10-Q 1 f72535e10-q.txt FORM 10-Q QUARTER ENDED MARCH 31, 2001 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 March 31, 2001. or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the period from ________ to ________. Commission File Number 0-11348 SILICON VALLEY GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2264681 (State of incorporation) (IRS Employer Identification No.) 101 METRO DRIVE, SUITE #400, SAN JOSE, CALIFORNIA 95110 (Address of principal executive offices) (Zip Code) (408) 441-6700 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The number of shares outstanding of the Registrant's Common Stock as of April 27, 2001 was 35,366,433. ================================================================================ 2 SILICON VALLEY GROUP, INC. INDEX PART I. FINANCIAL INFORMATION

2 3 PART I. FINANCIAL INFORMATION SILICON VALLEY GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS

See accompanying notes to consolidated condensed financial statements. 3 4 SILICON VALLEY GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes to consolidated condensed financial statements. 4 5 SILICON VALLEY GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying 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 present fairly the financial position and the results of operations for the interim periods. The statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2000. Results for fiscal 2001 interim periods are not necessarily indicative of results to be expected for the fiscal year ending September 30, 2001. The Company uses a 52-53 week fiscal year ending on the Friday closest to September 30. Both fiscal 2001 and 2000 contain 52 weeks. The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries, after elimination of significant intercompany transactions and balances. All operating units are aggregated into one segment because of their similarities in the nature of product and services, production processes, types of customers and distribution method. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated condensed financial statements and accompanying notes. The Company regularly assesses those estimates and, while actual results may differ, management believes that the estimates are reasonable. 2. PENDING MERGER WITH ASM LITHOGRAPHY HOLDING N.V. On October 1, 2000, the Company signed a definitive merger agreement with ASM Lithography Holding N.V. ("ASML"), whereby ASML will acquire the Company in an all stock transaction. Under the terms of the merger agreement, the Company will become a wholly owned subsidiary of ASML, and the Company's stockholders will receive 1.286 ordinary shares of ASML for each share of the Company's common stock. The transaction is intended to be accounted for as a pooling of interests. On November 6, 2000, the Company received early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, clearing the merger for United States antitrust purposes, on February 7, 2001 the stockholders of the Company approved the merger and on May 3, 2001 the Company announced that it reached agreement with the Committee on Foreign Investment in the United States to conclude action under provisions of Section 721 of the Defense Production Act of 1950, also known as the Exon-Florio Amendment. Consummation of the merger remains subject to completion of customary closing conditions. The merger is expected to close before June 1, 2001. 3. INVENTORIES Inventories are comprised of:

6 7 4. NET INCOME PER SHARE Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities to issue common stock (convertible preferred stock and common stock options) were exercised or converted into common stock. Weighted average options to purchase 1,561,000 shares of common stock at a weighted average exercise price of $31.10 per share were outstanding at March 31, 2001 but were not included in the computation of diluted earnings per share because their exercise price exceeded the market price and therefore, the effect would be antidilutive. The following table sets forth the computation of basic and diluted net income per share:

5. REVENUE RECOGNITION The Company recognizes revenue from sales of products based on existing technologies when the customer takes title to the product, generally at the time of shipment. Costs to install equipment in the customers' facilities are accrued at the time the product revenue is recognized. The Company recognizes revenue prior to installation as the installation costs, and the related estimated fair value, are insignificant relative to the sales price and gross profit of the transaction. In addition, the Company has a long history of successful installations within a short timeframe of delivery and the cost to complete installation does not vary materially from one instance to another. Revenue is deferred on initial shipments of new products based on new technologies until after customer acceptance. During the quarters ended March 31, 2001 and 2000, the Company recognized net sales of approximately $4,000,000 and $18,000,000 from a customer who accepted and took title to the related equipment and agreed to normal payment terms, but requested that the Company store the equipment until future shipment dates. At March 31, 2001 the Company was storing approximately $10,000,000 of such equipment with scheduled shipment dates through May 2001. Product liability and installation costs are accrued in the period that sales are recognized. 6. COMPREHENSIVE INCOME 7 8 Components of comprehensive income include net income, unrealized gains (losses) on investments, unrealized gains (losses) on derivatives and foreign currency translation adjustments. For the quarters and six months ended March 31, 2001 and 2000, the components of total comprehensive income are as follows:

7. DERIVATIVE FINANCIAL INSTRUMENTS Effective October 1, 1999, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative financial instruments be recognized in the financial statements and measured at fair value. Changes in the fair value are recognized periodically in either income or stockholders' equity as a component of comprehensive income (loss), depending on whether the derivative is being used to hedge changes in fair value or cash flows. The adoption of SFAS 133 did not have a material effect on the Company's financial results. The Company principally uses derivative financial instruments to manage foreign exchange and interest rate risks. The Company's risk management policy is to enter into such contracts only when pre-existing or probable risk exists that the Company wishes to reduce or eliminate. No derivative contracts are entered into for speculative purposes. There were no gains or losses due to hedge ineffectiveness for the quarters ended March 31, 2001 and 2000. 8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements of all public registrants. SAB 101, as amended, requires implementation by the Company no later than the fourth quarter of fiscal 2001. Accordingly, any revenues that do not meet SAB 101's guidance will be deferred and recorded as revenue in future periods, including such revenue previously reported for the first three quarters of fiscal 2001 that do not meet the criteria of SAB 101. Changes in the Company's revenue recognition policy resulting from the implementation of SAB 101 would be reported as a change in accounting principle as of October 1, 2000. Management is currently evaluating the potential effect of the implementation of SAB 101 on the financial condition and results of its operations. Management believes that the impact of implementing SAB 101 will not effect the fundamental aspects of the Company's operations as measured by shipments and cash flows. 