-----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, J5k7ssTzID06mL8SYECG42o9LAR6gU06TaWOPLe3bJLuFZY+8BL1qwY9vuBPvKjj 8tQRLwUxptawmIZ7nz9mgg== 0000950150-96-000823.txt : 19960813 0000950150-96-000823.hdr.sgml : 19960813 ACCESSION NUMBER: 0000950150-96-000823 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960812 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11348 FILM NUMBER: 96608694 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-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 30,1996 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 1996. ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the period from ________ to ________. Commission File Number 0-11348 SILICON VALLEY GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2264681 (State of incorporation) (IRS Employer Identification No.) 101 METRO DRIVE, SUITE #400, SAN JOSE, CALIFORNIA 95110 (Address of principal executive offices) (Zip Code) (408) 441-6700 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock as of July 26, 1996 was 30,172,738. ================================================================================ 2 SILICON VALLEY GROUP, INC. INDEX PART I. FINANCIAL INFORMATION
PAGE NO. -------- Consolidated Condensed Balance Sheets as of June 30, 1996 and September 30, 1995 3 Consolidated Condensed Income Statements for the Quarters and the Nine Month Periods Ended June 30, 1996 and 1995 4 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 30, 1996 and 1995 5 Notes to Consolidated Condensed Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION 15 SIGNATURES 16
2 3 PART I. FINANCIAL INFORMATION SILICON VALLEY GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
June 30, September 30, 1996 1995 ---- ---- (Unaudited) ASSETS CURRENT ASSETS: Cash and equivalents $ 253,022 $166,790 Temporary investments 44,852 13,733 Accounts receivable (net of allowance for doubtful accounts of $4,822 and $4,107, respectively) 153,158 122,849 Inventories 205,300 153,973 Prepaid expenses 6,684 7,389 Deferred taxes 1,750 1,000 ----------- -------- Total current assets 664,766 465,734 PROPERTY AND EQUIPMENT - NET 52,189 27,619 DEPOSITS AND OTHER ASSETS 2,891 2,097 INTANGIBLE ASSETS - NET 2,704 2,820 ----------- -------- TOTAL $ 722,550 $498,270 =========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of capital lease obligations $ 563 $ 885 Accounts payable 38,739 40,219 Accrued liabilities 146,017 99,427 Income taxes payable 1,699 2,177 ----------- -------- Total current liabilities 187,018 142,708 CAPITAL LEASE OBLIGATIONS 308 654 DEFERRED LIABILITIES 769 685 MINORITY INTEREST 4,521 3,976 STOCKHOLDERS' EQUITY: Common Stock - shares outstanding: June 30, 1996: 30,172,568 249,552 September 30, 1995: 25,233,170 377,509 Retained earnings 152,425 100,695 ----------- -------- Stockholders' equity 529,934 350,247 ----------- -------- TOTAL $ 722,550 $498,270 =========== ========
See Notes to Consolidated Condensed Financial Statements 3 4 SILICON VALLEY GROUP, INC. CONSOLIDATED CONDENSED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Quarters Ended Nine Months Ended June 30, June 30, -------- -------- 1996 1995 1996 1995 ---- ---- ---- ---- NET SALES $167,858 $127,722 $496,806 $323,073 COST OF SALES 96,522 75,559 289,655 196,177 -------- -------- -------- -------- GROSS PROFIT 71,336 52,163 207,151 126,896 OPERATING EXPENSES: Research, development and related engineering 17,374 10,095 49,998 28,189 Marketing, general and administrative 30,042 25,813 86,975 64,523 -------- -------- -------- -------- OPERATING INCOME 23,920 16,255 70,178 34,184 INTEREST AND OTHER INCOME - NET 3,704 2,797 10,574 5,141 INTEREST EXPENSE (82) (148) (334) (443) -------- -------- -------- -------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 27,542 18,904 80,418 38,882 PROVISION FOR INCOME TAXES 9,639 6,806 28,146 13,998 MINORITY INTEREST 307 54 542 23 -------- -------- -------- -------- NET INCOME $ 17,596 $ 12,044 $ 51,730 $ 24,861 ======== ======== ======== ======== PREFERRED STOCK DIVIDEND $ -- $ -- $ -- $ 537 ======== ======== ======== ======== NET INCOME PER SHARE $ 0.58 $ 0.45 $ 1.69 $ 1.04 ======== ======== ======== ======== SHARES USED IN PER SHARE COMPUTATIONS 30,535 26,968 30,520 23,973 ======== ======== ======== ========
