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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the period from ________ to ________.
Commission File Number 0-11348
SILICON VALLEY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2264681
(State of incorporation) (IRS Employer Identification No.)
101 METRO DRIVE, SUITE #400, SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices) (Zip Code)
(408) 441-6700
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the Registrant's Common Stock as of
July 30, 1997 was 30,939,216.
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SILICON VALLEY GROUP, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets as of
June 30, 1997 and September 30, 1996 3
Consolidated Condensed Statements of Operations
for the Quarters and the Nine Month Periods
Ended June 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended June 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, September 30,
1997 1996
----------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 151,551 $218,841
Temporary investments 80,358 43,220
Accounts receivable (net of allowance for doubtful
accounts of $6,275 and $6,003, respectively) 130,719 151,011
Inventories 220,095 213,229
Prepaid expenses 8,041 7,227
Deferred taxes 11,645 9,295
--------- --------
Total current assets 602,409 642,823
PROPERTY AND EQUIPMENT - NET 118,682 81,577
DEPOSITS AND OTHER ASSETS 4,424 2,312
INTANGIBLE ASSETS - NET 2,549 2,665
--------- --------
TOTAL $ 728,064 $729,377
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 742 $ 437
Accounts payable 39,569 35,556
Accrued liabilities 128,719 137,526
Income taxes payable 1,700 5,649
--------- --------
Total current liabilities 170,730 179,168
LONG-TERM DEBT AND CAPITAL LEASES 5,913 217
DEFERRED LIABILITIES 3,259 3,338
MINORITY INTEREST -- 4,705
STOCKHOLDERS' EQUITY:
Common Stock - shares outstanding:
June 30, 1997: 30,875,845
September 30, 1996: 30,175,794 391,332 378,033
Retained earnings 157,108 163,916
Net unrealized loss on investments (100) --
Accumulated translation adjustments (178) --
--------- --------
Stockholders' equity 548,162 541,949
--------- --------
TOTAL $ 728,064 $729,377
========= ========
See Notes to Consolidated Condensed Financial Statements
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SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Quarters Ended Nine Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $ 161,138 $ 167,858 $ 425,523 $ 496,806
COST OF SALES 100,250 96,522 264,348 289,655
--------- --------- --------- ---------
GROSS PROFIT 60,888 71,336 161,175 207,151
OPERATING EXPENSES:
Research, development and
related engineering 18,140 17,374 52,906 49,998
Marketing, general and
administrative 35,965 30,042 93,633 86,975
Settlement of royalty obligation -- -- 32,582 --
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 6,783 23,920 (17,946) 70,178
INTEREST AND OTHER INCOME - NET 2,806 3,704 8,111 10,574
INTEREST EXPENSE (148) (82) (341) (334)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST 9,441 27,542 (10,176) 80,418
PROVISION (CREDIT) FOR INCOME TAXES 3,210 9,639 (3,460) 28,146
MINORITY INTEREST -- 307 92 542
--------- --------- --------- ---------
NET INCOME (LOSS) $ 6,231 $ 17,596 $ (6,808) $ 51,730
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE $ 0.20 $ 0.58 $ (0.22) $ 1.69
========= ========= ========= =========
SHARES USED IN PER SHARE
COMPUTATIONS 31,557 30,535 30,458 30,520
========= ========= ========= =========
See Notes to Consolidated Condensed Financial Statements
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SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
June 30,
--------
1997 1996
---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (6,808) $ 51,730
Reconciliation to net cash provided by
operating activities:
Depreciation and amortization 17,977 8,732
Amortization of intangibles 116 116
Settlement of royalty obligation 27,582 --
Deferred income taxes (2,350) (750)
Minority interest 92 545
Changes in assets and liabilities:
Accounts receivable (2,708) (30,309)
Inventories (6,866) (51,327)
Prepaid expenses 1,262 705
Deposits and other assets (57) (794)
Accounts payable 4,013 (1,480)
Accrued and deferred liabilities (8,381) 46,890
Income taxes (3,949) (478)
--------- ---------
Net cash provided by operating activities 19,923 23,580
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of temporary investments (78,789) (88,647)
Maturities of temporary investments 41,551 57,528
Purchase of property and equipment (55,589) (33,302)
Purchase of minority interest in subsidiary (3,000) --
--------- ---------
Net cash used for investing activities (95,827) (64,421)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (499) (668)
Proceeds from borrowings 6,500 --
Sale of Common Stock 3,305 127,957
--------- ---------
Net cash provided by financing activities 9,306 127,289
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (692) (216)
--------- ---------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (67,290) (86,232)
CASH AND EQUIVALENTS:
Beginning of period 218,841 166,790
--------- ---------
End of period $ 151,551 $ 253,022
========= =========
See Notes to Consolidated Condensed Financial Statements
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SILICON VALLEY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been prepared
by the Company without audit and reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the financial position
and the results of operations for the interim periods. The statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosures necessary to
present the statements in accordance with generally accepted accounting
principles. For further information, refer to the Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report on Form
10-K for the year ended September 30, 1996. Results for fiscal 1997 interim
periods are not necessarily indicative of results to be expected for the fiscal
year ending September 30, 1997.