8 9 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, 2000, 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 semiconductor equipment industry is a cyclical business frequently affected by oversupply of product from our customers, progression of equipment technology, global and or regional economic events and other factors. During the quarter, customer cancellations and rescheduling impacted all of our product sectors, but most significantly our lithography segment resulting in a significant decline in sales and backlog. There is concern for the strength of semiconductor and semiconductor equipment business during the remainder of our fiscal year. However, this belief is a forward-looking statement subject to a number of risks and uncertainties, and we can not assure you that the semiconductor industry will not experience a prolonged period of order reschedules and cancellations or contraction, which could negatively impact our growth, profitability and shipments beyond fiscal 2001.* Please review the section entitled "Risks Inherent in Our Business" for a discussion of the factors which could impact industry strength and our profitability. On October 2, 2000, we announced that we had entered into an Agreement and Plan of Merger with ASM Lithography, Inc. ("ASML"). To date, we have received early termination of the Hart-Scott-Rodino antitrust waiting period, approval by our stockholders of the merger and regulatory approval related to the Exon-Florio amendments to the Defense Production Act of 1950. We expect to complete the transaction with ASML before June 1, 2001. Completion of the transaction is subject to certain customary closing conditions and we cannot assure you that we will be able to timely or successfully complete the merger. NET SALES Our net sales for the second fiscal quarter ended March 31, 2001 were $208,865,000, an increase of 2% over second quarter net sales for the preceding fiscal year of $204,596,000 and a decrease of 18% from first quarter fiscal 2001 sales of $255,048,000. During the first six months of fiscal 2001, net sales of $463,913,000 increased 21% over net sales of $384,397,000 during the comparable period of fiscal 2000. The increase in net sales compared to the second quarter of fiscal 2000 is primarily the result of increased shipments of Track and Thermal 9 10 products, offset by decreased Lithography sales. The decrease in net sales from the prior quarter is principally the result of decreased Lithography and Thermal shipments resulting from reduced customer requirements. The increase in net sales for the six months ended March 31, 2001 compared to the prior year period is due to increased shipments of Lithography, Track and Thermal products. Our international net sales (based on shipment destination) as a percentage of total net sales for the quarters ended March 31, 2001, March 31, 2000 and December 31, 2000 were 38%, 50% and 28%, respectively. The decrease in our international net sales as a percentage of net sales during the second quarter of fiscal 2001 compared to the second quarter of 2000 primarily relates to increased domestic shipments combined with reduced international shipments resulting primarily from a reduction of lithography product shipments into Europe. During the quarters ended March 31, 2001 and December 31, 2000, we recognized approximately $4,000,000 and $31,000,000 respectively of net sales to one customer who accepted and took title to the related equipment, and agreed to normal payment terms, but requested that we store the equipment until predetermined shipment dates ($18,000,000 during the quarter March 31, 2000). At March 31, 2001, we were storing approximately $10,000,000 of such equipment from this customer. The customer has scheduled the shipment dates for this equipment through May 2001. We rely on a few customers for a substantial percentage of our net sales. For the six months ended Mach 31, 2001, our largest customer accounted for 57% of net sales compared to 49% for the six months ended in fiscal 2000. We believe for the foreseeable future we will continue to rely on a few major customers for a substantial percentage of our net sales.* BOOKINGS New bookings during the second quarter of fiscal 2001 were $219,177,000, a 28% decrease from new bookings of $305,693,000 during the second quarter of fiscal 2000 and a 6% decrease from new bookings of $232,256,000 during our preceding quarter. Our backlog at March 31, 2001 was $419,556,000 compared to $483,789,000 at March 31, 2000 and $681,150,000 at December 31, 2000. Our backlog at March 31, 2001 is net of customer cancellations of approximately $232,000,000, a portion of which were replaced by new orders from the same customer, and net of customer shipment rescheduling beyond twelve months of approximately $40,000,000. Our backlog consists of only those orders to which a purchase order number has been assigned by our customer, with substantially all of the terms and conditions agreed upon and for which delivery has been specified within twelve months. Our backlog at March 31, 2001 includes orders for 37 Micrascan photolithography systems. Additionally, we have orders for 14 Micrascan systems with scheduled delivery dates outside our twelve-month backlog window. GROSS MARGIN Our gross margin was 37% during the second quarter of fiscal year 2001 and 43% for the second quarter of fiscal 2000, compared to 42% during the first quarter of fiscal 2001. During the first six months of fiscal 2001, gross margin was 40% compared to 43% during the comparable period of fiscal 2000. The decline in our gross margin during the quarter and six month periods ended March 31, 2001 when compared to our gross margin during the first quarter of fiscal 2001 and the comparable periods ended March 31, 2000 is primarily the result of decreased gross profit on Lithography products resulting from reduced volume and increased material related costs, and increased inventory costs on Thermal products. RESEARCH AND DEVELOPMENT 10 11 Our research, development and related engineering ("R&D") expenses consist primarily of personnel, material and outside contract costs associated with our product development activities and are net of funding we receive from outside parties under various development agreements. Funding is typically payable upon our attainment of one or more development milestones specified in the agreement. Neither our spending, nor our recognition of the funding related to the development milestones is ratable over the term of the agreements. During the second quarter of fiscal 2001, our R&D expenses were $32,682,000 (16% of net sales), compared to $33,260,000 (16% of net sales) during the year earlier quarter and $34,277,000 (13% of net sales) during the first quarter of fiscal 2001. Such R&D amounts are net of funding we recognized under joint development agreements of $1,355,000 during the second quarter of fiscal 2001, $1,197,000 during the second quarter of fiscal 2000 and $1,242,000 during the first quarter of fiscal 2001. R&D expense decreased from the second quarter of fiscal 2000 and the first quarter of fiscal 2001 primarily due to slightly reduced spending on lithography development programs. The fluctuation in R&D as a percentage of net sales primarily reflects the changes in period-to-period net sales. Our R&D expense for the six months ended March 31, 2001 was $66,959,000 or 14% of net sales compared to $63,399,000 or 16% of net sales for the same period of the prior fiscal year. We recognized under joint development agreements and offset against R&D expenditures $2,597,000 for the six-month period ended March 31, 2001 and $3,567,000 for the six month period ended March 31, 2000. R&D expense increased primarily due to increased spending on Track and Thermal engineering initiatives. MARKETING, GENERAL AND ADMINISTRATIVE