<PAGE> 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 September 30, 1996
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
OF 1934 For the transition period from __________ to ____________
Commission file number 0-21321
CYMER, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Nevada 33-0175463
<S> <C>
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
16275 Technology Drive, San Diego, CA 92127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 487-2442
Former name, former address and former fiscal
year, if changed since last report. N/A
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 __ __ No __X__
The number of shares of Common Stock, $0.001 par value per share, outstanding on
October 31, 1996 was 12,391,396.
<PAGE> 2
CYMER, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Balance Sheets as of September 30, 1996 and 3
December 31, 1995
Statements of Operations for the three and nine months 5
ended September 30, 1996 and 1995
Statements of Cash Flows for the nine months 7
ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements 9
ITEM 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 6. Exhibits 26
SIGNATURE PAGE 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
CYMER, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
(unaudited) (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $21,048 $2,015
Accounts receivable 16,581 4,832
Inventories 15,156 5,315
Prepaid expenses and other assets 920 306
----------- ---------
Total current assets 53,705 12,468
Property - net 9,224 3,053
Other Assets 200 98
----------- ---------
TOTAL ASSETS $63,129 $15,619
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving loan and security agreements $2,000 $2,786
Advances against commercial drafts 3,311 1,305
Accounts payable 6,806 2,369
Accrued liabilities 4,108 1,187
Deferred revenue 255 951
Current portion of capital lease obligations 171 25
Income taxes payable 554
----------- ---------
Total current liabilities 17,205 8,623
----------- ---------
Deferred Rent 418 369
----------- ---------
Capital Lease Obligations 352 48
----------- ---------
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
Committment and Contingencies (Note 6)
Redeemable convertible preferred stock - authorized -
9,834,880 shares; $.01 stated par value; issued and
outstanding 0 and 6,496,000 shares (liquidation preference -
$28,409 at December 31, 1995) 28,409
--------
Stockholders' Equity (Deficit):
Preferred Stock: 5,000,000 shares authorized, $0.001 par
value, no shares issued or outstanding
Common stock - authorized - 25,000,000 shares; $0.001 par
value, issued and outstanding 12,374,000 shares 12
Common stock - authorized - 15,000,000 shares; $0.01 stated
par value, issued and outstanding 1,160,000 shares 12
Paid-in capital 56,503 195
Accumulated deficit (10,968) (21,832)
Cumulative translation adjustment (393) (205)
--------- ---------
Total stockholders' equity (deficit) 45,154 (21,830)
--------- ---------
TOTAL $63,129 $15,619
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
CYMER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30,1996 AND 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30 ended September 30
-------------------- --------------------
1996 1995 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Product sales $17,785 $4,892 $35,553 $10,350
Other 461 827 1,875 2,648
-------- -------- -------- --------
Total revenues 18,246 5,719 37,428 12,998
COSTS AND EXPENSES:
Cost of product sales 10,032 2,893 20,961 6,135
Research and development 3,229 1,773 7,478 4,693
Sales and marketing 1,678 652 3,503 1,663
General and administrative 964 324 2,267 827
-------- -------- -------- --------
Total costs and expenses 15,903 5,642 34,209 13,318
-------- -------- -------- --------
OPERATING INCOME (LOSS) 2,343 77 3,219 (320)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Foreign currency exchange gain - net 256 73 644 240
Interest and other income 16 6 43 27
Interest and other expense (227) (68) (375) (206)
-------- -------- -------- --------
Total other income (expense) - net 45 11 312 61
-------- -------- -------- --------
Income (Loss) Before Provision for Income Taxes 2,388 88 3,531 (259)
Provision for Income Taxes 382 568 36
-------- -------- -------- --------
NET INCOME (LOSS) $2,006 $88 $2,963 ($295)
======== ======== ======== ========
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
EARNINGS (LOSS) PER SHARE:
<S> <C> <C> <C> <C>
Earnings per share $0.20 $0.29
======== ========
Weighted average common and common
equivalent shares outstanding 10,055 10,055
======== ========
Pro forma earnings (loss) per share $0.01 ($0.04)
======== ========
Pro forma weighted average common and
common equivalent shares outstanding 6,937 6,937
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 7
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
--------------------------------
1996 1995
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $2,963 ($290)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 1,405 640
Change in assets and liabilities:
Accounts receivable (12,180) (2,285)
Inventories (9,914) (2,284)
Prepaid expenses and other assets (757) (405)
Accounts payable 4,079 614
Accrued liabilities 3,341 293
Income taxes payable 554
Deferred revenue (684) 337
Deferred rent 49 20
--------------- --------------
Net cash used for operating activities (11,144) (3,360)
--------------- --------------
INVESTING ACTIVITIES:
Acquisition of property (7,070) (1,242)
Disposal of property 16 150
--------------- --------------
Net cash used for investing activities (7,054) (1,092)
FINANCING ACTIVITIES:
Net (payments) borrowings under revolving loan and
security agreements (786) 1,420
Proceeds from issuance of redeemable convertible preferred stock 5,833 2,607
Proceeds from issuance of common stock 29,981 (18)
Net advances against (discounting of) commercial drafts 2,177 (947)
Payments on capital lease obligations (105) (12)
--------------- --------------
Net cash provided by financing activities 37,100 3,050
--------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 131 (30)
--------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 19,033 (1,432)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,015 2,326
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,048 $894
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid $ 340 $ 105
=============== ==============
Income taxes paid $ 11 $ 28
=============== ==============
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred for furniture and equipment $573 $46
=============== ==============
Net book value of property transferred to inventory for resale $150
==============
Conversion of subordinated promissory notes and related
interest payable to redeemable convertible preferred stock $3,755
==============
</TABLE>
See Notes to Consolidated Financial Statements
8
<PAGE> 9
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
1 BASIS OF PRESENTATION
The accompanying consolidated financial information has been prepared
by Cymer, Inc. and its wholly-owned subsidiary, Cymer Japan, Inc., (collectively
the "Company"), without audit, in accordance with the instructions to Form 10-Q
and therefore does not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash flows in
accordance with generally accepted accounting principles.
Reincorporation and Recapitalization - The Company's Board of Directors
and stockholders approved a reincorporation into the State of Nevada that became
effective on August 21, 1996. In connection with the reincorporation, the
Company increased its authorized common stock to 25,000,000 shares. The Board of
Directors and stockholders also approved the creation of a new class of
5,000,000 shares of undesignated preferred stock which was authorized on the
closing of the Company's initial public offering.
The Company closed its initial public offering on September 18, 1996.
The offering resulted in the issuance of 3,508,532 shares of common stock at
$9.50 per share, netting approximately $31.0 million to the Company. Upon the
offering, all outstanding redeemable convertible preferred stock and stock
warrants were converted into common stock (Note 4).
Principles of Consolidation - The consolidated financial statements
include the accounts of Cymer, Inc. and its wholly-owned subsidiary, Cymer
Japan, Inc., (collectively, the "Company"). The Company primarily sells its
excimer lasers in Japan through Cymer Japan, Inc. All significant intercompany
balances have been eliminated in consolidation.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Earnings Per Share - Earnings per share is computed based on the
weighted average number of common and common equivalent shares outstanding
during each period using the treasury stock method, in which any shares that
could have been purchased on the open market with the funds received from the
exercise of options or warrants are to be considered additional outstanding
stock and have no dilutive effect on earnings per share. Stock options and
warrants are considered to be common stock equivalents. Primary earnings per
share is not significantly different from fully diluted earnings per share for
any of the periods indicated.