2. INVENTORIES
Inventories are comprised of (in thousands):
June 30, September 30,
1997 1996
---- ----
(Unaudited)
Raw materials $ 89,611 $103,993
Work-in-process 125,154 101,293
Finished goods 5,330 7,943
-------- --------
$220,095 $213,229
======== ========
3. ACQUISITION OF SVGL MINORITY INTEREST
On March 18, 1997, the Company purchased IBM's 6% equity interest in
SVGL for $3,000,000. As a result, the Company now accounts for SVGL as
a wholly-owned subsidiary.
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SILICON VALLEY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4. SETTLEMENT OF ROYALTY OBLIGATION
Under the terms of a research and development agreement, SVGL owed IBM
certain royalties based on future operating results. On March 18, 1997,
the Company satisfied this royalty payment to IBM in exchange for
$5,000,000 in cash, 489,296 shares of Common Stock valued at
$10,000,000 and $23,000,000 in SVGL product. Of the $38,000,000 total,
$32,582,000 related to products currently under development and was
recognized as an expense in the second quarter of fiscal 1997, and
$5,418,000 related to existing products and was recorded as a
prepayment which will be amortized to expense through fiscal year 2000
in proportion to the related product sales. Through June 30, 1997, such
amortization was not significant.
5. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). The Company is required to adopt SFAS 128 in the
first quarter of fiscal 1998 and will restate at that time earnings per
share (EPS) data for prior periods to conform with SFAS 128. Earlier
application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes dilution
and is computed by dividing net income by the weighted average of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year
periods, basic EPS would have been $(0.20) and $0.58 for the quarters
ended June 30, 1997 and 1996, respectively, and $(0.20) and $1.89 for
the year to date periods, respectively. Diluted EPS under SFAS 128
would not have been significantly different than EPS currently reported
for the periods.
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SILICON VALLEY GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
certain risks and uncertainties, including those discussed below, as well as
risk factors included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996, that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Forward-looking statements are indicated by an asterisk (*) following
the sentence in which such statement is made. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company designs, manufactures, markets and services semiconductor processing
equipment used in the fabrication of integrated circuits. The Company's products
are used in photolithography for exposure and photoresist processing, and in
deposition for oxidation/diffusion and low pressure chemical vapor deposition
(LPCVD). The Company manufactures and markets its photolithography exposure
products through its subsidiary, SVG Lithography Systems, Inc. (SVGL), its
photoresist processing products through its PhotoProcess Division, formerly the
Track Systems Division, (Track), and its oxidation/diffusion and LPCVD products
through its Thermco Systems Division (Thermco).