Our marketing, general and administrative ("MG&A") expenses consist primarily of product support, administrative and selling and marketing costs. MG&A expenses were $40,419,000 (19% of net sales) during the second quarter of fiscal 2001, compared to $40,107,000 (20% of net sales) and $43,295,000 (17% of net sales) during the second quarter of fiscal 2000 and the first quarter of fiscal 2001, respectively. During the six month period ended March 31, 2001, MG&A expenses were $83,714,000 (18% of net sales) compared to $76,499,000 (20% of net sales) at March 31, 2000. The increase in MG&A over the second quarter of the preceding fiscal year is primarily due to increased administration expense off set in part by reduced product support costs. The decrease in our MG&A from the first quarter of fiscal 2001 is primarily the result of lower product support costs resulting from reduced shipments. INTEREST AND OTHER INCOME Interest and other income for our second quarter of fiscal 2001 was $1,388,000 compared to $2,619,000 during the second quarter of fiscal 2000 and $682,000 during the first quarter of fiscal 2001. For the six month period ended March 31, 2001, interest and other income was $2,070,000 compared to $4,909,000 for the comparable period of fiscal 2000. The decrease in interest and other income between the fiscal 2001 and fiscal 2000 periods is primarily due to foreign exchange losses resulting from strengthening of the U.S. dollar against the Japanese Yen and the Euro and lower cash balances available for investment. INTEREST EXPENSE Our interest expense during the second quarter of fiscal 2001 was $220,000 compared to $416,000 during the second quarter of fiscal 2000 and $427,000 during the first quarter of fiscal 2001. During the first six months of fiscal 2001 interest expense was $647,000 compared to $1,129,000. TAX EXPENSE 11 12 We recorded a 28% tax provision during the first six months of fiscal 2001, compared to a 34% provision during the first quarter of fiscal 2001 and a 36% provision for fiscal 2000. Changes in our effective tax rate are due primarily to expected profitability and the geographic distribution of our pretax income. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents and short-term investments at March 31, 2001 totaled $55,538,000, a decrease of $35,401,000 from our December 31, 2000 balance of $90,939,000. Our operating activities consumed $44,180,000 in cash during the six months ended March 31, 2001. Cash utilized in operations result primarily from increased accounts receivable, inventory and deposits and reduced payables offset in part by net income and increased accrued liabilities. We used $21,373,000 in net cash for investing activities during the six months ended March 31, 2001 resulting primarily from capital equipment purchases of $36,013,000 offset in part by maturities of temporary investments of $14,640,000. Net cash provided by financing activities was $10,746,000 during the six months ended March 31, 2001 resulting primarily from proceeds due to the exercise of employee stock options and the Company's employee stock purchase plan. In connection with the proposed merger with ASM Lithography, we would be obligated to make payments under employment agreements with officers totaling approximately $15 million. Certain of these agreements will be replaced and superseded upon completion of the merger. We have an unsecured $150,000,000 bank revolving line of credit agreement. Our line of credit agreement was amended to extend its expiration until September 30, 2001. Advances under the line bear interest at the bank's prime rate or 0.65% to 1.50% over LIBOR. Our agreement, as amended, includes covenants regarding liquidity, profitability, leverage, and coverage of certain charges and minimum net worth and prohibits the payment of cash dividends to our shareholders. We are in compliance with the covenants as amended. At May 14, 2001, we had outstanding borrowings of $50,000,000 and irrevocable letters of credit for $8,000,000 under this line. We believe that we have sufficient working capital and available bank credit to sustain our operations and research and development activities, to the extent such activities are not funded by third parties for the next twelve months.* RISKS INHERENT IN OUR BUSINESS OUR OPERATING RESULTS WILL FLUCTUATE. We have previously experienced quarterly fluctuations in our operating results. Our operating results may in the future vary from quarter to quarter due to a number of factors, not all of which we control. These factors include: - our ability to introduce new products - the mix of our product shipments - our sales volume - our geographic mix of shipments - our competitors' activities - merger and acquisition activity - international events 12 13 - economic conditions affecting our customers' demand - exchange rate fluctuations - difficulties obtaining materials or components on a timely basis Many of these factors are beyond out control and, whether or not we manage these risks effectively, we will likely experience variability in our quarterly operating results in the future. WE RELY ON A FEW CUSTOMERS AND IF WE LOSE ANY OF THESE CUSTOMERS OR IF ANY OF THESE CUSTOMERS CANCEL OR DELAY SHIPMENTS OF OUR PRODUCTS, OUR OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED. We rely on a limited number of customers for the majority of our net sales. Our largest customer accounted for 49% of our net sales in fiscal 2000 and 57% of our net sales for the six month period ended March 31, 2001. We believe that, for the foreseeable future, we will continue to rely on a limited number of customers for the majority of our net sales.* The loss of any single customer can have a large negative impact on our sales. For example, due to the delay and subsequent cancellation of our 200-APS Track product, our largest Track customer decided to purchase systems with similar capabilities from another supplier. We expect that this decision will continue to have a harmful effect on our future Track product sales. If we lose any other significant customers or experience additional reductions in orders by a significant customer for any reason, our business, profitability and our cash flow will be harmed.* The risk of losing a single customer is heightened by the fact that we sell a relatively small number of systems to a few customers during each fiscal quarter at a high per system sales price. Our expenses for the most part are fixed in the short term and are based in part on our expectations for future revenues. As a result, our operating results for a quarter may be impacted because we can not adjust our expenses if: - our customers cancel or reschedule their orders or shipments, - we experience production or shipping delays, - we do not receive anticipated customer orders or - we ship fewer systems than we anticipate WE HAVE SIGNED AN AGREEMENT TO MERGE WITH ASM LITHOGRAPHY HOLDING N.V. AND FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT OUR STOCK PRICE AND FUTURE BUSINESS AND OPERATIONS. On October 2, 2000, we announced the signing of a merger agreement with ASM Lithography Holding N.V. whereby ASM Lithography will acquire us in an all stock transaction. Under the terms of the merger agreement, we will become a wholly owned subsidiary of ASM Lithography, and our stockholders will receive 1.286 ordinary shares of ASM Lithography for each share of our common stock. Completion of the merger is subject to customary closing conditions. We expect the merger to close before June 1, 2001 if all the closing conditions are met.