Pro Forma Earnings (Loss) Per Share - Pro forma earnings (loss) per
share is computed based on the weighted average number of common and common
equivalent shares outstanding during the period using the treasury stock method
and assumes conversion of all outstanding redeemable convertible preferred stock
and the exercise of all outstanding warrants. Stock options, redeemable
convertible preferred stock and warrants are considered to be common stock
equivalents, except where the stock options are not assumed converted as such
conversion would be antidilutive. All shares of common stock and common stock
equivalents issued within twelve months of an initial public offering at a price
per share less than the estimated offering price are considered to be
outstanding for all periods presented in the same manner as a stock split.
Accordingly, all shares of common stock and common stock equivalents issued
subsequent to August 1995 at a price per share below the estimated offering
price are considered to be outstanding for all periods presented.
9
<PAGE> 10
Unaudited Interim Financial Data - In the opinion of management, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments, consisting of only normal recurring accruals, necessary
for a fair presentation of the financial position and results of operations as
of and for such periods indicated. These consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form S-1 filing for the
period ended June 30, 1996. Results for the interim periods presented herein are
not necessarily indicative of results which may be reported for any other
interim period or for the entire fiscal year.
2. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------------------- -------------------------
<S> <C> <C>
INVENTORIES:
Raw Materials $ 6,236 $ 2,114
Work-in-progress 7,028 2,232
Finished goods 1,892 969
------------------------- -------------------------
Total $ 15,156 $ 5,315
========================= =========================
PROPERTY - at cost:
Furniture and equipment $ 8,267 $ 4,113
Capitalized lasers 3,108 1,788
Leasehold improvements 1,718 245
Construction in process 988 587
------------------------- -------------------------
Less accumulated depreciation
and amortization (4,857) (3,680)
------------------------- -------------------------
Total $ 9,224 $ 3,053
========================= =========================
</TABLE>
3. BORROWING FACILITIES
Revolving Loan Facility - The Company had a revolving loan facility
("Loan Facility") providing for borrowings of up to $1,000,000 and guaranteed by
a preferred stockholder of the Company. Interest was payable quarterly and the
balance was due on the earlier of March 31, 1997 or the completion of the
Company's initial public offering. The $1,000,000 balance owed plus accrued
interest due against this facility was paid upon completion of the Company's
initial public offering.
Loan and Security Agreement - The Loan and Security Agreement (the
"Agreement") provides for three revolving loan facilities and a loan with a bank
to provide for combined borrowings of up to a maximum of $11,000,000 with
interest on outstanding borrowings ranging from prime to prime plus .25%.
Borrowings under the Agreement are secured by substantially all the Company's
assets. The Agreement provides for the following: (i) $2,000,000 bank loan which
is secured by the Company's assets, bears interest at a rate of prime plus .25%
per annum, is payable in eight quarterly installments to begin December 31, 1996
through September 30, 1998; (ii) a $1,000,000 revolving bank line of credit
which is also secured by the Company's assets, bears interest at a rate of prime
per annum, is due March 5, 1997 and (iii) $8,000,000 under lines of credit
secured by the Company's foreign receivables and inventory and guaranteed by the
U.S. Export-Import Bank, which bear interest at a rate of prime per annum, and
are due March 5, 1997 (as to $3,000,000) and June 27, 1997 (as to $5,000,000).
The Agreement requires the Company to maintain compliance with certain financial
statement and other covenants including, among other items, limitation on
additional debt, total liabilities to tangible net worth and minimum tangible
net worth. As of September 30, 1996, the Company was in compliance with all such
covenants. There was $2,000,000 outstanding under the Agreement at September 30,
1996.
10
<PAGE> 11
4. CONVERSION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon the Company's initial public offering, all redeemable convertible
preferred stock was automatically converted into common stock. The conversion of
the Preferred Stock to common stock is generally on a 1 for 1 basis, subject to
adjustments for stock splits, stock dividends and other items, except for the
Series E Preferred Stock which was converted on an approximate 1 for 1.5 basis.
Approximately 7.6 million shares of redeemable convertible preferred stock were
converted into common upon the completion of the Company's initial public
offering. Upon conversion of the Preferred Stock, all preferred stock dividends
and other rights previously assigned ceased.
5. STOCK PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Stock Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in July 1996. A total of 1,500,000 shares of Common Stock have been
reserved for issuance under the 1996 Stock Plan. A total of 218,100 options have
been granted under this plan. The 1996 Stock Plan provides for the grant of
"incentive" stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options to
employees, directors and consultants of the Company. Incentive stock options may
be granted only to employees. The 1996 Stock Plan is administered by the Board
of Directors or by a committee appointed by the Board of Directors, which
determines the terms of options granted, including the exercise price and the
number of shares subject to the option. The exercise price of incentive stock
options granted under the 1996 Stock Plan must be at least equal to the fair
market value of the Company's Common Stock on the date of grant and the exercise
price of nonqualified stock options must be at least equal to 85% of the fair
market value of the Company's Common Stock on the date of grant. The maximum
term of options granted under the 1996 Stock Plan is ten years.
In the event of a merger of the Company with or into another
corporation, all outstanding options may be assumed or an equivalent option
substituted by the successor corporation. If the successor corporation does not
assume or substitute equivalent options for the outstanding options, the
exercisability of shares subject so such options will accelerate and become
fully vested and exercisable. In such event, the Company shall notify the
holders of outstanding options that such options are fully exercisable, and all
options not exercised will then terminate 15 days after the date of such notice.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Company's Board of Directors and approved by the Company's
stockholders in July 1996. The Purchase Plan is intended to qualify under
Section 423 of the Code. The Company has reserved 250,000 shares of Common Stock
for issuance under the Purchase Plan. Under the Purchase Plan, an eligible
employee may purchase shares of Common Stock from the Company through payroll
deductions of up to 10.0% of his or her base compensation (excluding bonuses,
overtime and sales commissions), at a price per share equal to 85.0% of the
lower of (i) the fair
11
<PAGE> 12
market value of the Company's Common Stock as of the first day of each six-month
offering period under the Purchase Plan or (ii) the fair market value of the
Common Stock at the end of the offering period. Each offering period will
commence the first day on which the national stock exchanges and the Nasdaq
National Market are open for trading on or after May 1 and November 1 of each
year, with the first offering period beginning on the date of the Company's
offering and ending on April 30, 1997. In the event of a merger or asset sale,
the offering period then in progress will be shortened so that each
participant's options will be exercised before the date of the merger or sale.
Any employee who is customarily employed for at least 20 hours per week and more
than five months per calendar year and who has been so employed for at least
three consecutive months on or before the commencement date of an offering
period is eligible to participate in the Purchase Plan.