The semiconductor industry into which the Company sells its products is highly
cyclical and has, historically, experienced periodic downturns which have had a
severe effect on the semiconductor industry's demand for semiconductor
processing equipment. During the first quarter of calendar 1996 (the Company's
second fiscal quarter), the growth rate of the worldwide semiconductor industry,
measured in terms of its book-to-bill ratio, declined. From March 1996 through
March 1997, the Company's quarterly customer order bookings (bookings) were
substantially below first half fiscal 1996 levels and did not improve
significantly until the third quarter of fiscal 1997. In addition to the
decreased level of bookings, the Company experienced customer deferrals of
scheduled equipment delivery dates and, to a lesser extent, customer order
cancellations. As a result of such lower bookings, the Company believes that
fiscal 1997 shipments will be lower than fiscal 1996 levels.* Further, there can
be no assurance that the Company will not again experience customer delivery
deferrals, order cancellations or a prolonged period of customer orders at
reduced levels, any or a combination of which would have an adverse effect on
its operating results.*
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
experienced by 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
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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. During the first nine months
of fiscal 1997, a similar trend existed with two customers accounting for 56% of
the Company's net sales, the largest representing 29% of the total. The loss of
any significant customer, including but not limited to the two largest
customers, delays in shipments due to rescheduling or reductions in orders by a
significant customer, 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, 1997 were $161,138,000, a
15% increase from net sales of $140,701,000 for the preceding quarter, but 4%
below net sales of $167,858,000 for the third quarter of fiscal 1996. For the
first nine months of fiscal 1997, net sales were $425,523,000, down 14% from net
sales of $496,806,000 during the first nine months of fiscal 1996. Comparing the
third and second quarters of fiscal 1997, the increase in net sales resulted
from higher shipments of SVGL and Track products offset in part by decreased
shipments of Thermco products. In comparing both the third quarter and first
nine months of fiscal 1997 to the corresponding periods of fiscal 1996, the
lower net sales were due to lower shipments of Thermco and Track products offset
in part by increased shipments of SVGL products.
During the third quarter of fiscal 1997, the Company recorded bookings of
$162,298,000 (which represented a book-to-bill ratio of 1.01 to 1). Such
bookings are net of the Company's reversal of a $26,098,000 order from Submicron
Technology PLC, a Thailand company that is experiencing severe financial
difficulties. The third quarter fiscal 1997 bookings were significantly higher
than the bookings for both the year-earlier quarter of $136,623,000 (which
represented a book-to-bill ratio of 0.81 to 1) and the preceding quarter of
$127,726,000 (which represented a book-to-bill ratio of 0.91 to 1). At June 30,
1997, the Company had a backlog of $384,302,000, down slightly from the
September 30, 1996 backlog of $394,589,000. The Company includes in backlog only
those orders to which a purchase order number has been assigned by the customer,
with all terms and conditions agreed upon and for which delivery has been
specified within twelve months. At June 30, 1997, the backlog included orders
for 39 Micrascan photolithography systems. In addition to the systems included
in backlog, SVGL had orders for 13 systems with scheduled delivery dates outside
the twelve month backlog window, including orders for six advanced technology
193 nanometer Micrascan systems currently under development.
Gross margin was 38% in both the third and second quarters of fiscal 1997 and
was 42% in the third quarter of fiscal 1996. For the first nine months of fiscal
1997, gross margin was 38% compared to 42% for the same period of fiscal 1996.
During the third and second quarters of fiscal 1997, gross margins were impacted
by costs associated with Track's most recent generation product, the 200APS.
Shipments of 200APS systems were to commence during the second quarter of fiscal
1997, but have been delayed by approximately nine to twelve months.* In
comparing both the third quarter and first nine months of fiscal 1997 to the
corresponding periods of fiscal 1996, the lower gross margin was primarily due
to reduced volumes in Track and Thermco and the costs related to Track's 200APS
product discussed above, offset in part by increased SVGL margin. The
improvement in the SVGL gross margin compared to the year earlier periods
resulted primarily from the mix of Micrascan photolithography systems shipped as
well as increased manufacturing volumes and efficiencies related to Micrascan
systems.
