,000 compared to $26,451,000 for fiscal 1994. The increase in operating income resulted from the higher fiscal 1995 net sales and gross profits, offset in part by increased R&D and MG&A costs. During fiscal 1995, interest and other income was $9,465,000 compared to $1,090,000 for fiscal 1994. The increase was primarily the result of interest earned on significantly higher cash balances. Additionally, the fourth quarter of fiscal 1995 included $1,500,000 in initial royalty fees from a nonexclusive license granted to a third party for the use of certain cleaning technology owned by the Company. Interest expense was $620,000 during fiscal 1995 compared to $721,000 during fiscal 1994. The year-earlier period included interest expense related to borrowings outstanding under the Company's bank line of credit during the first several months of fiscal 1994. The Company recorded a 36% provision for income taxes for fiscal 1995 compared to a 38% provision for fiscal 1994. As discussed above, variations in the Company's effective tax rate related primarily to changes in the geographic distribution of its pretax income. During fiscal 1995, minority interest represented a reduction from net income of $194,000 compared to an addition to net income of $135,000 during fiscal 1994. The Company had net income of $38,995,000 ($1.57 per share) in fiscal 1995 compared to net income of $16,764,000 ($0.84 per share) for fiscal 1994. The number of shares used in the per share computations was 24,850,000 and 18,538,000 for fiscal 1995 and 1994, respectively. The significant increase in such shares was primarily the result of the issuance of Series B Convertible Preferred Stock (which was subsequently converted to Common Stock along with the Series A Preferred Stock) and the sale of 3,192,606 shares of Common Stock in an underwritten public offering in March 1995. (See Note 11 to the Consolidated Financial Statements.) FLUCTUATIONS IN QUARTERLY RESULTS AND DEPENDENCE ON NEW PRODUCT DEVELOPMENT 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 cancellation, or production or shipping delays can significantly affect quarterly revenues and profitability. The Company has experienced, and may again experience, quarters during which a substantial portion of the Company's net sales are realized near the end of the quarter.* Accordingly, delays in shipments near the end of a quarter can cause quarterly net sales to fall short of anticipated levels. Since most of the Company's expenses are fixed in the short term, such shortfalls in net sales could have a material adverse effect on the Company's business and results of operations.* The Company's operating results may also vary from quarter to quarter based upon numerous factors including the timing of new product introductions, product mix, level of sales, the relative proportion of THIRTY-TWO SILICON VALLEY GROUP, INC. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS domestic and international sales, activities of competitors, acquisitions, international events, and problems obtaining materials or components on a timely basis.* In light of these factors and the effect of the current uncertainty in the global semiconductor market on demand for the Company's wafer fabrication systems, the Company is likely to again experience variability in quarterly operating results.* Semiconductor manufacturing equipment and processes are subject to rapid technological change. The Company believes that its future success will depend in part upon its ability to continue to enhance its existing products and their process capabilities and to develop and manufacture new products with improved process capabilities that enable semiconductor manufacturers to fabricate semiconductors more efficiently.* Additionally, the Company believes that it will have to develop products capable of processing 300-mm wafers as advanced semiconductor manufacturers progress from the current 200-mm wafer standard. Failure to successfully introduce new products in a timely manner could result in the loss of competitive position and reduced sales of existing products.* In addition, new product introductions could contribute to quarterly fluctuations in operating results as orders for new products commence and increase the potential for a decline in orders of existing products, particularly if new products are delayed.* During fiscal 1996, the Company introduced new products in all three of its product groups for shipment in fiscal 1997. From time to time, the Company has experienced difficulty in ramping up production or effecting transitions to new products and, consequently, has suffered delays in product deliveries. There can be no assurance that the Company will not experience manufacturing problems as a result of either capacity constraints or upgrading or expanding existing operations in an effort to increase production capability.* These issues could result in product delivery delays and a subsequent loss of future sales.