1996 Director Option Plan
The Company's 1996 Director Option Plan (the "Director Option Plan")
was adopted by the Board of Directors and approved by the stockholders of the
Company in July 1996. The Director Option Plan went into effect upon the
Company's offering. Under the Director Option Plan, the Company reserved 100,000
shares of Common Stock for issuance to non-employee directors of the Company
pursuant to nonstatutory stock options. Each director who is elected or
appointed to the Board of Directors subsequent to the adoption of the Director
Option Plan and who is not an employee of the Company will automatically receive
a nonstatutory option to purchase 10,000 shares of Common Stock of the Company
on the date such person becomes a director. In addition, each non-employee
director shall receive an option to acquire 2,500 shares of the Company's Common
Stock upon such director's reelection at each Annual Meeting of Stockholders,
provided that on such date such director shall have served on the Board of
Directors for at least six months. Each option granted under the Director Option
Plan shall be exercisable at 100% of the fair market value of the Company's
Common Stock on the date such option was granted. Of the options granted under
the Director Option Plan, 6.25% shall vest three months after their dates of
grant, with an additional 6.25% vesting at the end of each subsequent three
month period. The Plan shall be in effect for a term of ten years unless sooner
terminated by the Board.
In the event of a merger of the Company with or into another
corporation, all outstanding options may be assumed or an equivalent option
substituted by the successor corporation. Following such assumption or
substitution, if the director's service terminates other than a voluntary
resignation by the optionee, the option will become fully exercisable. If the
successor corporation does not assume an outstanding option or substitute an
equivalent option for such outstanding option, such option will become fully
vested and exercisable. In such event, the Board will notify the optionee that
such optionee has 30 days from the date of notice to exercise the fully vested
option and the option will terminate at the end of the 30-day period.
5. COMMITTMENT AND CONTINGENCIES
On November 1, 1996, the Company entered into a settlement agreement
for the dismissal of a patent complaint filed against the Company in September,
1996. Under the terms of the settlement, it was agreed to (i) release the
Company from any claims either may have with respect to the patents and (ii)
dismiss the patent infringement action with prejudice. Total payments under
the agreement are to be made over a 13 year period. Such annual payments are
not material to the Company's financial position or results of operations.
Should the Company cease making or selling excimer lasers, or the complainants
cease to maintain the patent rights, or should the patent rights be finally
adjudicated to be invalid, the above payments shall cease.
In addition, the Company has been notified of alleged infringements of
certain Japanese patents related to its manufacture and sale of laser systems.
The Company believes, based upon the advice of counsel, that the Company's
products do not infringe any valid claim of the asserted patents.
12
<PAGE> 13
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's statements of
operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales 97.5% 85.5% 95.0% 79.6%
Other 2.5 14.5 5.0 20.4
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of product sales 55.0 50.6 56.0 47.2
Research and development 17.7 31.0 20.0 36.1
Sales and marketing 9.2 11.4 9.4 12.8
General and administrative 5.3 5.7 6.0 6.4
----- ----- ----- -----
Total costs and expenses 87.2 98.7 91.4 102.5
----- ----- ----- -----
Operating income (loss) 12.8 1.3 8.6 (2.5)
Other income net 0.2 0.2 0.8 0.5
----- ----- ----- -----
Income (loss) before provision for
income taxes 13.1 1.5 9.4 (2.0)
Provision for income taxes 2.1 1.5 0.3
----- ----- ----- -----
Net income (loss) 11.0% 1.5% 7.9% (2.3)%
===== ===== ===== =====
Gross margin on product sales 43.6% 40.9% 41.0% 40.7%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
REVENUES. The Company's total revenues consist of product sales, which
include sales of laser systems and spare parts and service and training
revenues, and other revenues, which primarily includes revenues from funded
development activities performed for customers and for SEMATECH. Revenue from
product sales is generally recognized at the time of shipment unless customer
agreements contain inspection or other conditions, in which case revenue is
recognized at the time such conditions are satisfied. Funded development
contracts are accounted for on the percentage-of-completion method based on the
relationship of costs incurred to total estimated costs, after giving effect to
estimates of costs to complete the development project.
Product sales increased 264% from $4.9 million in the three months
ended September 30, 1995 to $17.8 million in the three months ended September
30, 1996, primarily due to increased sales of DUV photolithography laser
systems. A total of 41 laser systems were sold in the three month period ended
September 30, 1996 compared to 12 laser systems in the three month period ended
September 30, 1995. Funded development revenues decreased 44% from $827,000 for
the three months ended September 30, 1995 to $461,000 in the three months ended
September 30, 1996, primarily due to the completion in 1995 of a laser research
project sponsored by SEMATECH.
13
<PAGE> 14
The Company's sales are generated primarily by shipments to customers
in Japan, the Netherlands, and the United States. Approximately 78%, 54%, 69%
and 82% of the Company's sales in 1993, 1994, 1995 and the first nine months of
1996, respectively, were derived from customers outside the United States. The
Company maintains a wholly-owned Japanese subsidiary which sells to the
Company's Japanese customers. Revenues from Japanese customers, generated
primarily by this subsidiary, accounted for 68%, 33%, 50% and 57% of revenues
from 1993, 1994, 1995 and the first nine months of 1996, respectively. The
activities of the Company's Japanese subsidiary are limited to sales and service
of products purchased by the subsidiary from the parent corporation. All costs
of development and production of the Company's products, including costs of
shipment to Japan, are recorded on the books of the parent company. The Company
anticipates that international sales will continue to account for a significant
portion of its net sales.
COST OF PRODUCT SALES. Cost of product sales includes direct material
and labor, warranty expenses, license fees and manufacturing and service
overhead. Cost of product sales rose 247% from $2.9 million for the three months
ended September 30, 1995 to $10.0 million for the three months ended September
30, 1996. The gross margin on these sales increased to 43.6% for the three
months ended September 30, 1996 from 40.9% for the same three month period in
1995 as the increase in sales over the period absorbed more of the overhead
costs associated with manufacturing.
RESEARCH AND DEVELOPMENT. Research and development expenses include
costs of internally-funded and customer-funded projects as well as continuing
product support expenses which primarily include employee and material costs,
depreciation of equipment and other engineering related costs. Research and
development expenses increased 82% from $1.8 million in the three months ended
September 30, 1995 to $3.2 million in the three months ended September 30, 1996,
due primarily to increased product support efforts associated with the release
of the Company's 5000 series lasers and the hiring of additional technical
personnel. As a percentage of total revenues, such expenses declined from 31.0%
to 17.7% in the respective periods due to the growth in the Company's revenues.
SALES AND MARKETING. Sales and marketing expenses include the expenses
of the sales, marketing and customer support staffs and other marketing
expenses. Sales and marketing expenses increased 157% from $652,000 for the
three months ended September 30, 1995 to $1.7 million in the three months ended
September 30, 1996 due primarily to increased sales commissions and increased
sales support efforts and marketing activities as more lasers were placed in the
field. As a percentage of total revenues, such expense declined from 11.4% to
9.2% in the respective periods due to the growth in the Company's revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of management and administrative personnel costs, professional
services and administrative operating costs. These expenses increased 198% from
$324,000 in the three months ended September 30, 1995 to $964,000 for the three
months ended September 30, 1996 due to an increase in general and administrative
support as the Company's sales volume, manufacturing capacity and overall level
of business activity increased. As a percentage of total revenues, such expenses
decreased from 5.7% to 5.3% in the respective periods.
OTHER INCOME (EXPENSE). Other income (expense) consists primarily of
interest income and expense and foreign currency exchange gains and losses
associated with the fluctuations in the value of the Japanese yen against the
U.S. dollar. Other income increased from $11,000 for the three months ended
September 30, 1995 to $45,000 for the three months ended September 30, 1996.