Research, development and related engineering (R&D) expense was $18,140,000 (11%
of net sales) during the third quarter of fiscal 1997, $17,176,000 (12% of net
sales) during the preceding quarter and $17,374,000 (10% of net sales) during
the third quarter of fiscal 1996. The Company's R&D expenditures are net of
funding received from outside parties under development agreements. During the
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third and second quarters of fiscal 1997 such funding totaled $2,777,000 and
$1,550,000, respectively. During the third quarter of fiscal 1996, the outside
funding was negligible. While the amount of R&D was relatively comparable in
each of the three quarters, the Company expects that multiple lithography
development programs, efforts in all of the product groups to design equipment
capable of processing the next generation 300mm wafer and costs associated with
Track's 200APS program will result in increased R&D expenditures during the
fourth quarter of fiscal 1997.*
Through the first nine months of fiscal 1997 R&D was $52,906,000, compared to
$49,998,000 during the first nine months of fiscal 1996. Such R&D amounts are
net of funding recognized under joint development agreements of $4,963,000 and
$4,157,000 during the fiscal 1997 and fiscal 1996 periods, respectively. In
comparison to the year-earlier period, the increase was primarily due to new
product development at SVGL and costs associated with Track's 200APS program,
offset in part by reduced spending at Thermco.
During the second-half of calendar 1996, the Company sold approximately
$20,000,000 in product to Submicron Technology PLC (SMT), a newly established
semiconductor foundry in Thailand. SMT paid the Company approximately
$14,000,000 before encountering severe financial difficulties. During the third
quarter of fiscal 1997, the Company determined that the remaining receivable
from SMT was uncollectible and recorded a bad debt loss of $6,000,000. In
connection with the sale to SMT, the Company had accrued costs of approximately
$2,000,000 for the installation and warranty of the systems sold to SMT, but had
yet to commence such efforts. These accrued costs were reversed at the time the
bad debt loss was recognized, resulting in a net effect on the Company's fiscal
1997 second quarter and nine-month operating results of approximately $4,000,000
(the SMT Charge).
Marketing, general and administrative expenses (MG&A) were $35,965,000 (22% of
net sales) during the third quarter of fiscal 1997, compared to expenditures of
$30,505,000 (22% of net sales) during the preceding quarter and $30,042,000 (18%
of net sales) during the third quarter of fiscal 1996. The increase in MG&A
between the third and second quarters of fiscal 1997 was primarily due to the
SMT Charge and the amortization of certain prepaid royalties related to a
transaction with IBM which is discussed below. The increase over the
year-earlier quarter was principally the result of the SMT Charge, the expansion
of the Company's sales and marketing functions, costs incurred by SVGL to expand
its technical customer training and support functions and costs incurred by
Thermco related to its international installed base. The increase in MG&A as a
percentage of net sales compared to the year-earlier quarter was primarily the
result of the SMT Charge.
During the first nine months of fiscal 1997 MG&A was $93,633,000 (22% of net
sales), up from $86,975,000 (18% of net sales) during same period of fiscal
1996. The increase in MG&A over the year-earlier period was the result of the
same factors discussed in the year to year quarterly comparison above, including
the SMT Charge, except that such increases were offset in part by reductions in
certain costs due to the lower level of Track and Thermco shipments during the
first nine months of fiscal 1997. The increase in MG&A as a percentage of net
sales during the first nine months of fiscal 1997 was partially due to lower net
sales during the 1997 period.
Under the terms of a research and development agreement, SVGL owed IBM certain
royalties based on future operating results. During the second quarter of fiscal
1997, the Company satisfied its obligation, recognized an expense of $32,582,000
which represented royalties related to products currently under development, and
recorded a prepayment of $5,418,000 which represented royalties related to
existing products which is being amortized to MG&A through fiscal 2000, in
proportion to the related product sales.