See Notes to Consolidated Condensed Financial Statements 4 5 SILICON VALLEY GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months Ended June 30, -------- 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED) Net income $ 51,730 $ 24,861 Reconciliation to net cash provided by (used for) operating activities: Depreciation and amortization 8,732 8,039 Amortization of intangibles 116 246 Minority interest 545 23 Changes in assets and liabilities: Accounts receivable (30,309) (36,161) Inventories (51,327) (53,581) Prepaid expenses 705 192 Deposits and other assets (794) (206) Accounts payable (1,480) 17,701 Accrued and deferred liabilities 46,890 35,544 Income taxes (1,228) 1,333 -------- -------- Net cash provided by (used for) operating activities 23,580 (2,009) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of temporary investments (88,647) (4,821) Maturities of temporary investments 57,528 -- Purchase of property and equipment (33,302) (14,466) -------- -------- Net cash used for investing activities (64,421) (19,287) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (668) (587) Sale of Common Stock 127,957 90,764 Sale of Preferred Stock -- 29,800 Collection of receivable from sale of Common Stock warrants -- 8,204 -------- -------- Net cash provided by financing activities 127,289 128,181 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (216) (242) -------- -------- INCREASE IN CASH AND EQUIVALENTS 86,232 106,643 CASH AND EQUIVALENTS: Beginning of period 166,790 87,829 -------- -------- End of period $253,022 $194,472 ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Preferred Stock dividend $ -- $ 537 ======== ======== Preferred Stock Series A converted to Common Stock $ -- $ 17,000 ======== ======== Preferred Stock Series B converted to Common Stock $ -- $ 29,800 ======== ========
See Notes to Consolidated Condensed Financial Statements 5 6 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The accompanying consolidated condensed financial statements have been prepared by the Company without audit and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to a fair statement of the financial position and the results of operations for the interim periods. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission, but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1995. Results for fiscal 1996 interim periods are not necessarily indicative of results to be expected for the fiscal year ending September 30, 1996. 2. INVENTORIES Inventories are comprised of:
June 30, September 30, 1996 1995 (In thousands) Raw materials $100,009 $ 63,803 Work-in-process 99,873 87,060 Finished goods 5,418 3,110 -------- -------- $205,300 $153,973 ======== ========
3. BANK LINE OF CREDIT In December 1995, the Company replaced its then existing bank credit facility with a $75,000,000 unsecured revolving bank credit agreement that expires in December 1998. Advances under the new facility will bear interest at either the prime rate or LIBOR plus 1%. The agreement includes certain covenants regarding financial ratios and prohibits the payment of cash dividends. 6 7 SILICON VALLEY GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 4. STOCK OFFERING During the first quarter of fiscal 1996, 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. 5. RECENTLY ISSUED ACCOUNTING STANDARD The Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, in fiscal 1997. SFAS No. 123 establishes accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. Under SFAS No. 123 the Company may either adopt the new fair value based accounting method or continue the intrinsic value based method and provide pro forma footnote disclosures of net income and earnings per share as if the accounting provisions of SFAS No. 123 had been adopted. The Company plans to adopt only the footnote disclosure requirements of SFAS No. 123; therefore such adoption will have no effect on the Company's consolidated net earnings or cash flows. 7 8 SILICON VALLEY GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis contains certain 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. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below, as well as risk factors included in the Company's Annual Report on Form 10K for the fiscal year ended September 30, 1995. 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 which have had a severe effect on the semiconductor industry's demand for semiconductor processing equipment. In recent months the Company has experienced lower customer order bookings, customer deferrals of scheduled equipment delivery dates and, to a lesser extent, customer order cancellations. During the third fiscal quarter ended June 30, 1996, the Company's customer order bookings were $136,623,000, down from bookings of $193,541,000 during the immediately preceding quarter and $171,914,000 for the year-earlier quarter. The Company believes that at least through the first quarter of fiscal 1997, shipments and earnings will be below third quarter fiscal 1996 levels, primarily due to the customer delivery deferrals, to a lesser extent customer order cancellations, and the reduced level of customers orders. 