Foreign currency exchange gains totaled $73,000 and interest expense totaled
$68,000 for the three months ended September 30, 1995 compared to $256,000 and
$227,000, respectively, for the three months ended September 30, 1996.
The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar due to the fact that sales by
the Company to its Japanese subsidiary are denominated in dollars, and sales by
the subsidiary to customers in Japan are denominated in yen. The Company's
subsidiary manages its exposure to such fluctuations by entering into foreign
currency exchange contracts to hedge its purchase commitments to the Company.
14
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PROVISION FOR INCOME TAXES. There was no provision for income taxes in
the three month period ended September 30, 1995 as the income was minimal for
the period and the Company had net operating loss carryforwards which would
absorb any income tax effect. The tax provision of $382,000 for the three months
ended September 30, 1996 was attributable to the operating income generated in
the three month period taking into account net operating loss carryforward
effects from previous periods. At September 30, 1996, the Company had $2.7
million in federal and state net operating loss carryforwards which may be
offset against future income.
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
REVENUES. Product sales increased 244% from $10.4 million in the nine
months ended September 30, 1995 to $35.6 million in the nine months ended
September 30, 1996, primarily due to increased sales of DUV photolithography
laser systems. A total of 83 laser systems were sold in the nine month period
ended September 30, 1996 compared to 23 laser systems in the nine month period
ended September 30, 1995. Funded development revenues decreased 29% from $2.6
million for the nine months ended September 30, 1995 to $1.9 million in the nine
months ended September 30, 1996, primarily due to the completion in 1995 of a
laser research project sponsored by SEMATECH.
COST OF PRODUCT SALES. Cost of product sales rose 242% from $6.1
million for the nine months ended September 30, 1995 to $21 million for the nine
months ended September 30, 1996. The gross margin on these sales increased to
41.0% for the nine months ended September 30, 1996 from 40.7% for the same nine
month period in 1995 as the increase in sales over the period absorbed more of
the overhead costs associated with manufacturing.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
59% from $4.7 million in the nine months ended September 30, 1995 to $7.5
million in the nine months ended September 30, 1996, due primarily to increased
product support efforts associated with the release of the Company's 5000 series
lasers and the hiring of additional technical personnel. As a percentage of
total revenues, such expenses declined from 36.1% to 20.0% in the respective
periods due to the growth in the Company's revenues.
SALES AND MARKETING. Sales and marketing expenses increased 111% from
$1.7 million for the nine months ended September 30, 1995 to $3.5 million in the
nine months ended September 30, 1996 due primarily to increased sales
commissions and increased sales support efforts and marketing activities as more
lasers were placed in the field. As a percentage of total revenues, such
expenses declined from 12.8% to 9.4% in the respective periods due to the growth
in the Company's revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 174% from $827,000 in the nine months ended September 30, 1995 to $2.3
million for the nine months ended September 30, 1996 due to an increase in
general and administrative support as the Company's sales volume, manufacturing
capacity and overall level of business activity increased. As a percentage of
total revenues, such expenses decreased from 6.4% to 6.0% in the respective
periods.
OTHER INCOME (EXPENSE). Other income increased from $61,000 for the
nine months ended September 30, 1995 to $312,000 for the nine months ended
September 30, 1996. Foreign currency exchange gains totaled $240,000 and
interest expense totaled $206,000 for the nine months ended September 30, 1995
compared to $644,000 and $375,000, respectively, for the nine months ended
September 30, 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes was
insignificant in the nine months ended September 30, 1995 and primarily
represented taxes in Japan for research and development revenues generated from
agreements with Seiko. The tax provision of $568,000 for the nine months ended
September 30, 1996 was primarily attributable to income generated in the second
and third quarter of 1996.
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<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the cash flow
generated from the Company's September 18, 1996 initial public offering, which
netted approximately $30 million (after expenses), the private sale of equity
securities over the Company's ten year history totaling approximately $27.1
million and short term bank borrowings. As of September 30, 1996, the Company
had approximately $21.0 million in cash and cash equivalents, $36.5 million in
working capital and $5.8 million in bank and other debt.
Net cash used in operating activities was approximately $3.4 million
for the nine months ended September 30, 1995 and $11.1 million for the nine
months ended September 30, 1996. The increase in cash used in operations in the
nine months ended September 30, 1996 was primarily attributable to an increase
in accounts receivable and inventory as the working capital requirements of the
Company increased due to the business expanding during this period.
Net cash used for investing activities was approximately $1.1 million
for the nine months ended September 30, 1995 as compared to $7.1 million for the
nine months ended September 30, 1996. These expenditures were primarily for the
purchase of computer equipment, test equipment, research and development tools,
a management information system, and particularly during the nine months ended
September 30, 1996, manufacturing process machinery and tenant improvements in
the manufacturing area in order to accommodate the business expansion for the
period.
The Company's financing activities provided net cash of approximately
$3.1 million and $37.1 million for the nine months ended September 30, 1995 and
1996, respectively. During the nine months ended September 30, 1995, the Company
sold Redeemable Convertible Preferred Stock for approximately $2.6 million,
increased its bank borrowings by $1.4 million and reduced advances against
commercial drafts by $947,000. In the nine months ended September 30, 1996, the
Company received net proceeds of approximately $30.0 million (after expenses)
from their September 18, 1996 initial public offering, received net proceeds of
approximately $5.8 million from the sale of Redeemable Convertible Preferred
Stock, and increased advances against commercial drafts by $2.2 million.
The Company has available line of credit arrangements with a bank
permitting borrowings of up to $11.0 million. These borrowings are secured by
substantially all of the Company's assets, including its intellectual property,
and provide for the following facilities: (i) a $5.0 million revolving line of
credit expiring June 27, 1997, which is based on eligible accounts receivable of
the Company's Japanese subsidiary and eligible inventory of the Company and its
subsidiary and is partially guaranteed by the Export-Import Bank of the United
States; (ii) a $3.0 million revolving line of credit expiring March 5, 1997
based on eligible international accounts receivable and inventory (excluding
Japan) and partially guaranteed by the Export-Import Bank of the United States;
(iii) a $1.0 million domestic revolving loan facility expiring March 5, 1997
based on eligible domestic accounts receivable; and (iv) a $2.0 million term
loan facility which is due September 30, 1998. The Company also has through
its subsidiary in Japan a Y500 million credit facility for the discounting of
customer promissory notes, under which Y369 million ($3.3 million) was
outstanding as of September 30, 1996. The Company also has two foreign currency
exchange facilities.
On November 1, 1996, the Company entered into a settlement agreement
for the dismissal of a patent complaint filed against the Company in September,
1996. Under the terms of the settlement, it was agreed (i) release the Company
from any claims either may have with respect to the patents and (ii) dismiss the
patent infringement action with prejudice. Total payments under the agreement
are to be made over a 13 year period. Such annual payments are not material to
the Company's financial position or results of operations. Should the Company
cease making or selling excimer lasers, or the complainants cease to maintain
the patent rights, or should the patent rights be finally adjudicated to be
invalid, the above payments shall cease.
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company's future capital requirements will depend on many
factors, including the rate of the Company's manufacturing expansion, the timing
and extent of spending to support product development efforts and expansion of
sales and marketing and field service and support, the timing of introductions
of new products and enhancements to existing products, and market acceptance of
the Company's products. The Company expects that it may need to raise additional
equity or debt financing in the next 12 months, principally to fund the
Company's manufacturing expansion. There can be no assurance that additional
equity or debt financing, if required, will be available on acceptable terms or
at all.