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During the third quarter of fiscal 1997, the Company had operating income of
$6,783,000, compared to an operating loss of $27,461,000 for the preceding
quarter and operating income of $23,920,000 during the third quarter of fiscal
1996. For the first nine months of fiscal 1997, the Company had an operating
loss of $17,946,000, compared to operating income of $70,178,000 for the
corresponding period of fiscal 1996. The fiscal 1997 second quarter and nine
month operating losses were the result of the royalty settlement discussed
above. Without giving effect to the royalty settlement discussed above, the
Company would have had operating income for the second fiscal quarter and first
nine months of fiscal 1997 respectively, of $5,121,000 and $14,636,000.
Interest and other income was $2,806,000 during the third quarter of fiscal 1997
compared to $2,629,000 for the preceding quarter and $3,704,000 for the
year-earlier quarter. For the first nine months of fiscal 1997, interest and
other income was $8,111,000 compared to $10,574,000 for the first nine months of
fiscal 1996. Compared to the year-earlier periods, the decrease in third quarter
and nine-month fiscal 1997 interest and other income was primarily the result of
a significantly greater percentage of the Company's investment portfolio
consisting of tax-free and tax-advantaged instruments which have lower pre-tax
yields than taxable instruments and lower cash balances available for
investment. The Company invests in tax-free and tax-advantaged instruments when
the after-tax yields on such instruments are higher than those on taxable
instruments.
Interest expense was not material during the first nine months of fiscal 1997 or
fiscal 1996.
The Company recorded a 34% provision for income taxes for the first nine months
of fiscal 1997, compared to a 35% provision for all of fiscal 1996. Variations
in the Company's effective tax rate relate primarily to changes in the
geographic distribution of its pretax income.
The minority interest represented that share of SVGL's operating results which
were attributable to its minority shareholder, IBM. In March 1997, the Company
purchased IBM's interest in SVGL for $3,000,000. The Company now accounts for
SVGL as a wholly-owned subsidiary and there is no longer a minority interest.
For the second quarter of fiscal 1997, minority interest was recorded from the
beginning of the quarter through the date the Company purchased IBM's interest
and represented an addition to income of $102,000. For the third quarter of
fiscal 1996, minority interest represented a $307,000 reduction from income. For
the first nine months of fiscal 1997 and 1996, minority interest represented
reductions from income of $92,000 and $542,000, respectively.
For the third quarter of fiscal 1997 the Company had net income of $6,231,000
($0.20 per share), compared to a net loss of $16,370,000 ($0.54 per share) for
the second quarter of fiscal 1997 and net income of $17,596,000 ($0.58 per
share) for the third quarter of fiscal 1996. For the first nine months of fiscal
1997, the Company had a net loss of $6,808,000 ($0.22 per share), compared to
net income of $51,730,000 ($1.69 per share) for the first nine months of fiscal
1996.
FLUCTUATIONS IN QUARTERLY RESULTS, DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND
GEOGRAPHIC MARKET PENETRATION
The Company has, at times during its existence, experienced quarterly
fluctuations in its operating results. Due to the relatively small number of
systems sold during each fiscal quarter and the relatively high revenue per
system, customer order rescheduling or cancellations, or production or shipping
delays can significantly affect quarterly revenues and profitability. The
Company has experienced, and may again experience, quarters during which a
substantial portion of the Company's net sales are realized near the end of the
quarter.* Accordingly, delays in shipments near the end of a quarter can cause
quarterly net sales to fall short of anticipated levels. Since most of the
Company's expenses are fixed in
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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 domestic and international sales, activities
of competitors, acquisitions, international events, and difficulties obtaining
materials or components on a timely basis.* In light of these factors, the
Company is likely to continue to experience variability in quarterly operating
results.*
Semiconductor manufacturing equipment and processes are subject to rapid
technological change. The Company believes that its future success will depend
in part upon its ability to continue to enhance its existing products and their
process capabilities and to develop and manufacture new products with improved
process capabilities that enable semiconductor manufacturers to fabricate
semiconductors more efficiently.* Additionally, the Company believes that it
will have to develop products capable of processing 300mm wafers as advanced
