<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 June 30, 1997
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>
<S> <C>
Nevada 33-0175463
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
16750 Via Del Campo Court, San Diego, CA 92127
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (619) 451-7300
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 X No
--- ---
The number of shares of Common Stock, with $0.001 par value, outstanding on June
30, 1997 was 14,171,638.
<PAGE> 2
CYMER, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 3
1996 and June 30, 1997
Consolidated Statements of Income for the 4
three and six months ended June 30, 1996 and 1997
Consolidated Statements of Cash Flows for the 5
six months ended June 30, 1996 and 1997
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Changes in Securities 25
ITEM 3. Defaults upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 25
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 25
SIGNATURE PAGE 26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
CYMER, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 55,405 $ 18,960
Short-term investments 10,449 11,129
Accounts receivable - net 18,833 49,192
Foreign exchange contracts receivable 9,317 26,204
Inventories 15,678 36,752
Deferred income taxes 1,432 4,594
Prepaid expenses and other 1,880 4,267
--------- ---------
Total current assets 112,994 151,098
PROPERTY - net 11,707 25,175
LONG-TERM INVESTMENTS 1,361 6,079
OTHER ASSETS 3,405 3,430
--------- ---------
TOTAL ASSETS $ 129,467 $ 185,782
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loan and security agreements $ 1,750 $ 1,250
Accounts payable 7,095 18,381
Accrued and other liabilities 8,401 21,310
Foreign exchange contracts payable 8,396 26,499
Income taxes payable 2,609 4,756
--------- ---------
Total current liabilities 28,251 72,196
--------- ---------
OTHER LIABILITIES 2,396 2,930
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred Stock - authorized 5,000,000 shares;
$0.001 par value, no shares issued or outstanding
Common stock - authorized 25,000,000 shares;
$0.001 par value, issued and outstanding 13,780,000
and 14,172,000 shares 14 14
Paid-in capital 106,672 106,944
Net unrealized loss on investments (4)
Retained earnings (accumulated deficit) (7,421) 4,417
Cumulative translation adjustment (445) (715)
--------- ---------
Total stockholders' equity 98,820 110,656
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,467 $ 185,782
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CYMER, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30 ended June 30
------------------------ -----------------------
1996 1997 1996 1997
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 11,242 $ 50,030 $ 17,768 $ 86,476
Other 780 102 1,414 627
-------- -------- -------- --------
Total revenues 12,022 50,132 19,182 87,103
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of product sales 6,475 31,003 10,588 52,700
Research and development 2,291 6,344 4,249 10,592
Sales and marketing 1,070 2,756 1,825 5,015
General and administrative 752 2,059 1,303 3,856
-------- -------- -------- --------
Total costs and expenses 10,588 42,162 17,965 72,163
-------- -------- -------- --------
OPERATING INCOME 1,434 7,970 1,217 14,940
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Foreign currency exchange gain
(loss) - net 47 470 47 (85)
Interest and other income 10 507 27 1,204
Interest and other expense (98) (158) (148) (275)
-------- -------- -------- --------
Total other income (expense)
- net (41) 819 (74) 844
-------- -------- -------- --------
Income Before Provision for Income Taxes 1,393 8,789 1,143 15,784
Provision for Income Taxes 176 1,359 186 3,946
NET INCOME $ 1,217 $ 7,430 $ 957 $ 11,838
======== ======== ======== ========
EARNINGS PER SHARE:
Earnings per share $ 0.48 $ 0.77
======== ========
Weighted average common and common
equivalent shares outstanding 15,347 15,279
======== ========
Pro forma earnings per share $ 0.13 $ 0.10
======== ========
Pro forma weighted average common
and common equivalent shares
outstanding 9,666 9,666
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION
For the six months
ended June 30
-----------------------
1996 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 957 $ 11,838
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 753 2,777
Deferred income taxes (3,162)
Change in assets and liabilities:
Accounts receivable (4,599) (29,261)
Foreign exchange contracts receivable (15,991)
Inventories (6,059) (20,812)
Prepaid expenses and other assets (614) (2,617)
Accounts payable 2,646 8,638
Foreign exchange contracts payable 17,158
Accrued and other liabilities 1,172 15,269
Income taxes payable 172 2,147
Other (189) 232
-------- --------
Net cash used for operating activities (5,761) (13,784)
-------- --------
INVESTING ACTIVITIES:
Acquisition of property (5,031) (15,391)
Disposal of property 16
Purchases of investments (26,278)
Proceeds from sold or matured investments 20,867
-------- --------
Net cash used for investing activities (5,015) (20,802)
-------- --------
FINANCING ACTIVITIES:
Net (payments) borrowings under revolving loan
and security agreements 4,464 (500)
Proceeds from issuance of redeemable convertible
preferred stock 5,752
Proceeds from issuance of common stock 46 272
Net advances against commercial drafts 459
Payments on capital lease obligations (49) (159)
-------- --------
Net cash provided by (used for) financing
activities 10,672 (387)
-------- --------
</TABLE>
(continued)
5
<PAGE> 6
<TABLE>
For the six months
ended June 30
-----------------------
1996 1997
<S> <C> <C>
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 70 (1,472)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (34) (36,445)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,015 55,405
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,981 $ 18,960
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 125 $ 320
======== ========
Income taxes paid $ 11 $ 2,963
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred for furniture
and equipment $ 573 $ 839
======== ========
</TABLE>
6
<PAGE> 7
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997
(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.