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<PAGE> 17
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS AND
MARKET PRICE OF STOCK
The last paragraph under the heading "--Liquidity and Capital
Resources" contains forward-looking statements. The Company may from time to
time make additional written and oral forwarding-looking statements, including
statements contained in the Company's filings with the Securities and Exchange
Commission and in its reports to stockholders. Such forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission.
Likely Fluctuations in Quarterly Operating Results. The Company's
quarterly operating results have in the past fluctuated and are likely in the
future to fluctuate significantly depending upon a variety of factors. Such
Factors may include: the demand for semiconductors in general and, in
particular, for leading edge devices with smaller circuit geometries;
cyclicality in the market for semiconductor manufacturing equipment; the timing
and size of orders from the Company's small base of customers; the ability of
the Company to manufacture, test and deliver laser systems in a timely and cost
effective manner; the ability of the Company's competitors to obtain orders
from the Company's customers; the timing of new product announcements and
releases by the Company and its competitors; the entry of new competitors into
the market for DUV photolithography illumination sources; the ability of the
Company to manage its costs as it begins to supply its products in volume; and
the Company's ability to manage effectively its exposure to foreign currency
exchange rate fluctuations, principally with respect to the yen (in which sales
by the Company's Japanese subsidiary are denominated).
The Company has historically derived a substantial portion of its
quarterly and annual revenues from the sale of a relatively small number of
systems, which are priced at up to $450,000. As a result, the precise timing of
the recognition of revenue from an order for one or a small number of systems
can have a significant impact on the Company's total revenues and operating
results for a particular period. The Company's operating results for a
particular period could be adversely affected if orders for a small number of
systems, or even one system, are canceled or rescheduled by customers or cannot
be filled in time to recognize revenue during that period due to, for example,
unanticipated manufacturing, testing, shipping or product acceptance delays.
The Company had a backlog of orders at September 30, 1996 of approximately $52.1
million for shipment during the 12 months ending September 30, 1997. However,
customers may cancel or delay orders with little or no penalty, and because of
the Company's limited experience in producing lasers in volume, there can be
no assurance that the Company will recognize revenue on any significant portion
of this backlog. The Company's expense levels are based, in large part, on the
Company's expectations as to future revenues and are, therefore, relatively
fixed in the short term. If revenue levels fall below expectations, net income
will be disproportionately and adversely affected. The impact of these and
other factors on the Company's revenues and operating results in any future
period cannot be forecast with any degree of certainty.
The Company believes that semiconductor manufacturers are currently
developing capability for pilot production of 0.25um devices. The Company also
believes that demand for its excimer lasers for DUV photolithography tools is
currently being driven by the efforts to develop such capability. Once
semiconductor manufacturers have acquired such capability, the Company
believes that they will not invest in DUV photolithography tools to expand
their capacity to manufacture 0.25um devices until such time as their sales
forecasts justify such investment. As a result, the Company believes that
once current demand is satisfied, the Company's revenues could flatten or even
decline in future periods before resuming growth in response to future demand,
if any. Accordingly, the Company currently expects that demand for its DUV
excimer lasers, and thus its revenues, may decrease in the second half of 1997,
as compared to the first half of 1997.
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<PAGE> 18
Recently, the Company has significantly increased the scale of its
operations and its manufacturing capacity, including hiring additional personnel
and substantially increasing the number of systems in production. This expansion
has resulted in higher materials and work-in-process inventory levels and
significantly higher operating expenses, and has required the Company to
implement a variety of new systems, procedures and controls. Based on its
backlog of orders at September 30, 1996, the Company expects to continue to
increase its inventories and operating expenses. If orders received by the
Company do not result in sales, or if the Company is unable to sustain its
revenues at anticipated levels, the Company's operating results would be
materially adversely affected.
Due to the foregoing factors, as well as other unanticipated factors,
it is likely that in some future quarter the Company's operating results will
be below the expectations of public market analysts or investors. In such
event, the price of the Company's Common Stock would be materially adversely
affected.
History of Losses; Unpredictability of Future Operating Results. The
Company was founded in 1986 and shipped its first prototype laser system in
1988. Although the Company's revenues have increased over the last three years
and each of the last six quarters, the Company has incurred annual operating
losses since inception and incurred an operating loss in the quarter ended
March 31, 1996. There can be no assurance that the Company's revenues will grow
or be sustained in future periods or that the Company will be profitable in any
future period. The Company's history of annual and quarterly operating losses,
its substantial expansion in manufacturing capacity, its limited experience in
supplying products in volume and the difficulty of predicting the demand for
its products, among other factors, make the prediction of future operating
results difficult if not impossible.
Risk of Excessive Inventory Buildups by Photolithography Tool
Manufacturers. Substantially all of the Company's customers are
photolithography tool manufacturers, which in turn sell their systems to
semiconductor manufacturers. Over the past year, the Company's customers have
substantially increased their forecasted shipments of DUV photolithography
tools. The Company believes that the increase in demand for DUV
photolithography tools coupled with the dependence of the manufacturers of
these tools on a limited number of laser suppliers may have caused a degree of
over-ordering of the Company's products. The Company is working with its
customers to better understand end user demand for DUV photolithography tools.
However, there can be no assurance that the Company will be successful in this
regard, or that its customers will not build excessive laser inventories.
Excessive customer laser inventories could result in a material decline in the
Company's revenues and operating results in future periods as such inventories
are brought into balance.
Risks Associated with Rapid and Substantial Manufacturing Expansion. To
meet current and anticipated demand for its products, the Company must continue
to increase the rate by which it manufacturers and tests its photolithography
laser systems. This increase would follow a nearly seven-fold increase in the
manufacturing rate from December 1995 to September 1996. The Company is
currently unable to manufacture and test its photolithography laser systems fast
enough to fill orders and is behind on its delivery schedules. While the Company
is not aware of any order cancellations as a result of these delays, such
delays, if they continue or recur, increase the risk that customers will cancel
orders and seek to meet all or a portion of their needs for illumination sources
from the Company's competitors. The Company is also increasingly relying on
outside suppliers for the manufacture of various components and subassemblies
used in its products and is dependent upon these suppliers to meet the Company's
manufacturing schedules. The failure by one or more of these suppliers to supply
the Company on a timely basis with sufficient quantities of components or
subassemblies that perform to the Company's specifications could affect the
Company's ability to deliver completed lasers to its customers on schedule.
Additionally, the Company may underestimate the costs required to increase its
manufacturing capacity, which may materially adversely affect the Company's
results of operations.
In addition to increasing manufacturing capacity at its facilities in
San Diego, California, the Company is also seeking to qualify Seiko
Instruments, Inc. ("Seiko") of Japan as a contract manufacturer of its
photolithography lasers. While the Company is seeking to have Seiko begin
limited production of lasers for the Company in 1996, there can be no assurance
that Seiko will be successfully qualified and commence production on schedule.
The failure of Seiko to be so qualified or to commence production on schedule
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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<PAGE> 19
Seiko has been advised by Komatsu, Ltd. ("Komatsu"), a competitor of
the Company, that certain aspects of the Company's lasers might infringe a
patent that has been issued to Komatsu in Japan and that Komatsu intends to
enforce its rights under that patent against Seiko if Seiko engages in
manufacturing activities for the Company. Cymer has been advised by its patent
counsel that in the opinion of such firm the Company's products do not infringe
any valid claims included in the Komatsu patent. In the event that,
notwithstanding its manufacturing agreement with the Company, Seiko should
determine not to commence manufacturing the Company's products until resolution
of the matter with Komatsu, the Company's ability to meet the anticipated
demand for its products could be materially adversely affected.