semiconductor manufacturers progress from the current 200mm wafer standard.*
Failure to successfully introduce new products in a timely manner could result
in the loss of competitive position and reduce sales of existing products.* In
addition, new product introductions could contribute to quarterly fluctuations
in operating results as orders for new products commence and increase the
potential for a decline in orders of existing products, particularly if new
products are delayed.*
During fiscal 1996, the Company introduced new products in all three of its
product groups for shipment in fiscal 1997. From time-to-time, the Company has
experienced difficulty in effecting transitions to new products or in ramping up
production and, consequently, has suffered delays in product deliveries. There
can be no assurance that the Company will not experience manufacturing problems
as a result of capacity constraints or ramping up production by upgrading or
expanding existing operations.* These issues could result in product delivery
delays and a subsequent loss of future sales.* Semiconductor manufacturers tend
to select either a single supplier or a primary supplier for a certain type of
equipment. The Company believes that prolonged delays in delivering initial
quantities of newly developed products to multiple customers, whether due to the
protracted release of product from engineering into manufacturing or due to
manufacturing difficulties, could result in semiconductor manufacturers electing
to install competitive equipment in their fabrication facilities and could
preclude industry acceptance of the Company's products.* Therefore, the
inability to effect the timely production of such products or any failure to
achieve market acceptance could have a material adverse effect on the Company's
business and results of operations.*
Historically, the unit cost of the Company's products has been the highest when
they are newly introduced into production and cost reductions have come over
time through engineering improvements, economies of scale and improvements in
the manufacturing process. As a result, new products have, at times, had an
unfavorable impact on the Company's gross margins and results of operations.
There can be no assurance that the initial shipments of new products will not
have an adverse effect on the Company's profitability or that the Company will
be able to attain design improvements, manufacturing efficiencies or
manufacturing process improvements over time which will increase profitability.*
Further, the potential unfavorable effect of newly introduced products on
profitability can be exacerbated when there is intense price competition in the
marketplace.*
The semiconductor equipment industry is intensely competitive. The Company faces
substantial competition both in the United States and other countries in all of
its products. Significant competitive factors include product performance and
reliability, familiarity with particular manufacturers' products, established
relationships between suppliers and customers, particulate contamination
control, product
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availability and, particularly in recent months, intense price competition. Many
of the Company's competitors are Japanese corporations. With the strength of the
U.S. Dollar in relation to the Japanese yen, the Company's ability to compete on
the basis of price has been impaired.
The Company's customers are heavily concentrated in the United States and
Europe. The Japanese and Pacific Rim markets (including fabrication plants
located in other parts of the world which are operated by Japanese and Pacific
Rim semiconductor manufacturers) represent a substantial portion of the overall
market for semiconductor manufacturing equipment. Further, in many instances,
Japanese and Pacific Rim semiconductor manufacturers fabricate devices such as
DRAMs, with potentially different economic cycles than those affecting the sales
of devices manufactured by the majority of the Company's U.S. and European
customers. To date neither the Company's shipments into Japan nor into the
Pacific Rim have been significant. The Company believes that it must
substantially increase its share of these markets if it is to compete as an
industry leader.* Failure to secure customers in these markets may limit the
global market share available to the Company and may increase the Company's
vulnerability to industry or geographic downturns.*
In the past, several of the Company's larger customers have entered into joint
ventures (JV) with European, Japanese or Pacific Rim semiconductor
manufacturers. In such cases, the Company has encountered intense price
competition from foreign competitors who are suppliers to the non-U.S. member of
the JV. Further, in certain instances the Company has not secured the equipment
order when the non-U.S. member has had the responsibility for selecting the
equipment to be used by the JV in its U.S. operations. There can be no assurance
that as the Company's customers form additional alliances, whether in the U.S.