* If the merger is not completed for any reason, we may be subject to a number of material risks, including the following: - if for any reason we decide to terminate the merger, we may be required to pay ASM Lithography a termination fee of $47,000,000, which amounts to approximately 2.75% of the total value of the merger consideration to be received by our stockholders as of the time the merger was publicly announced on October 2, 2000. - the price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the merger will be completed - costs related to the merger, such as legal and accounting fees, must be paid and expensed even if the merger is not completed 13 14 - uncertainty related to the merger may damage relationships with our employees which may adversely affect our ability to attract and retain key personnel - our customers may delay, defer or cancel purchasing decisions. THE SEMICONDUCTOR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE. IF WE DO NOT CONSTANTLY DEVELOP NEW PRODUCTS TO KEEP PACE WITH THE TECHNOLOGICAL CHANGE AND MEET OUR CUSTOMERS' DEMAND WE WILL LOSE CUSTOMERS AND OUR BUSINESS WILL SUFFER. Our products and processes are affected by rapid technological change and can quickly become obsolete. We believe our future success depends on our ability to continue to enhance our existing products and their process capabilities. We must develop and manufacture new products with improved process capabilities that enable our customers to fabricate more advanced semiconductors with increased efficiency. We are developing new technology products in our Track, Thermal and Lithography operations that are expected to be capable of processing or will be able to be upgraded in the field for processing 300mm wafers. Our failure to successfully introduce these or any other new products in a timely manner would result in the loss of our competitive position and could reduce the sale of our existing products.* In addition, new product introductions could contribute to quarterly fluctuations in our operating results as orders for new products commence and increase the potential for a decline in orders of our existing products, particularly if new products are delayed.* We believe that advanced logic devices, DRAMs and ASICs will require increasingly finer line widths.* Therefore, we must continue our development of future systems capable of processing wafers faster, printing line widths finer than .10 micron and processing 300mm wafers at a progressively lower cost of ownership. If we fail to develop the advanced technology required by our customers at progressively lower costs of ownership and supply sufficient quantities to a worldwide customer base we will experience a material adverse impact on our net sales and profitability.* Furthermore, in order for us to continue growing and to meet expected technology requirements of our customers, we must timely introduce, manufacture and obtain sufficient orders of our products. If we are not able to effectively transition from our legacy products to our new products, including 300mm versions, our financial condition and results of operations could be materially harmed. * WE HAVE EXPERIENCED DELAYS IN THE INTRODUCTION OF OUR PRODUCTS WHICH, IN THE PAST, HAVE CAUSED US TO LOSE CUSTOMERS. IF WE EXPERIENCE SIMILAR DELAYS IN THE INTRODUCTION OF OUR FUTURE PRODUCTS, OUR CUSTOMERS MAY DECIDE TO PURCHASE FROM OUR COMPETITORS INSTEAD, AND OUR BUSINESS WILL SUFFER. We have experienced delays in the introduction of new products and product enhancements due to technical, manufacturing and other difficulties and we may experience similar delays in the future. For example, in September 1998, we terminated future development of our previously announced 200-APS Track product and concentrated our efforts on completing the development of our next generation product, the ProCell. During June of 1999 we introduced the ProCell product which we initially shipped to a customer during our third quarter of fiscal 2000. We believe if there are delays in delivering initial quantities of the ProCell product, or any new product to multiple customers, this would result in customers purchasing our competitors' equipment.* This could harm industry acceptance of our ProCell product or any of our products. If we are unable to timely produce the ProCell or any other next generation product or the market does not accept such products, our business and results of operations will be harmed.* In June 1999, five participants withdrew from our 193-nanometer development program and declined delivery of initial tools. These participants withdrew in part due to delays in our product development and due to changes in their technical requirements for our product. We are responding to this change in requirement by accelerating development of a very high numerical aperture version of our 193-nanometer product. Very high numerical aperture or "VHNA" technology is the physical attribute of the lens to achieve higher resolution and smaller line widths. We also are enhancing the VHNA version of our 193 product to optimize cost of ownership and to address 14 15 a broader market. We can not assure you that we will introduce this product on time or that customers will commit to this product for their production needs. If we are unsuccessful in the introduction of this product or in obtaining sufficient orders for this product from our customers, future profitability could be harmed.* Our customers usually select either a single supplier or a primary supplier for their equipment needs. We believe that significant delays in delivering quantities of newly developed products to multiple customers, due to engineering or manufacturing difficulties, could result in our customers electing to purchase our competitors equipment for their production requirements.* Due to the delay and subsequent termination of our 200-APS Track product in September 1998, and delays in our initial shipment of the ProCell until June 2000, our competitors have increased their Track market share. It has become increasingly difficult for us to regain Track market position. Our inability to produce new products on time or any failure of our products to achieve market acceptance could materially harm our business and results of operations.* NEW PRODUCT INTRODUCTIONS ARE FREQUENTLY ACCOMPANIED BY A NEGATIVE IMPACT ON GROSS PROFITS. IF WE FAIL TO SUCCESSFULLY INTRODUCE NEW PRODUCTS OR TO ACHIEVE LONG TERM EFFICIENCIES FOLLOWING THE INTRODUCTION OF NEW PRODUCTS, THEN OUR GROSS PROFITS MAY BE MATERIALLY ADVERSELY AFFECTED IN THE LONG TERM. The unit cost of our products has historically been the highest when they are newly introduced into production and have at times had a negative impact on our gross profit, results of operations and cash flow. Cost reductions and enhancements come over time through: - engineering improvements, - economies of scale, - improvements in our manufacturing process and - improved serviceability of our products. Additionally, the unfavorable effect of new products on profitability and cash flow can be exacerbated when there is intense competition in the marketplace. We can not assure you that initial shipments of our new products will not adversely effect our profit or cash flow or that we will be able to improve our gross profit, results of operations and cash flow.* WE HAVE INVESTED HEAVILY IN OUR 193 NANOMETER MICRASCAN STEP AND SCAN TECHNOLOGY. IF THE MARKET FOR THIS TECHNOLOGY DOES NOT DEVELOP AS WE EXPECT OR IF OUR COMPETITORS PRODUCE 193 NANOMETER TECHNOLOGY MORE TIMELY AND EFFECTIVELY THAN US, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSELY AFFECTED. We believe that the photolithography exposure equipment market is one of the largest segments of the semiconductor processing equipment industry.