Dependence on Key Suppliers. Certain of the components and
subassemblies included in the Company's products are obtained from a single
supplier or a limited group of suppliers. In particular, there are no
alternative sources for certain of the components and subassemblies, including
certain optical components and pre-ionizer tubes used in the Company's lasers.
In addition, the Company is increasingly outsourcing the manufacture of various
subassemblies. Although to date the Company has been able to obtain adequate
supplies of its components and subassemblies in a timely manner from existing
sources, the Company has only recently commenced volume production of its laser
systems. The Company believes that its recent manufacturing expansion has
significantly strained the production capacity of certain key suppliers,
including suppliers of optical components and pre-ionizer tubes. If the Company
is unable to obtain sufficient quantities of components or subassemblies, or if
such items do not meet the Company's quality standards, delays or reductions in
product shipments could occur which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Single Product Line. The Company's only product line
is excimer lasers, the primary market for which is for use in DUV
photolithography equipment for manufacturing deep-submicron semiconductor
devices. Demand for the Company's products will depend in part on the rate at
which semiconductor manufacturers adopt excimer lasers as the illumination
source for their photolithography tools. Impediments to such adoption include a
shortage of engineers with experience implementing, utilizing and maintaining
DUV photolithography systems that incorporate excimer laser illumination
sources, instability of photoresists used in DUV photolithography and a
shortage of specialized glass used in DUV optics. There can be no assurance
that such impediments can or will be overcome, and, in any event, such
impediments may materially reduce the demand for the Company's products. In
addition, to the extent that such manufacturers are able to produce
semiconductors with smaller critical feature sizes by extending the performance
capabilities of mercury lamp illumination sources used in existing i-line or
DUV photolithography tools, the demand for the Company's products would also be
materially reduced. Further, if the Company's customers experience reduced
demand for DUV photolithography tools, or if the Company's competitors are
successful in obtaining significant orders from such customers, the Company's
results of operations would be materially adversely affected.
Limited Production Use of Excimer Lasers. The Company first shipped
its lasers for photolithography applications in 1988. The Company is not aware
of any semiconductor manufacturer using the Company's laser for volume
production of semiconductor devices. There can be no assurance that the
Company's products will meet production specifications when subjected to
prolonged and intense use in volume production in semiconductor manufacturing
processes. If any semiconductor manufacturer is not able to successfully
achieve volume production using the Company's lasers, the Company's reputation
with semiconductor manufacturers or the limited number of photolithography tool
manufacturers could be damaged, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
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<PAGE> 20
Dependence on Small Number of Customers. The Company's primary
customer base is composed of a small number of manufacturers of DUV
photolithography tools. Four large firms, ASM Lithography, Canon, Nikon and SVG
Lithography (a subsidiary of Silicon Valley Group, Inc.), dominate the
photolithography total business and collectively accounted for approximately 65%
and 91% of the Company's total revenues in 1995 and the nine months ended
September 30, 1996, respectively. Sales to ASM Lithography, Canon, Nikon and
SVG Lithography accounted for approximately 18%, 19%, 27% and 1%, respectively,
of total revenues in 1995 and approximately 25%, 31%, 24% and 11%,
respectively, of total revenues in the nine month period ended September 30,
1996. The Company expects that sales of its systems to these customers will
continue to account for substantially all of its revenues in the foreseeable
future. None of the Company's customers is obligated to purchase a minimum
number of the Company's products. Loss of any significant business from any
one of these customers or a significant reduction in orders from any one of
these customers, including reductions caused by changes in a customer's
competitive position, a decision to purchase illumination sources from other
suppliers or economic conditions in the semiconductor and photolithography tool
industries, would have a material adverse effect on the Company's business,
financial condition and results of operations.
Need to Manage a Changing Business. The Company recently has
dramatically expanded the scope of its operations and the number of employees in
most of its functional areas. For example, the Company increased the number of
its employees from 136 to 285 between December 31, 1995 and September 30, 1996.
The Company also substantially increased its manufacturing capacity during that
period and installed a new management information system. If demand for the
Company's products continues to grow, the Company will be required to continue
this expansion. The management of such growth, if such growth occurs, will
require the Company to continue to improve and expand its management,
operational and financial systems, procedures and controls, including accounting
and other internal management systems, and its quality control, delivery and
field service and customer support capabilities. The Company will also be
required to manage effectively its expanding international operations, including
the operations of its Japanese subsidiary, its field service and support
presence in Asia and Europe and its qualification of Seiko as a manufacturer of
its photolithography lasers. There can be no assurance that the Company will be
able to successfully expand its operations, effect timely deliveries of its
products or maintain the product quality and reliability required by its
customers. The Company has experienced, and may continue to experience, delays
in deliveries to customers as a result of its inability to increase its
manufacturing capacity fast enough to meet demand. Any failure to manage the
Company's growth, if such growth occurs, would materially adversely effect the
Company's financial condition and results of operations.
Dependence on Semiconductor Industry. Substantially all of the
Company's revenues are derived from photolithography tool manufacturers that in
turn depend on the demand for their products from semiconductor manufacturers.
Semiconductor manufacturers correspondingly depend on the demand from
manufacturers of end-products or system that use semiconductors. The
semiconductor industry is highly cyclical and has historically experienced
periodic and significant downturns, which often have had a severe effect on the
demand for semiconductor manufacturing equipment, including photolithography
tools. The Company believes that downturns in the semiconductor manufacturing
industry will occur in the future, and will result in decreased demand for
semiconductor manufacturing equipment. In addition, the Company believes that
its ability to reduce expenses in a future downturn will be constrained by the
need for continual investment in research and development, and the need to
maintain extensive ongoing customer service and support capability.
Accordingly, any downturn in the semiconductor industry could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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<PAGE> 21
Competition. The Company currently has two significant competitors in
the market for excimer laser systems for photolithography applications.
Lambda-Physik R&D ("Lambda-Physik"), a German-based subsidiary of Coherent, Inc.
("Coherent"), and Komatsu, Ltd., located in Japan. Both of these
companies are larger than the Company, have access to greater financial,
technical and other resources than does the Company and are located in closer
proximity to the Company's customers than is the Company. Although the Company
believes that these competitors are not yet supplying excimer lasers in volume
for photolithography applications, the Company believes that both companies are
aggressively seeking to gain larger positions in this market. The Company
believes that its customers have each purchased one or more products offered by
these competitors and that its customers will consider further purchases, in
part as a result of delays in deliveries by the Company in recent months as the
Company has been seeking to expand its manufacturing capacity. The Company also
believes that its customers are actively seeking a second source for excimer
lasers. Furthermore, photolithography tool manufacturers may seek to develop or
acquire the capability to manufacture internally their own excimer lasers. In
the future, the Company will likely experience competition from other
technologies, such as X-ray, electron beam and ion projection processes. To
remain competitive, the Company believes that it will be required to manufacture
and deliver products to customers on a timely basis and without significant
defects and that it will also be required to maintain a high level of investment
in research and development and in sales and marketing. There can be no
assurance that the Company will have sufficient resources to continue to make
the investments necessary to maintain its competitive position. In addition, the
market for excimer lasers is still small and immature and there can be no
assurance that larger competitors with substantially greater financial
resources, including other manufacturers of industrial lasers, will not attempt
to enter the market. There can be no assurance that the Company will remain
competitive. A failure to remain competitive would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Rapid Technological Change; New Product Introductions. 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 excimer laser products and their process
capabilities and to develop and manufacture new products with improved
capabilities. In order to enhance and improve its products and develop new
products, among other things, the Company must work closely with its customers,
particularly in the product development stage, to integrate its lasers with its
customer's photolithography tools. There can be no assurance that future
technologies, such as X-ray, electron beam and ion projection processes, will
not render the Company's excimer laser products obsolete or that the Company
will be able to develop and introduce new products or enhancements to its
existing products and processes in a timely manner that satisfy customer needs
or achieve market acceptance. The failure to do so could materially adversely
affect the Company's business, financial condition and results of operations.