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 reduce earnings. In recent months the worldwide semiconductor industry growth rate has declined. 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's 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 1995, the Company's three largest customers accounted for 47% of the Company's sales, the largest representing 18% of the total, and a similar trend exists through the first nine months of fiscal 1996, with the largest customer representing approximately 30% of the total sales during the period. The loss of a significant customer, further delays in shipments due to customer rescheduling or any additional reductions in orders by a significant 8 9 customer, or any reduction or rescheduling activity of significance, including reductions in orders due to market, economic or competitive conditions in the semiconductor industry, will adversely affect the Company's business and results of operations. Net sales for the third fiscal quarter ended June 30, 1996 were $167,858,000, down slightly from net sales of $170,668,000 for the preceding quarter, and 31% above net sales of $127,722,000 during the third quarter of fiscal 1995. The decrease in net sales from the preceding quarter was the result of lower Thermco shipments offset in part by increased SVGL shipments of Micrascan photolithography systems. The increase in shipments over the third quarter of fiscal 1995 was the result of increased shipments of SVGL Micrascan photolithography systems and Track systems. For the first nine months of fiscal 1996, net sales were $496,806,000, up 54% from net sales of $323,073,000 during the first nine months of fiscal 1995. The sales growth over the year-earlier period was due to increased shipments in each of the Company's product groups. During the third quarter of fiscal 1996, the Company had bookings of $136,623,000 (which represented a book to bill ratio of 0.81 to 1), a 29% decline from second quarter fiscal 1996 bookings of $193,541,000 (which represented a book to bill ratio of 1.13 to 1) and 21% below third quarter fiscal 1995 bookings of $171,914,000 (which represented a book to bill ratio of 1.35 to 1). At June 30, 1996 the Company had a backlog of $410,048,000 compared to $441,283,000 at March 31, 1996 and $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 March 31, 1996, the backlog included orders for 33 Micrascan photolithography systems, including orders for a lamp version machine capable, in certain applications, of printing 0.25 micron line widths and orders for a laser .25 micron product. In addition to the systems included in backlog, the Company received orders from five global semiconductor manufacturers for six advanced technology 193 nanometer Micrascan systems on which the Company has initiated development, but with estimated completion and shipment dates significantly outside the twelve month backlog window. Gross margins were 42% in the third quarter of fiscal 1996, compared to 41% during both the preceding quarter and the third quarter of fiscal 1995. In each comparison, the improved gross margins were primarily the result of increased manufacturing volumes and efficiencies related to SVGL's Micrascan photolithography system. Fiscal 1996 nine-month gross margins were 42%, up from 39% for the first nine months of fiscal 1995. The favorable change year over year was primarily the result of the improved SVGL margins discussed above, 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 which are specified in the agreement. Neither the spending, nor the recognition of the funding related to the development milestones is ratable over the term of the agreements. The majority of development funding is received by SVGL from SEMATECH. Research, development and related engineering (R&D) expense was $17,374,000 (10% of net sales) during the third quarter of fiscal 1996, $17,118,000 (10% of net sales) during the preceding quarter and $10,095,000 (8% of net sales) during the third quarter of fiscal 1995. During the third quarter of 9 10 fiscal 1996, development funding was negligible. During the second quarter of fiscal 1996 and the third quarter of fiscal 1995, development funding of $1,889,000 and $3,897,000, respectively, was recognized and offset against R&D. The increase in R&D expense over the year-earlier quarter was primarily the result of new product development, costs incurred to support increased product shipments and less development funding recognized by SVGL under its agreements with SEMATECH. Through the first nine months of fiscal year 1996, R&D expense was $49,998,000, compared to $28,189,000 for the same period of fiscal 1995. The costs are net of funding recognized under development agreements of $4,157,000 in 1996 and $8,571,000 in 1995. The year to year increase 