* The development of a market for our Micrascan step-and-scan photolithography products is highly dependent on the continued trend towards finer line widths in integrated circuits and the ability of our competitors to keep pace with this trend. If these industry trends do not materialize or if we are not able to successfully develop products to meet the demands of the industry, our business will suffer.* We believe that the transition of our customers to step-and-scan systems has accelerated.* We also believe that our customers will require volume quantities of production equipment as advanced as the current and pending versions of our Micrascan to produce both critical and to some degree sub-critical layers of semiconductor devices.* Currently, competitive step-and-scan equipment capable of producing .25 micron line widths and below is available from competitors. Our customer's technological advancements are requiring our products to produce line-widths to satisfy 130-nanometer and 100-nanometer nodes requiring the use of new laser and photoresist technology. We currently have under development a 193-nanometer product to address these requirements which we expect will be available in 2001.* Our current plans are to have machines available as bridge tools, capable of being upgraded on our customer's factory floor from a 200mm to a 300mm machine.* Our business will suffer if demand for our Micrascan Products and our 193-nanometer products in particular, does not develop. This demand may not develop if: - We do not timely and successfully complete development of our 193-nanometer product, - If our competitors high numerical aperture 248-nanometer steppers are able to achieve finer line widths, - If our competitors are successful in timely developing and supplying 193-nanometer products that are more competitive than those we currently are developing, or - Economic conditions of the semiconductor industry delay the trend towards finer line width in integrated circuits. 15 16 WE FACE INTENSE COMPETITION. The semiconductor equipment industry is very competitive. We face substantial competition throughout the world in all of our products. Many of our competitors have greater financial resources than we do. The trend toward consolidation in our industry has made it increasingly important for us to have the financial resources necessary to compete on a worldwide basis across a broad range of product offerings, to fund customer service and support and to invest in both product and process research and development. Significant competitive factors include; - technology, - cost of ownership, a formula that includes: initial price, system throughput and reliability and time to maintain or repair, - familiarity with particular manufacturers' products, - established relationships between suppliers and customers, - product availability and - technological differentiation. We do encounter intense price competition, particularly in Asia and have experienced difficulty establishing new relationships with certain customers who have long-standing relationships with other suppliers. We believe that outside Japan and the Pacific Rim we compete favorably with respect to most of these competitive factors.* We believe we will continue to face severe price competition globally from our competitors, the majority of whom are Japanese corporations.* We may continue to be forced to compete for customers on the basis of reduced prices, which could reduce our net sales and gross margins and adversely impact our cash flow.* IF WE CANNOT SUCCESSFULLY SELL OUR PRODUCTS TO THE JAPANESE AND PACIFIC RIM MARKETS OUR MARKET SHARE AND FUTURE GROWTH WILL SUFFER Historically our customers have been 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 or their partners) represent a large portion of the overall market for our products. We believe that our Japanese competitors have a significant advantage resulting from their dominance of the Japanese and Pacific Rim semiconductor equipment market.* This advantage provides our competitors with the sales and technology base to compete more effectively throughout the rest of the world. As we are not engaged in any significant collaborative effort with any Japanese or Pacific Rim semiconductor manufacturers we may be at a competitive disadvantage to our Japanese competitors who are engaged in collaborative efforts with such semiconductor manufacturers. To date we have not had significant success in penetrating either of these markets particularly with our photolithography equipment. We believe that for us to succeed in the long term we must substantially increase our share of the Japanese and Pacific Rim markets if we are to compete as a global supplier.* Further, in many instances, Japanese and Pacific Rim semiconductor manufacturers fabricate devices such as dynamic random access memory devices with potentially different economic cycles than those affecting the sales of devices manufactured by the majority of our U.S. and European customers. If we fail to gain customers in these markets it may limit the worldwide market share available to us and increase our risk of industry or geographic downturns and would adversely affect our business.* 16 17 We are attempting to compete throughout the Pacific Rim against competitors having greater market share and more established service and support infrastructures. We have invested in the staffing and facilities we believe are necessary to sell, service and support customers in the Pacific Rim including a 36,000 square foot customer demonstration facility in Kawasaki City, Japan. However, we anticipate that we will continue to face significant price and technological competition.* There can be no assurance that our Pacific Rim operations will be profitable, even if we are successful in obtaining significant sales into this region.* We are focused on increasing our penetration into Korea and Taiwan, but to date have had limited success in securing volume orders from customers in this area. Many of our customers, who often have long standing relationships with our competitors, are outsourcing their manufacturing to foundries located in Taiwan. If we are not successful in selling into these markets, it could have a harmful effect on our net sales, profitability and cash flow.* IF WE DO NOT SUCCESSFULLY INTEGRATE THE SEMICONDUCTOR EQUIPMENT GROUP WE PURCHASED FROM WATKINS-JOHNSON COMPANY, OUR NET SALES, PROFITABILITY AND CASH FLOW COULD BE HARMED. We completed our acquisition of the Semiconductor Equipment Group of Watkins-Johnson on July 6, 1999. We may not realize the intended benefits from the acquisition due to the following: - we may experience difficulty with integrating the operations and personnel of the Semiconductor Equipment Group, - we may require additional financial resources to fund the operations, - we may be unable to maximize our financial and strategic position by the incorporation or development of the acquired technology and products, - if we are unable to continue to attract and retain key personnel, - if we are unable to integrate the acquired products, technology and information systems from engineering, sales, product development and marketing perspectives and - if we are unable to consolidate functions and facilities We believe we must successfully transition our Semiconductor Equipment Group products to incorporate process improvements such as single wafer processing and scalability from 200mm to 300mm wafer capability.* We can not assure you that we will not experience difficulties or delays in transitioning our products, which could materially harm our net sales, profitability and cash flow.* Our acquisition included the assumption of certain liabilities of the Semiconductor Equipment Group, which may prove more costly than we have anticipated. As an example, certain environmental remediation steps were put in place in the Scotts Valley California facility. We can not assure you that additional environmental hazards, liabilities or actions to streamline the operations may not result in future charges which may have a material adverse impact on our profitability and cash flow.