Need to Expand Field Service and Support Organization. The Company
believes that the need to provide fast and responsive service to the
semiconductor manufacturers using its lasers is critical and that it will not
be able to depend solely on its customers to provide this specialized service.
Therefore, the Company believes it is essential to establish, through trained
third-party sources or through its own personnel, a rapid response capability
to service its lasers throughout the world. Accordingly, the Company intends to
expand its direct support infrastructure in Japan and Europe, expand its field
service and support in Korea through an independent firm, and establish a joint
service and support capability with an independent firm to serve Taiwan and
Southeast Asia. The establishment of these activities will entail recruiting
and training qualified personnel, identifying qualified independent firms and
building effective and highly trained organizations that can provide service to
customers in various countries in their assigned regions. There can be no
assurance that the Company will be able to attract qualified personnel to
establish these operations successfully or that the costs of such operations
will not be excessive. A failure to implement this plan effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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<PAGE> 22
Risks Associated with Customer-Funded Research and Development. The
Company has in the past funded a significant portion of its research and
development expenses from research and development revenues received from
photolithography tool manufacturers and from SEMATECH, a semiconductor industry
consortium, in connection with the design and development of specific products.
The Company's staffing levels and other expenditures for research and
development are, in part, determined by the level of funding that the Company
expects to receive for specific projects. No assurance can be given that the
Company will continue to generate research and development revenues to offset a
sufficient portion of its product development costs. Any material cancellation
of this funding or a failure to secure research and development funding
commensurate with the Company's expectations could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, the recognition of research and development revenues
is dependent on the Company accomplishing certain research and development
milestones. If such milestones are not achieved, the Company will not
recognize the associated research and development revenues, which could have a
material adverse effect on its business, financial condition and results of
operations. Although the Company anticipates that it will continue to receive
research and development revenues in the future, there can be no assurance that
this level of support will be maintained at past levels, and the Company
believes that such revenues will constitute a decreasing percentage of its
overall revenues. As a result, the Company may have to bear a greater
proportion of the cost of design and development of its products which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Although the Company's arrangements with photolithography tool
manufacturers and SEMATECH seek to clarify the ownership of the intellectual
property arising from research and development services performed by the
Company, there can be no assurance that disputes over the ownership or rights
to use or market such intellectual property will not arise between the Company
and such parties. Any such dispute could result in restrictions on the
Company's ability to market its products and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Uncertainty Regarding Patents and Protection of Proprietary Technology.
The Company believes that the success of its business depends more on such
factors as the technical expertise of its employees, as well as their innovative
skills and marketing and customer relations abilities, than on patents,
copyrights trade secrets and other intellectual property rights. Nevertheless,
the success of the Company may depend in part on patents, and as of September
30, 1996 the Company owned 16 United States patents covering certain aspects
of technology associated with excimer lasers which expire from May 2008 to
December 2011 and had applied for 12 additional patents in the United States,
three of which have been allowed. As of September 30, 1996 the Company had filed
34 patent applications in other countries. There can be no assurance that the
Company's pending patent applications or any future applications will be
approved, that any issued patents will provide it with competitive advantages or
will not be challenged by third parties, or that the patents of others will not
have an adverse effect on the Company's ability to do business. In this regard,
due to cost constraints, the Company did not begin filing for patents in Japan
or other countries with respect to inventions covered by its United States
patents and patent applications until recently and has therefore lost the right
to seek patent protection in those countries for certain of its inventions.
Additionally, because foreign patents may afford less protection under foreign
law than is available under United States patent law, there can be no assurance
that any such patents issued to the Company will adequately protect the
Company's proprietary information. Furthermore, there can be no assurance that
others will not independently develop similar products, duplicate the Company's
products or, if patents are issued to the Company, design around the patents
issued to the Company.
Others may have filed and in the future may file patent applications
that are similar or identical to those of the Company. To determine the
priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that could
result in substantial cost to the Company. No assurance can be given that any
such patent application will not have priority over patent applications filed
by the Company.
The Company also relies upon trade secret protection, employee and
third-party nondisclosure agreements and other intellectual property protection
methods to protect its confidential and proprietary information. Despite these
efforts, there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology or that
the Company can meaningfully protect its trade secrets.
22
<PAGE> 23
The Company has in the past been, and may in the future be, notified
that it may be infringing intellectual property rights possessed by third
parties.
In July 1996, the Company's prospective Japanese manufacturing partner,
Seiko, was notified by Komatsu, one of the Company's competitors, that certain
aspects of the Company's lasers might infringe certain claims furnished by
Komatsu to Seiko that Komatsu advised Seiko were included in a patent
application filed by Komatsu in Japan (the "Patent Claims"). Seiko in turn
notified the Company of this claim. In connection with its manufacturing
agreement with Seiko, the Company has agreed to indemnify Seiko against such
claims under certain circumstances. A patent has now been issued by the Japanese
Patent Office covering the Patent Claims and Komatsu has advised Seiko of its
intention to enforce its rights under that patent against Seiko if Seiko engages
in manufacturing activities for the Company. The Company has been advised by its
patent counsel in this matter, Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, which is relying in part on the opinion of the Company's Japanese
patent counsel, that in the opinion of such firm the Company's products do not
infringe any valid Patent Claims. However, there can be no assurance that
litigation will not ensue with respect to these claims or that the Company and
Seiko would ultimately prevail in any such litigation.
Any patent litigation would at a minimum be costly and could divert the
efforts and attention of the Company's management and technical personnel, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, there can be no assurance that
other infringement claims by third parties or other claims for indemnification
by customers or end users of the Company's products resulting from infringement
claims will not be asserted in the future or that such assertions, if proven to
be true, will not materially adversely affect the Company's business, financial
condition and results of operations. If any such claims are asserted against the
Company, the Company may seek to obtain a license under the third party's
intellectual property rights. There can be no assurance, however, that a license
will be available on reasonable terms or at all. The Company could decide, in
the alternative, to resort to litigation to challenge such claims or to design
around the patented technology. Such actions could be costly and would divert
the efforts and attention of the Company's management and technical personnel,
which would materially adversely affect the Company's business, financial
condition and results of operations.