* The Company believes that protracted delays in delivering initial quantities of newly developed products to multiple customers could result in semiconductor manufacturers electing to install competitive equipment in their fabrication facilities and could preclude industry acceptance of its products.* The inability to produce such products or any failure to achieve market acceptance could have a material adverse effect on the Company's business and results of operations.* 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 that will increase profitability.* Further, the potential unfavorable effect of newly introduced products on profitability can be exacerbated when there is intense price competition in the market place.* 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 that are operated by Japanese and Pacific Rim semiconductor manufacturers) represent a substantial portion of the overall market for semiconductor manufacturing equipment and, to date, the Company has not been successful in obtaining a substantial share of these markets. The Company believes that it must expand globally if it is to compete as an industry leader.* Further, in many instances, Japanese and Pacific Rim semiconductor manufacturers fabricate devices such as DRAMs, with potentially different economic cycles than those affecting the sales of devices manufactured by the majority of the Company's U.S. and European customers. Failure to secure customers in these markets may limit the market share available to the Company and may increase the Company's vulnerability to industry or geographic downturns.* THIRTY-THREE SVG 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In order to expand its market share in the Pacific Rim, the Company has begun investing in the staffing and facilities necessary to sell, service, and support customers in the area through entities in Korea, Singapore, and Thailand. Throughout the Pacific Rim, the Company will be competing with established equipment suppliers with significant market share and anticipates that it will encounter significant price competition as well as competition based on technological ability.* There can be no assurance that the Company's Pacific Rim operations will be profitable, even if it is successful in obtaining significant sales into the region.* SVG LITHOGRAPHY SYSTEMS, INC. (SVGL) The Company believes that the photolithography exposure equipment market is one of the largest segments of the semiconductor processing equipment industry and that the SVGL Micrascan II series of photolithography systems are currently the most technically advanced step-and-scan machine shipping in multiple quantities to global semiconductor manufacturers.* The Company believes that advanced semiconductor manufacturers are beginning to require volume quantities of production equipment as advanced as the current and pending versions of Micrascans, however, it does not believe that substantial sales of such systems will begin until late calendar 1997 or 1998.* Currently, customers can purchase DUV steppers to produce product at 0.25-micron line widths. If manufacturers of traditional I-line or DUV steppers are able to further enhance existing technology to achieve finer line widths sufficiently to erode Micrascan's competitive and technological advantages, demand for the Micrascan technology may not develop as the Company expects.* Additionally, competitive equipment capable of producing 0.25-micron line widths using step-and-scan technology is currently available in limited quantities. The Company believes that advanced logic devices and DRAMs will require increasingly finer line widths.* The ability to maintain technological leadership is critical to SVGL's success and it must continue to develop advanced technology equipment capable of meeting manufacturers' requirements.* In particular, the Company believes that it must, in the first half of fiscal 1997, begin shipping both its lamp-based (Micrascan QML) and laser-based (Micrascan III) systems capable of printing 0.25-micron line widths, as well as progressing on its development of a system capable of printing line widths finer than 0.25 micron.* The Company believes that its ability to supply systems in volume will be a major factor in customer decisions to commit to the Micrascan technology.* The Company is currently expanding the manufacturing capacity of SVGL to meet potential future demand for its advanced photolithography systems.* During the first half of fiscal 1996, SVGL commenced certain facility and capital improvements and, on August 2, 1996, the Company, for approximately $21,200,000, purchased from The Perkin-Elmer Corporation a 248,000-square- foot facility occupied by SVGL in Wilton, Connecticut and an additional 201,000-square-foot building, which SVGL will also occupy, in Ridgefield, Connecticut. During fiscal 1997, it is the Company's intent to invest in significant further capital improvements related to the buildings purchased and the equipment required to expand the production capabilities of SVGL.