or in other parts of the world, that the Company will be successful in obtaining
equipment orders or that it will be able to obtain orders with sufficient gross
margin to assure a profitable transaction, either of which could have an adverse
effect on the Company's results of operations.*
In order to expand its market share in the Pacific Rim, the Company has begun
investing in the staffing and facilities necessary to sell, service and support
customers, primarily in Korea and intends commence such investments in Taiwan.*
Throughout the Pacific Rim, the Company will be competing with established
equipment suppliers with significant market share and anticipates that it will
encounter significant price competition as well as competition based on
technological ability.* There can be no assurance that the Company's Pacific Rim
operations will be profitable, even if it is successful in obtaining significant
sales into this region.*
SVG LITHOGRAPHY SYSTEMS, INC. (SVGL)
The Company believes that the photolithography exposure equipment market is one
of the largest segments of the semiconductor processing equipment industry and
that SVGL's Micrascan II family of photolithography systems, capable of printing
line widths as fine as .30 micron, are currently the most technically advanced
step-and-scan machines shipping in multiple quantities to global semiconductor
manufacturers.* In addition, SVGL is shipping lamp-based Micrascan QML systems,
which are capable of printing isolated .25 micron line widths, and laser-based
Micrascan III systems capable of printing .25 micron line widths.* The Company
believes that advanced semiconductor manufacturers are beginning to require
volume quantities of production equipment as advanced as the current and pending
versions of Micrascan.* The Company also believes that the transition to deep
ultraviolet (DUV) step-and-scan systems will accelerate in calendar 1998.* 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
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Company expects.* Additionally, competitive equipment capable of producing .25
micron line widths using step-and-scan technology is currently available in
limited quantities from one competitor, and the Company believes that at least
two other manufacturers of advanced photolithography systems will begin shipping
competitive machines in the near future.*
The Company believes that advanced logic devices and DRAMs will require
increasingly finer line widths.* The ability to maintain technological
leadership is critical to SVGL's success and it must continue to develop
advanced technology equipment capable of meeting manufacturers' requirements.*
In particular, the Company believes that it must continue its development of
future systems capable of printing line widths finer than .25 micron.*
The Company believes that its ability to supply systems in volume will be a
major factor in customer decisions to commit to the Micrascan technology.*
During fiscal 1996, the Company began implementing a program to expand SVGL's
manufacturing capacity to meet potential future demand for its advanced
photolithography systems.* As part of the expansion program, the Company
purchased both the existing SVGL facility and a second building to provide
immediate and longer-term expansion capability. During the first nine months of
fiscal 1997, the Company has invested in significant further capital
improvements related to the facilities and the equipment required to expand the
production capabilities of SVGL and expects such expenditures to continue during
the fourth quarter.*
The time required to build a Micrascan system is significant. If SVGL is to be
successful in supplying increased quantities of Micrascan systems, it will not
only need to be able to build more systems, it will need to build them faster.*
SVGL will require trained personnel and additional raw materials and components,
as well as improved manufacturing and testing techniques to both facilitate
volume and shorten manufacturing cycle time.* To that end, SVGL is continuing to
develop its vendor supply infrastructure, increase its staffing levels and
implement manufacturing improvements to meet expected 1997 and 1998 shipment
volumes. Additionally, the Company must increase its field service and technical
support organization staffing and infrastructure to support the anticipated
customer requirements. There can be no assurance that the Company will not
experience manufacturing difficulties or encounter problems in its attempt to
increase production and upgrade or expand existing operations.
One of the most critical components of the Micrascan systems are the projection
optics, which are primarily manufactured by SVGL. As part of its overall
investment in capacity, the Company is increasing SVGL's optical manufacturing
floor space and procuring metrology equipment and test stands. The Company
believes that in order for SVGL to attain it goals, it must be successfully
reduce the cycle times required to build projection optics and increase the
optical manufacturing output.*
The Company purchases the raw materials for the optics from a single supplier
with which it has a long-term supply agreement. The agreement specifies
quantities of material that increase over time. Additionally, the supplier is
obligated to create and store certain defined quantities of safety stock. There
can be no assurance that the supplier will be able to supply the quantities of
material specified in the agreement. If the supplier were unable to meet its
increasing commitments, SVGL would be unable to manufacture the quantity of
systems required to meet the anticipated future demand, which would have a
material adverse effect on the Company's business and results of operations.