The Company has registered the trademark CYMER in the United States
and certain other countries and is seeking additional registrations in certain
countries. In Japan, the Company's application for registration was rejected on
the grounds that it is similar to a trademark previously registered by a
Japanese company for a broad range of products. The Company is seeking a
partial nullification of the other registration with respect to laser devices
and related components and does not believe that the holder of the other
trademark is engaged in any business similar to that of the Company. For this
reason, the Company is continuing to use the trademark CYMER in Japan and
believes that it will ultimately be permitted to register such mark for use
with its products and that it is not infringing the other company's trademark.
There can be no assurance that the Company will ultimately succeed in its
efforts to register its trademark in Japan or that it will not be subjected to
an action for trademark infringement, which could be costly to defend and, if
successful, would require the Company to cease use of the mark and,
potentially, to pay damages.
Dependence on Key Personnel. The Company is highly dependent on the
services of a number of key employees in various areas, including engineering,
research and development, sales and marketing and manufacturing. In particular,
there are a limited number of experts in excimer laser technology and
competition for such personnel is intense. The Company has in the past
experienced difficulty in hiring personnel, including experts in laser
technology. The Company believes that, to a large extent, its future success
will depend upon the continued services of its engineering, research and
development, sales and marketing and manufacturing personnel and on its ability
to attract and retain highly skilled personnel in each of these areas. The
Company does not have employment agreements with any of its employees, and
there is no assurance that the Company will be able to retain its key
employees. The failure of the Company to hire and retain such personnel could
have a material adverse effect on the Company's business, financial condition
and results of operation.
23
<PAGE> 24
Risks of International Sales and Operations. Approximately 54%, 69%
and 82% of the Company's revenues in 1994, 1995 and the nine months ended
September 30, 1996, respectively, were derived from customers located outside
the United States. Because a significant majority of the Company's principal
customers are located in other countries, the Company anticipates that
international sales will continue to account for a significant portion of its
revenues. In order to support its overseas customers, the Company maintains a
subsidiary in Japan, is expanding its field service and support operations in
Japan and Europe, is working with an independent firm to expand field service
and support in Korea, is seeking to establish with an independent firm a joint
field service and support capability to serve Taiwan and Southeast Asia, and is
seeking to qualify Seiko as a manufacturer of its products in Japan. There can
be no assurance that the Company will be able to manage these operations
effectively or that the Company's investment in these activities will enable it
to compete successfully in international markets or to meet the service and
support needs of its customers. Additionally, a significant portion of the
Company's sales and operations could be subject to certain risks, including
tariffs and other barriers, difficulties in staffing and managing foreign
subsidiary and branch operations, currency exchange risks and exchange
controls, potentially adverse tax consequences and the possibility of
difficulty in accounts receivable collection. Further, while the Company has
experienced no difficulty to date in complying with U.S. export controls, these
rules could change in the future and make it more difficult or impossible for
the Company to export its products to various countries. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar due to sales by the Company
to its Japanese subsidiary being denominated in dollars, and sales by the
subsidiary to customers in Japan being denominated in yen. The Company's
subsidiary manages its exposure to such fluctuations by entering into foreign
currency exchange contracts to hedge its purchase commitments. Although
management will continue to monitor the Company's exposure to currency
fluctuations, and, when appropriate, use financial hedging techniques to
minimize the effect of these fluctuations, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's results of operations or financial condition. In the future, the
Company could be required to sell its products in other currencies, which
would make the management of currency fluctuations more difficult and expose
the Company to greater risks in this regard.
The Company's products are subject to numerous foreign government
standards and regulations that are continually being amended. Although the
Company endeavors to meet foreign technical and regulatory standards, there can
be no assurance that the Company's products will continue to comply with
foreign government standards and regulations, or changes thereto, or that it
will be cost effective for the Company to redesign its products to comply with
such standards and regulations. The inability of the Company to design or
redesign products to comply with foreign standards could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Environmental and Other Government Regulations. Federal, state and
local regulations impose various controls on the storage, handling, discharge
and disposal of substances used in the Company's manufacturing process and on
the facility leased by the Company. The Company believes that its activities
conform to present governmental regulations applicable to its operations and its
current facilities, including those related to environmental, land use, public
utility utilization and fire code matters. There can be no assurance that such
governmental regulations will not in the future impose the need for additional
capital equipment or other process requirements upon the Company or restrict
the Company's ability to expand its operations. The adoption of such measures
or any failure by the Company to comply with applicable environmental and land
use regulations or to restrict the discharge of hazardous substances could
subject the Company to future liability or could cause its manufacturing
operations to be curtailed or suspended.
24
<PAGE> 25
Risks of Product Liability Claims. The Company faces a significant
risk of exposure to product liability claims in the event that the use of its
products results in personal injury or death, and there can be no assurance
that the Company will not experience material product liability losses in the
future. The Company maintains insurance against product liability claims in the
amount of $5.0 million per occurrence and $6.0 million in the aggregate, but
there can be no assurance that such coverage will continue to be available on
terms acceptable to the Company or that such coverage will be adequate for
liabilities actually incurred. Also, in the event that any of the Company's
products prove to be defective, the Company may be required to recall or
redesign such products. A successful claim brought against the Company in excess
of available insurance coverage, or any claim or product recall that results in
significant adverse publicity against the Company, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
25
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In November, 1993, the registrant was notified by Coherent, Inc.
("Coherent"), the parent corporation of Lambda Physik, one of the registrant's
competitors, that certain aspects of the registrant's products might infringe
upon a patent owned by Coherent. In June, 1996, the registrant was notified by
Coherent that certain aspects of its products might infringe a second patent
owned by Coherent. In September, 1996, Coherent and Lambda-Physik commenced a
patent infringement action against the registrant with respect to the first
patent in the United States District Court for the Northern District of
California.
On November 1, 1996, the registrant entered into a settlement agreement
with Coherent and Lambda Physik. Under the terms of the settlement, Coherent and
Lambda Physik agreed to (i) dismiss the patent infringement action with
prejudice and (ii) release the registrant from any claims either may have with
respect to the two disputed patents. Total payments under the agreement are to
be made over a 13 year period. Such annual payments are not material to the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 8, 1996, the sole stockholder of the registrant, by written
consent, approved (i) the merger of Cymer Laser Technologies into the registrant
in connection with the reincorporation of Cymer Laser Technologies into the
State of Nevada and (ii) the registrant's 1996 Stock Option Plan, 1996 Employee
Stock Purchase Plan and 1996 Director Option Plan.
ITEM 6. EXHIBITS
(a) Exhibits
Financial Data Schedule (submitted for SEC use only)
26
<PAGE> 27
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.
CYMER, INC.
(Registrant)
Date: November 14, 1996 By: /s/ William A. Angus, III
-------------------------------------
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AT SEPTEMBER 30, 1996 AND STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SEPTEMBER 30,
1996 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 21,048
<SECURITIES> 0
<RECEIVABLES> 16,581
<ALLOWANCES> 0
<INVENTORY> 15,156
<CURRENT-ASSETS> 53,705
<PP&E> 14,081
<DEPRECIATION> 4,857
<TOTAL-ASSETS> 63,129
<CURRENT-LIABILITIES> 17,205
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 45,142
<TOTAL-LIABILITY-AND-EQUITY> 63,129
<SALES> 35,553
<TOTAL-REVENUES> 37,428
<CGS> 20,961
<TOTAL-COSTS> 20,961
<OTHER-EXPENSES> 13,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> 3,531
<INCOME-TAX> 568
<INCOME-CONTINUING> 2,963
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