* WE MANUFACTURE OUR PRODUCTS IN LOCATIONS SUBJECT TO NATURAL DISASTERS AND UNCERTAIN ENERGY SUPPLIES. Our California facilities are located in seismically active regions. We manufacture our Track products in San Jose, California and substantially all of our Thermal products in Orange and Scotts Valley, California. Our Tinsley optical components are manufactured in Richmond California. Our photolithography exposure products are manufactured in Wilton and Ridgefield, Connecticut. If we lose the use of any of our facilities as a result of a natural disaster, we would experience a material adverse effect on our operating results and cash flow.* Our California facilities are subject to an ongoing energy crisis being faced by that state. As a result of a variety of factors relating to increased energy demand and difficulties experienced with energy deregulation in the state of California, businesses and residences in California are subject to uncertain power supplies, rolling power blackouts 17 18 and extremely high energy costs. If we are not able to secure a consistent energy supply for our manufacturing and corporate facilities at manageable rates our ability to timely and cost effectively manufacture our products may be seriously harmed.* The uncertainty and risks related to the California energy crises are expected to last for the foreseeable future.* WE ARE SUBJECT TO A NUMBER OF ENVIRONMENTAL REGULATIONS. IF WE FAIL TO COMPLY WITH THESE REGULATIONS WE MAY FACE PENALTIES OR DELAYS IN PRODUCTION THAT COULD CAUSE US TO LOSE CUSTOMERS. We are subject to a number of governmental regulations related to our discharge or disposal of toxic and hazardous chemicals used in our manufacturing process. We believe that in general we are in compliance with these regulations and that we have obtained or expect to obtain shortly all necessary environmental permits to conduct our business.* The failure to comply with present or future regulations could result in fines or penalties being assessed against us, interruption of our production or in our customers refusing to accept our products.* Our Scotts Valley, California facility is subject to an environmental remediation plan being monitored by various governmental agencies. Watkins-Johnson Company purchased a guaranteed fixed price remediation contract from a third party environmental consultant to remediate the groundwater contamination at the facility. The remediation agreement obligates the third party to perform all of the obligations and responsibilities of Watkins-Johnson Company. We can not assure you that the third party consultant will have the financial resources or technical expertise to execute under the remediation agreement or that environmental regulatory agencies will not ultimately look to us to remediate the groundwater contamination at the site.* In 1996, we purchased from Perkin Elmer approximately 50 acres of land with a 201,000 square foot building thereon located in Ridgefield, Connecticut. At the time we purchased this property, we were aware that certain groundwater and soil contamination was present and that the property was subject to a clean-up order being performed by Perkin Elmer under the jurisdiction of the Connecticut Department of Environmental Protection. Agreements we have with Perkin Elmer provide that Perkin Elmer has sole responsibility for all obligations or liabilities related to the clean-up order. We believe we are adequately indemnified by Perkin Elmer, but, if for some reason Perkin Elmer was unable to comply or did not comply with the clean-up order, we could be required to do so.* IF WE CANNOT SUCCESSFULLY SUPPLY LARGE VOLUMES OF MICRASCAN PRODUCTS TO MULTIPLE CUSTOMERS, WE MAY LOSE CUSTOMERS AND MARKET SHARE AND AS A RESULT OUR BUSINESS WILL SUFFER. We believe that our ability to supply systems in volume to multiple customers will be a major factor in customer decisions to commit to our Micrascan technology.* Based upon the expected future demand for our advanced lithography step-and-scan products, we have increased our Micrascan production capacity and in particular our optical manufacturing floor space. In 1996, we purchased from Perkin Elmer a 243,000 square foot facility (subsequently increased to 276,000 square feet) that we occupied in Wilton, Connecticut and an additional 201,000 square foot building, which we now occupy, in Ridgefield, Connecticut. While we have invested in significant capital improvements related to the buildings purchased and the equipment required to expand our Micrascan production and optical manufacturing capabilities, we have not invested in all of the metrology and other equipment required to complete our expansion and maximize our manufacturing capacity. If we are not able to complete our expansion, we may not be able to meet customer demand and our market share will suffer. As we continue to expand our manufacturing infrastructure, this will require our continued recruitment, training and retention of a high quality workforce, as well as the achievement of manufacturing results on a scale greater than we have been successful at in the past. If we are unsuccessful in managing this expansion it could result in 18 19 production delays and a subsequent loss of future orders and customers. We believe that significant delays in delivering quantities of our Micrascan products could result in customers electing to install competitive equipment in their facilities. These factors could impede acceptance of our Micrascan products on an industry-wide basis resulting in our profit being adversely affected by the increase in fixed costs and operating expenses without a commensurate increase in net sales.* The time required for us to build our Micrascan systems is significant. For us to be successful, we will need to build more systems faster and reduce the cycle time required to build projection optics. To accomplish these objectives we will require; - additional trained personnel, - additional raw materials and components, - improved manufacturing and testing techniques and - continued development of our vendor supply infrastructure We also must continue building our factory, field service and technical support organization and infrastructure to support anticipated customer requirements.* We can not assure you that we will not experience manufacturing difficulties or encounter problems in our attempt to increase or upgrade operations or that the anticipated customer requirements will not be reached.* Our Tinsley Laboratories, Inc. subsidiary designs, provides research and manufactures precision optical components, assemblies and systems, primarily for our photolithography products. Tinsley provides technology and expertise relating to aspherical lenses, a key component of our photolithography products. The adaptation of certain of Tinsley's manufacturing processes by us and Tinsley's commencement of the fabrication of non-aspherical lenses is important to our ability to supply large volumes of photolithography products. However, there is no certainty that Tinsley's manufacturing technology is scaleable, or that such expertise can be transferred to us without substantial time or expense, if at all.* The inability of us to transfer these technology's and manufacturing processes for use in a substantially larger scale or the inability of Tinsley to manufacture non-aspherical lenses in sufficient quantities could adversely affect our ability to supply large volumes of Micrascan products.