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. Marketing, general and administrative expenses (MG&A) were $30,042,000 (18% of net sales) during the third quarter of fiscal 1996, relatively level with expenditures of $29,234,000 (17% of net sales) during the preceding quarter and above third quarter fiscal 1995 MG&A of $25,813,000 (20% of net sales). The slight decrease in net sales from the preceding quarter resulted in the increase of MG&A as a percentage of sales. In comparison to the year-earlier quarter the increased MG&A expenditures were principally the result of costs related to the higher level of shipments, the Company's expanded marketing and technical customer training and support functions and the accrual of certain royalties payable by SVGL to IBM under the terms of a research and development agreement. Compared to the year-earlier quarter, MG&A decreased as a percentage of sales due to the significant growth in sales. During the first nine months of fiscal 1996 MG&A was $86,975,000 (18% of net sales) up from $64,523,000 (20% of net sales) during same period of fiscal 1995. The year to year increase was primarily due to costs related to the higher level of shipments, the expansion of the Company's marketing and technical customer training and support functions, and administrative costs incurred in supporting the Company's operations. Compared to the year-earlier period, the decrease of MG&A as a percentage of sales was due to the significant year to year sales growth. Operating income was $23,920,000 for the third quarter of fiscal 1996, slightly below operating income of $24,062,000 for the preceding quarter and above third quarter fiscal 1995 operating income of $16,255,000. Fiscal 1996 nine-month operating income was $70,178,000 compared to $34,184,000 for the first nine months of fiscal 1995. The increase in operating income from the year-earlier periods was the result of improved gross margins on higher sales partially offset by increased operating expenses. Interest and other income was $3,704,000 during the third quarter of fiscal 1996 compared to $3,411,000 for the preceding quarter and $2,797,000 for the year-earlier quarter. For the first nine months of fiscal 1996, interest and other income was $10,574,000 compared to $5,141,000 for the nine months of fiscal 1995. In comparison to the year-earlier periods, the increases were due to higher cash balances available for investment as a result of an underwritten public offering of the Company's Common Stock in October 1995. See "Liquidity and Capital Resources". Interest expense was not significant during the first nine months of fiscal 1996 or fiscal 1995. 10 11 The Company recorded a 35% provision for income taxes for the first nine months of fiscal 1996, compared to a 36% provision for all of fiscal 1995. Variations in the Company's effective tax rate relate primarily to changes in the geographic distribution of its pretax income. The minority interest represents that share of SVGL's operating results attributable to its minority shareholder. For the third and second quarters of fiscal 1996 and the third quarter of fiscal 1995, minority interest represented reductions from income of $307,000, $128,000 and $54,000, respectively. For the first nine months of fiscal 1996 and fiscal 1995, the reductions for minority interest were $542,000 and $23,000, respectively. In comparison to the earlier periods, the increased third quarter and nine-month fiscal 1996 reductions for minority interest reflect improvements in SVGL's profitability. The Company had net income of $17,596,000 ($0.58 per share), $17,653,000 ($0.58 per share) and $12,044,000 ($0.45 per share) for the third and second quarters of fiscal 1996 and the third quarter of fiscal 1995, respectively. For the first nine months of fiscal 1996 and 1995, the Company had net income of $51,730,000 ($1.69 per share) and $24,861,000 ($1.04 per share), respectively. FLUCTUATIONS IN QUARTERLY RESULTS AND DEPENDENCE ON THE DEVELOPMENT AND SALES OF NEW PRODUCTS 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, production or shipping delays or customer order rescheduling or cancellations 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 proportions of domestic and international sales, activities of competitors, acquisitions, international events, and problems obtaining materials or components on a timely basis. In light of these factors and the effect of the current uncertainty in the global semiconductor market on demand for the Company's wafer fabrication systems, the Company is likely to once 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. Failure to introduce new products successfully in a timely manner could result in the loss of competitive position and reduced sales of existing products. In particular, the Company believes that advanced logic devices and DRAMs will require increasingly finer line widths. In order to remain competitive as a leading edge supplier of advanced photolithography equipment, the Company must continue to develop advanced technology equipment capable of producing line widths of .25 micron and below, including future versions with the ability to process wafers in larger diameters than the 200 millimeter wafers currently utilized by advanced manufacturers. 