* The time required to build a Micrascan system is significant. If SVGL is to be successful in supplying increased quantities of Micrascan systems, it will not only need to be able to build more systems, it will need to build them faster.* As a result, SVGL will require additional trained personnel and raw materials and components, as well as improved manufacturing and testing techniques to both facilitate volume and shorten manufacturing cycle time.* To that end, SVGL is continuing to increase staffing levels, develop its vendor supply infrastructure, and implement manufacturing improvements to meet expected 1997 and 1998 shipment volumes. Additionally, the Company must increase its field service and technical support organization staffing and infrastructure to support the anticipated customer requirements. There can be no assurance that the Company will not experience manufacturing difficulties or encounter problems in its THIRTY-FOUR SILICON VALLEY GROUP, INC. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS attempt to increase production and upgrade or expand existing operations.* In particular, the Company believes that protracted delays in delivering initial quantities of Micrascan products to multiple customers could result in semiconductor manufacturers electing to install competitive equipment in their advanced fabrication facilities, which could preclude industry acceptance of the Micrascan technology and products*. In addition, the Company's operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity and field service and technical support activities if net sales do not increase commensurately.* Historically, the Company has depended on external funding to assist in the high cost of development in its photolithography operation. The agreements that are currently in effect are discussed in detail below. In September 1994, the Company and SEMATECH entered into a series of agreements whereby the Company sold SEMATECH warrants to purchase the Company's Common Stock and SEMATECH agreed, based upon the Company achieving certain performance milestones, to provide, through 1997, $22,000,000 of funding for the development of the Micrascan technology and to increase SVGL's manufacturing capability and capacity. As of September 30, 1996, the Company had recognized $17,250,000 of such SEMATECH funding. Additionally, under the agreements with SEMATECH, the Company was obligated to provide certain funds from its own resources. The Company has funded sufficient qualifying expenditures to fulfill its contractual obligation. In February 1995, the Company entered into an agreement with Intel Corporation, Motorola Inc., and Texas Instruments Incorporated (the "Investors") under which the Investors made a $30,000,000 equity investment in the Company and received certain rights to purchase future generations of the Company's Micrascan products. The Company agreed to utilize the proceeds of the transaction for research and development related to its Micrascan technology and the expansion of its manufacturing capacity, as well as working capital for its Micrascan products. The agreement with the Investors also obligated the Company to fund from its own resources not less than $25,000,000, including amounts it funded under the agreements with SEMATECH. The Company has fulfilled its funding obligation under the agreement with the Investors. During fiscal 1996, the Company entered into agreements with certain customers (the Participants) whereby each agreed to assist in funding the Company's development of an advanced-technology 193-nanometer Micrascan system. In exchange for such funding, each Participant received the right to purchase one such system and, in addition, received a right of first refusal (ratable among such Participants) to all such machines manufactured during the first two years following the initial system shipments. For each initial system ordered, each Participant agreed to fund $5,000,000 in such development costs. The agreements call for each Participant to pay $1,000,000 of initial development funding and four subsequent payments of $1,000,000 upon the completion of certain development milestones. The Participants may withdraw from the development program without penalty, but payments made against completed development milestones are not refundable and all preferential rights to future equipment are forfeited. At September 30, 1996, the Company had received $5,000,000 in initial funding from four Participants and had received single unit orders for systems from two other customers. There can be no assurances that the Participants will remain in the program.