* OUR MICRASCAN PRODUCTS UTILIZE CERTAIN MATERIAL AND COMPONENTS PROVIDED BY SOLE SOURCE SUPPLIERS. There are certain raw materials, components and subassemblies that we obtain either from single sources or from a limited group of qualified suppliers. Although to date we have not experienced significant delays in our production due to unavailability or delays in procurement of component parts or raw materials, disruption of these sources could occur which could at least temporarily harm our operating results. Moreover, if we experience prolonged delays in obtaining certain components, this could materially harm our business, operating results and damage relationships with our customers.* The raw material for a proprietary component of the optical system for our Micrascan product is available from only one supplier. This supplier has expanded their capacity to meet our projected long-term requirements and has created and stored agreed upon quantities of safety stock. Additionally, a version of our Micrascan III system utilizes an Excimer laser that is manufactured in volume by only one supplier. In fiscal 1999 we qualified an additional source of lasers for current and future versions of our Micrascan products, allowing the potential for the integration of such lasers into our system. If our suppliers are unable to meet their commitments and provide acceptable quantities of material, we would be unable to manufacture the quantity of products we require to meet our customers anticipated future demand, which may have a material adverse effect on our business, revenue and profitability.* Calcium fluoride is a raw material that has historically been in short supply and is integral to the production of optics capable of producing quality line widths of .10 micron and below. The optical system for our MSV, 193 HNA product and our 157-nanometer lithography product, currently under development, utilizes calcium 19 20 fluoride.* We have qualified a supplier and have put in place a Supply Agreement with this supplier for the production and supply of calcium fluoride. We can not assure you that this supplier will be able to supply the quality or quantity of calcium fluoride necessary for us to meet expected customer demand.* Failure to secure adequate supplies of calcium fluoride could have a material adverse effect on our business and operating results.* WE DEPEND ON OUTSIDE RESEARCH AND DEVELOPMENT FUNDING TO ASSIST IN DEVELOPING OUR ADVANCED MICRASCAN TECHNOLOGY. IF WE LOSE THIS FUNDING OR ARE UNSUCCESSFUL IN RECEIVING OUTSIDE FUNDING FROM OTHER SOURCES OUR OPERATING RESULTS WILL BE ADVERSELY AFFECTED. In fiscal 1999, we entered into an agreement with Intel for the development of 157-nanometer lithography technology. This agreement obligates us, among other things, to develop and sell to Intel a predetermined number of initial tools. Intel has agreed to provide advanced payments for the development and manufacture of these machines, based upon predetermined milestones. At September 30, 2000, $2,000,000 of development funding from Intel has been recognized and offset against R&D expense. Separately, in 1999 Intel invested approximately $15,000,000 in us in the form of the purchase of Series 1 Convertible Preferred Stock. We are obligated to dedicate a certain amount of our 157-nanometer unit production output to Intel and are required to use the proceeds from the Series 1 Preferred investment and funds received under the agreement for the development of technology for use on 157-nanometer lithography equipment. We can not assure you that we will be successful in developing 157-nanometer technology or that we will be able to manufacture significant quantities of machines to satisfy our obligations to Intel or other customers.* We can not assure you that we will be able to fund from operations the development program or that we will be able to obtain future outside funding beyond that which we are currently receiving.* If we fail to receive such funds or if we are required to increase our own funds to fund development, our research and development expenses would increase and our operating income would be reduced correspondingly.* THE FUTURE PROFITABILITY OF OUR LITHOGRAPHY OPERATION IS UNCERTAIN. If we are to attain our objective of being a volume supplier of advanced photolithography products to multiple customers, we must expand our customer base to include additional customers who order production-quantities of products. We believe the costs associated with the following factors make it difficult for our Lithography division to operate profitably in the future*: - our continued development of our Micrascan technology, - our expansion of SVGL's manufacturing capacity, - our related increase in manpower and customer support, - increased competition and - developing and manufacturing current and future Micrascan products, in particular the projection optics. If we cannot appropriately manage the costs related to these factors, we will not be able to operate profitably. WE ARE DEPENDENT ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL. Our future success is dependent to a large extent on the continued contributions of our executive officers and key management and technical personnel. In particular, the future growth of our Lithography division is especially dependent on our ability to attract and retain key skilled employees, particularly those related to the optical segment of our business. We have agreements with each of our executive officers to encourage their continued service to us in the event of a change-in-control. Each of our executive officers, key management and technical personnel would be difficult to replace. The loss of the services of one or more of our executive officers or key personnel, or the inability to continue to attract qualified personnel could delay our product development initiatives or otherwise have a material adverse effect on our business, financial condition and operating results. 20 21 WE ARE SUBJECT TO LEGAL PROCEEDINGS, WHICH MAY HAVE A MATERIALLY ADVERSE IMPACT ON OUR FINANCIAL RESULTS. On or about August 12, 1998, Fullman initiated a lawsuit in the United States District Court for the District of Oregon alleging claims for fraudulent conveyance, constructive trust and declaratory relief in connection with a settlement we had previously entered into resolving claims against a Thailand purchaser of our equipment. In its complaint against us, Fullman, allegedly another creditor of the Thailand purchaser, alleges damages of approximately $11,500,000 plus interest. We successfully moved to transfer the case to the United States District Court for the Northern District of California. The court granted our motion for summary judgement, dismissing the plaintiffs claims on February 1, 2001 and denied plaintiffs motion for summary judgement. The plaintiff has appealed the grant of summary judgement which has been denied. We believe we have meritorious defenses to any appeal by the plaintiff and intend to conduct a vigorous defense. However, an unfavorable outcome in this matter could have a material adverse effect on our financial condition.* In addition to the above, from time to time, we are party to various legal actions arising out of the normal course of business, none of which is expected to have a material effect on our financial position or operating results.* RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements of all public registrants. SAB 101, as amended, requires implementation by the Company no later than the fourth quarter of fiscal 2001. Accordingly, any revenues that do not meet SAB 101's guidance will be deferred and recorded as revenue in future periods, including such revenue previously reported for the first three quarters of fiscal 2001 that do not meet the criteria of SAB 101. Changes in the Company's revenue recognition policy resulting from the implementation of SAB 101 would be reported as a change in accounting principle as of October 1, 2000. Under the Company's existing revenue recognition policy, revenue from sales of products based on existing technologies is recognized when the customer takes title to the product, generally at the time of shipment. Costs to install equipment in the customers' facilities are accrued at the time the product revenue is recognized. The Company has historically recognized revenue prior to installation as the installation costs, and the related estimated fair value, are insignificant relative to the sales price and gross profit of the transaction. In addition, the Company has a long history of successful installations within a short timeframe of delivery and the cost to complete installation does not vary materially from one instance to another. 21 22 We are currently evaluating the potential effect of the implementation of SAB 101 on our financial results and operations. While SAB 101 is not expected to affect the fundamental aspects of our operations as measured by shipments and cash flows, the implementation of SAB 101 could result in changes to the timing of our revenue recognition practices, and therefore could have a material and adverse effect on our financial condition and results of operations in the period of implementation.* QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. We attempt to minimize our currency fluctuation risk by actively managing the balances of current assets and liabilities denominated in foreign currencies. A 10% change in the foreign currency exchange rates would not have a material impact on our results of operations.* We purchase foreign exchange contracts to hedge certain of our existing firm commitments (primarily Yen denominated). We recognize gains and losses on these contracts to income when the related transaction being hedged is recognized. As the effect of movements in currency exchange rates on forward exchange contracts generally offsets the related effects on the underlying items being hedged, these financial instruments are not expected to subject us to risks that otherwise result from changes in currency exchange rates.* We have investments in marketable debt securities that are subject to interest rate risk. However, due to the short-term nature of our debt investments and our ability to hold our fixed income investments to maturity, the impact of a 10% interest rate change would not have a material impact on the value of such investments.* We have fixed rate debt obligations, which range between 2.2% to 12% with a weighted average of 3.1% and maturity dates through February 2011. Certain of our manufacturing facilities are leased under operating lease agreements under which the monthly rent payments adjust based on LIBOR. Monthly rent payments are variable at 0.75% to 2.0% over LIBOR. For one of the leases, we have entered into an interest rate swap contract to fix the interest rate and therefore, the lease payment. For the other lease, we have income and cash flow exposure to the extent that LIBOR changes. The impact of a 10% change in interest rates would not have a material impact on the amount of our lease payment.* PART II. OTHER INFORMATION SILICON VALLEY GROUP, INC. ITEM 1. LEGAL PROCEEDINGS. On or about August 12, 1998, Fullman initiated a lawsuit in the United States District Court for the District of Oregon alleging claims for fraudulent conveyance, constructive trust and declaratory relief in connection with a settlement we had previously entered into resolving claims against a Thailand purchaser of our equipment. In its complaint against us, Fullman, allegedly another creditor of the Thailand purchaser, alleges damages of approximately $11,500,000 plus interest. We successfully moved to transfer the case to the United States District Court for the Northern District of California. The court granted our motion for summary judgement, dismissing the plaintiffs claims on February 1, 2001 and denied plaintiffs motion for summary judgement. The plaintiff has appealed the grant of summary judgement which has been denied. On July 8, 1999, we filed a complaint for copyright infringement to protect our investment and intellectual property from six third party vendors. We subsequently settled or withdrew 22 23 complaints against five of the defendants. Our complaint alleged that the named defendant has infringed upon certain of our copyrights on our 8X series equipment by duplicating or modifying software in the refurbishment and sale of replacement boards. Our complaint further asks for preliminary and permanent injunction against the defendants' further infringement of our copyrights and sale of infringing systems and boards, and for an award of damages. This defendant filed a counterclaim against us in response to our complaint. We entered into a settlement agreement with the final defendant/counter claimant on January 11, 2001. In addition to the above, the Company, from time to time, is party to various legal actions arising out of the normal course of business, none of which is expected to have a material effect on the Company's financial position or operating results. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) A Special Meeting of Stockholders of the Company was held on February 7, 2001 ("the Meeting"). The vote of holders of record of 34,826,388 shares of the Company's Stock outstanding at the close of business on December 20, 2000 was solicited by proxy pursuant to Regulation 14A under the Securities Act of 1934. (b) At the Meeting, holders of 21,020,898 shares of Company Common stock, or 60 per cent of the outstanding Company Common Stock, were represented in person or by proxy, constituting a quorum. (c) At the Meeting the votes cast with respect to the resolution to adopt the ASM Lithography Merger Agreement were as follows: FOR 20,898,728 AGAINST 97,484 ABSTAIN 24,686 NOT VOTING None ---------- ------ ------ ---- ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. (b) Reports on Form 8-K. 23 24 The Company filed a report on 8-K on January 8, 2001, in connection with a press release announcing that the Company and ASM Lithography Holding N.V. voluntarily requested the withdrawal of their filing in connection with the Exon-Florio review process in order to provide more time to address certain United States government inquiries regarding the pending merger. The Company filed a report on 8-K on February 6, 2001, in connection with a press release announcing that the Company and ASM Lithography Holding N.V. had refiled their petition in connection with the Exon-Florio review. The Company filed a report on 8-K on March 26, 2001, in connection with a press release announcing that the Company expected a decline in revenues due to lower global demand. The Company filed a report on 8-K on May 7, 2001, in connection with a press release announcing that the Company and ASM Lithography Holding N.V. had reached an agreement with the Committee on Foreign Investment in the United States (CFIUS), under the provisions of the Exon-Florio amendment to the Defense Procurement Act of 1950, to proceed with their previously announced merger. 24 25 SILICON VALLEY GROUP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SILICON VALLEY GROUP, INC. -------------------------------------- (Registrant) Date: May 14, 2001 By: /s/Papken S. Der Torossian ---------------------------------- Papken S. Der Torossian Chief Executive Officer and Chairman of the Board Date: May 14, 2001 By: /s/Russell G. Weinstock ---------------------------------- Russell G. Weinstock Vice President Finance and Chief Financial Officer 25

SILICON VALLEY GROUP INC 10-Q