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, 11 12 particularly if new products are delayed. Furthermore, 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 the photolithography exposure equipment market is one of the largest segments of the semiconductor processing equipment industry and that its Micrascan II is currently the most technically advanced step and scan machine shipping in multiple quantities to global semiconductor manufacturers. However, competitive equipment capable of producing .25 micron line widths using step and scan technology is currently available in limited quantities. Additionally, customers can purchase Deep UV steppers to produce product at sub-.30 micron line widths. 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. The Company is relatively new to the photolithography exposure business and does not share the same level of financial resources as its competitors. As a result, major customers may be unwilling to rely on SVGL to be the primary source of this advanced technology. The Company believes that advanced semiconductor manufacturers will not require volume quantities of production equipment as advanced as the current and pending versions of Micrascan until late fiscal 1997, and that substantial sales of Micrascan systems will not begin until late calendar 1997 or 1998. Additionally, if manufacturers of traditional I-line or Deep UV steppers are able to further enhance their machines to achieve finer line widths sufficiently to erode Micrascan's competitive and technological advantages, demand may not develop as the Company expects. Although SVGL has been modestly profitable during the first nine months of 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 and the additional manpower requirements related to the expanded capacity, there can be no assurance that SVGL will be able to operate profitably in the future. The Company believes that for SVGL to succeed in the long term, it must sell its Micrascan products on a global basis. The Japanese and Pacific Rim markets (including fabrication plants located in other parts of the world which are operated by Japanese and Pacific Rim semiconductor manufacturers) represent a substantial portion of the overall market for photolithography exposure equipment and to date neither SVGL, Track nor Thermco has been successful in obtaining a substantial share of these markets. In many instances, Japanese and Pacific Rim semiconductor manufacturers fabricate devices such as DRAM's, with potentially different economic cycles than those effecting the sales of devices manufactured by the majority of the Company's US 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. Presently, SVGL does not have sufficient manufacturing capacity to meet the anticipated multiple customer demand for Micrascan products. 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 and is currently expanding the manufacturing capacity of SVGL to meet potential future demand for its advanced photo-lithography systems. During the first half of fiscal 1996 SVGL commenced facility and capital improvements and, on August 2, 1996, the Company purchased from The Perkin-Elmer Corporation the 248,000 square foot facility that SVGL occupies in Wilton, CT and an additional 201,000 square foot building in Ridgefield, CT. Additionally, SVGL has been increasing staffing levels and incurring the administrative costs necessary to meet expected 1997 and 1998 shipment volumes. 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 12 13 of capacity constraints or ramping up production by upgrading or expanding existing operations. These issues could result in product delivery delays and a subsequent loss of future sales. 