* In the event that the Company did not receive the funding anticipated under the agreements, it would be required to replace the shortfall from its own funds or other sources. If the Company were required to use its own funds, its research and development expenses would increase and its operating income would be reduced correspondingly. The agreements with the Participants stipulate that if the Company receives funding for the development program in excess of $25,000,000, it will issue, ratably to the Participants, credits totaling such excess in the form of a cash discount that can be applied to the purchase of additional systems by each Participant. There is no assurance that the Company will receive all funding that it currently anticipates or that it will be able to obtain future outside funding beyond that which it is currently receiving. THIRTY-FIVE SVG 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS While the recent volume of orders for Micrascan systems has been consistent and encouraging, they are not necessarily indicative of industry-wide acceptance of the Micrascan technology. Although SVGL has been profitable during fiscal 1996, the Company believes that with the costs associated with the continued development of the Micrascan technology, the expansion of SVGL's manufacturing capacity, the additional manpower requirements related to the expanded capacity and customer support and the potential difficulties inherent in manufacturing initial quantities of the 0.25-micron Micrascan systems, there can be no assurance that SVGL will be able to operate profitably in the future.* Additionally, SVGL is subject to the accrual of certain royalties based on operating income and payable to IBM under the terms of a research and development agreement. If SVGL is successful in increasing its operating income, the Company believes that such royalties will be significant.* LIQUIDITY AND CAPITAL RESOURCES In October 1995, the Company sold 4,025,000 shares of its Common Stock through an underwritten public offering. The net proceeds of the offering were approximately $126,200,000. At September 30, 1996, cash and cash equivalents and temporary investments totaled $262,061,000 compared to the September 30, 1995 total of $180,523,000, an increase of $81,538,000. The proceeds of the Common Stock offering and significant cash inflows resulting from customer deposits on advanced photolithography systems were offset in part by cash used to finance the growth of accounts receivable resulting from the Company's increased shipments, higher inventory levels required to satisfy the current backlog of customer orders, and purchases of property and equipment. During fiscal 1996, the Company provided SVGL, its 94%-owned subsidiary, with intercompany loans of approximately $46,255,000 (including approximately $21,200,000 for its purchase of land and buildings). The Company believes that for the foreseeable future it will have to continue providing SVGL with a significant amount of funding. In connection with its acquisition of SVGL in 1990, the Company committed to purchase under certain circumstances, additional SVGL securities (the SVGL Calls) in an amount up to $23,200,000 at any time through May 1997. To the extent the SVGL Calls are not exercised, the Company has the option to purchase up to $15,000,000 of SVGL Common Stock under similar terms. The Company may choose to continue funding SVGL through intercompany loans or it may choose to make an additional equity investment in SVGL. In July 1996, the Board of Directors authorized the Company to institute a stock repurchase program whereby up to 5,000,000 shares of its Common Stock may be purchased in the open market from time to time. Through December 20, 1996, no Common Stock had been repurchased and the Company had not announced its intention to commence such repurchases. The Company has a $75,000,000 unsecured revolving bank credit facility. Advances under the facility bear interest at either the U.S. prime rate or the LIBOR rate plus 1%. In November 1996, the term of the credit facility was extended an additional year to December 1999. At December 20, 1996, there were no borrowings outstanding under the facility. The Company believes that it has sufficient working capital and available bank credit to sustain operations and provide for the expansion of its business for the foreseeable future.* THIRTY-SIX SILICON VALLEY GROUP, INC. EX-23.1 3 CONSENT OF DELOITTE & TOUCHE, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-31298 and 33-85020 of Silicon Valley Group, Inc. on Form S-8 of our reports dated October 24, 1996 appearing in and incorporated by reference in this Annual Report on Form 10-K of Silicon Valley Group, Inc. for the year ended September 30, 1996. /s/ DELOITTE & TOUCHE DELOITTE & TOUCHE LLP San Jose, California December 20, 1996 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, AS INCORPORATED BY REFERENCE INTO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, AND IS QUALIFIELD IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10K. 1,000 YEAR SEP-30-1996 OCT-01-1995 SEP-30-1996 218,841 43,220 157,014 6,003 213,229 642,823 150,130 68,553 729,377 179,168 0 0 0 378,033 163,916 729,377 639,928 639,928 371,636 371,636 0 0 437 98,384 34,437 63,221 0 0 0 63,221 2.07 0 MINORITY INTEREST OF $726,000 IS DEDUCTED FROM AFTER-TAX INCOME IN ARRIVING AT NET INCOME OF $63,221,000.
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