The Company believes that protracted delays in delivering quantities of both
current and future generations of Micrascan products to multiple customers could
result in semiconductor manufacturers electing to install competitive equipment
in their advanced fabrication facilities, which could preclude industry
acceptance of the Micrascan technology and products.* In addition, the Company's
operating
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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 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 $17,500,000 of funding for the development of Micrascan
technology and $4,500,000 to be utilized to increase SVGL's manufacturing
capability and capacity. During the quarter ended June 30, 1997, $250,000 of
such development funding was recognized and represented all of the remaining
development funding available under the SEMATECH agreements.
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 June 30, 1997, the Company had received $13,000,000 in funding
from six Participants, of which $5,098,000 had been recognized and offset
against R&D expenditures. In March 1997, one participant withdrew from the
program. There can be no assurances that the other Participants will remain in
the program.* In the event that the Company does not receive the funding
anticipated under the agreements, it would be required to replace the shortfall
from its own funds or other sources. If the Company were required to use its own
funds, its research and development expenses would increase and its operating
income would be reduced correspondingly. The agreements with the Participants
stipulate that if the Company receives funding for the development program in
excess of $25,000,000, it will issue, ratably to the Participants, credits
totaling such excess in the form of a cash discount which can be applied to the
purchase of additional systems by each Participant. There is no assurance that
the Company will receive all funding which it currently anticipates or that it
will be able to obtain future outside funding beyond that which it is currently
receiving.
While the recent volume of orders for Micrascan systems has been relatively
consistent and encouraging, they are not necessarily indicative of industry-wide
acceptance of the Micrascan technology. If SVGL is to attain its goal of being a
volume supplier of advanced photolithography systems, the Company believes that
it must expand its customer base to include additional customers from whom it
secures and successfully fulfills orders for production-quantities of Micrascan
systems.* Although SVGL is profitable, the Company believes that as a result of
costs associated with the continued development of the Micrascan technology, the
expansion of SVGL's manufacturing capacity, the related increase in manpower and
customer support, and the potential difficulties inherent in manufacturing
initial quantities of the .25 micron and sub-.25 micron Micrascan systems, in
particular the projection optics
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required for these systems, there can be no assurance that SVGL will be able to
operate profitably in the future.*
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, cash and cash equivalents and temporary investments totaled
$231,909,000, down $30,152,000 from the September 30, 1996 balance of
$262,061,000. This decrease was primarily due to purchases of property and
equipment to facilitate the expansion of SVGL's manufacturing capacity and
offset in part by cash generated from operations.
As part of an agreement with Connecticut state agencies, the Company, on
February 28, 1997, received a $6,500,000 loan from the Connecticut Development
Authority. The loan has a ten year term, bears interest at 8.25% and is secured
by the Company's Wilton, Connecticut facility which houses certain operations of
SVGL. The Company anticipates that in the near future it will close the
remaining portion of the agreement and will receive a $3,000,000 ten year loan
from the State of Connecticut Department of Economic and Community Development.
This loan is to bear interest at 1% and also be secured by the Company's Wilton,
Connecticut facility.*
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 August 8, 1997, no
Common Stock had been repurchased and the Company had not announced its
intention to commence such repurchases.
The Company has a $75,000,000 unsecured revolving bank credit facility which
expires in December 1999. Advances under the facility bear interest at either
the U.S. prime rate or the LIBOR rate plus 1%. At August 8, 1997, there were no
borrowings outstanding under the facility.
The Company believes that it has sufficient working capital and available bank
credit to sustain operations and provide for the expansion of its business for
the foreseeable future.*
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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.
(b) Reports on Form 8-K
None.
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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 11, 1997 By: /s/ PAPKEN S. DER TOROSSIAN
-----------------------------------
Papken S. Der Torossian
Chief Executive Officer and
Chairman of the Board
Date: August 11, 1997 By: /s/ RUSSELL G. WEINSTOCK
-----------------------------------
Russell G. Weinstock
Vice President Finance and
Chief Financial Officer
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EXHIBIT INDEX
Ex 27 Financial Data Schedule