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 if net sales do not increase commensurably. Historically, the Company has depended on external funding to assist in the high cost of development in its photolithography operation. To that end, the Company and SEMATECH entered into a series of agreements whereby SEMATECH agreed both to assist in funding the development of the Micrascan technology and to increase SVGL's manufacturing capability and capacity. The agreements with SEMATECH included the sale of warrants to purchase the Company's Common Stock ("the Warrants") and, based upon the Company achieving certain performance milestones, provide for $22,000,000 of such funding through 1997, the majority of which the Company expects would be an offset to its research and development expenditures. In April 1996, SEMATECH exercised the warrants through a net issuance provision contained in the applicable agreement, resulting in the issuance of approximately 702,000 shares of Common Stock with no inflow of cash to the Company. From the time the Warrants were issued, earnings per share computations included the net number of common shares into which the Warrants were exercisable. As of June 30, 1996, the Company had recognized $17,119,000 of such SEMATECH funding. There are no assurances that the Company will be able to attain the remaining SEMATECH milestones or that SEMATECH will be capable of providing the agreed upon funding. In the event that the Company does not receive the contracted SEMATECH funding for any reason, it would be required to make up 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. Additionally, under the agreements with SEMATECH the Company was obligated to fund, from its own resources, 120% of amounts received from SEMATECH up to $36,000,000. By the first quarter of fiscal 1996, the Company had 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") 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 Stock (which was subsequently converted to Common Stock) 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 obligates the Company to fund, during the five year period ending February 2000, an amount such that the total the Company funds under the agreements with both SEMATECH and the Investors is not less than $25,000,000. The Company believes that at June 30, 1996, it had fulfilled the entire funding obligation under its agreement with the Investors. 13 14 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 June 30, 1996 cash and cash equivalents and temporary investments totaled $297,874,000 compared to the September 30, 1995 total of $180,523,000, an increase of $117,351,000. 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 the first nine months of fiscal 1996 the Company provided SVGL, its 94%-owned subsidiary, with approximately $15,700,000 in funding, all of which was recorded as intercompany loans. The Company believes that for the foreseeable future it will have to continue providing SVGL with a significant amount of funding. In connection with its acquisition of SVGL in 1990, the Company committed to purchase under certain circumstances, additional SVGL securities ("the SVGL Calls") in an amount up to $23,200,000 at any time through May 1997. To the extent the SVGL Calls are not exercised, the Company has the option to purchase up to $15,000,000 of SVGL Common Stock under similar terms. The Company may choose to continue funding SVGL through intercompany loans or it may choose to make an additional equity investment in SVGL. In December 1995, the Company replaced its existing bank credit facility with a $75,000,000 unsecured revolving bank credit agreement which expires in December 1998. Under the new facility, advances will bear interest at either the U.S. prime rate or the LIBOR rate plus 1%. At August 12, 1996, there were no borrowings outstanding under the agreement. The Company believes that it has sufficient working capital and available bank credit to sustain operations and provide for the expansion of its business for the foreseeable future. 14 15 PART II. OTHER INFORMATION SILICON VALLEY GROUP, INC. ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 27. Financial Data Schedule. 15 16 SILICON VALLEY GROUP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SILICON VALLEY GROUP, INC. .......................... (Registrant) Date: August 12, 1996 By:/s/ Papken S. Der Torossian ---------------------------- Papken S. Der Torossian Chief Executive Officer and Chairman of the Board Date: August 12, 1996 By:/s/ Russell G. Weinstock ---------------------------- Russell G. Weinstock Vice President Finance and Chief Financial Officer 16 17 EXHIBIT INDEX 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FOR THIRD QUARTER OF FISCAL 1996 AS FILED IN THE COMPANY'S FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996. 1,000 3-MOS SEP-30-1996 APR-01-1996 JUN-30-1996 253,022 44,852 157,980 4,822 205,300 664,766 117,488 65,299 722,550 187,018 0 0 0 377,509 152,425 722,550 167,858 167,858 96,522 96,522 0 0 82 27,542 9,639 17,596 0 0 0 17,596 0.58 0 MINORITY INTEREST OF 307,000 IS DEDUCTED FROM AFTER-TAX INCOME IN ARRIVING AT NET INCOME OF 17,596,000.
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