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 sells its excimer lasers
in Japan primarily 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.
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 consolidated 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 Annual Report
on Form 10-K (including items incorporated by reference therein) for the year
ended December 31, 1996 and the Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997. 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. EARNINGS PER SHARE
Earnings Per Share - Earnings per share is computed based on the weighted
average number of common and common equivalent shares (common stock options and
warrants) outstanding during each period using the treasury stock method.
Primary earnings per share is not significantly different from fully diluted
earnings per share for any of the periods indicated.
Pro Forma Earnings Per Share - Pro forma earnings per share is presented
for the period prior to the Company's initial public offering of common stock in
September 1996. The amount 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
7
<PAGE> 8
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.
New Accounting Pronouncement. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," effective for financial statements issued after
December 15, 1997. SFAS No. 128 requires dual presentation of "Basic" and
"Diluted" EPS by entities with complex capital structures, replacing "Primary"
and "Fully Diluted" EPS under Accounting Principles Board ("APB") Opinion No.
15. Basic EPS excludes dilution from common stock equivalents and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from common stock equivalents, similar to fully diluted EPS, but uses
only the average stock price during the period as part of the computation. The
Company will be required to adopt the new method of reporting EPS for the year
ending December 31, 1997.
The pro forma effects of adopting SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
--------------------- ---------------------
(shares in thousands) (shares in thousands)
<S> <C> <C>
Basic:
Weighted average number of
common shares 14,067 13,980
====== ==========
Earnings per share $ 0.53 $ 0.85
====== ==========
Diluted:
Weighted average number of common shares
and common share equivalents outstanding 15,334 15,285
====== ==========
Earnings per share $ 0.48 $ 0.77
====== ==========
</TABLE>
3. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
----------- --------
(in thousands)
<S> <C> <C>
Inventories:
Raw materials $ 6,243 $15,696
Work-in-progress 6,680 14,504
Finished goods 2,755 6,552
------- -------
Total $15,678 $36,752
------- -------
Accrued and other liabilities:
Warranty and installation reserves $ 4,950 $16,400
Payroll and payroll related 932 2,994
Commissions 539 -
Other 1,980 1,916
------- -------
Total $ 8,401 $21,310
------- -------
</TABLE>
8
<PAGE> 9
4. CONTINGENCIES
The Company's Japanese manufacturing partner has been notified that its
manufacture of the Company's laser systems in Japan may infringe a Japanese
patent held by another Japanese company. The Company has indemnified its
Japanese manufacturing partner against patent infringement claims under certain
circumstances. The Company believes, based upon the advice of counsel, that the
Company's products do not infringe any valid claim of the asserted patent.
9
<PAGE> 10
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's statements of
income as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1996 1997 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Product sales 93.5% 99.8% 92.6% 99.3%
Other 6.5 0.2 7.4 0.7
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of product sales 53.9 61.8 55.2 60.5
Research and development 19.1 12.7 22.2 12.2
Sales and marketing 8.9 5.5 9.5 5.8
General and administrative 6.3 4.1 6.8 4.4
----- ----- ----- -----
Total costs and expenses 88.2 84.1 93.7 82.9
----- ----- ----- -----
Operating income 11.8 15.9 6.3 17.1
Other income (expense) -net (0.3) 1.6 (0.3) 1.0
----- ----- ----- -----
Income before provision for
income taxes 11.5 17.5 6.0 18.1
Provision for income taxes 1.5 2.7 1.0 4.5
----- ----- ----- -----
Net income 10.0% 14.8% 5.0% 13.6%
----- ----- ----- -----
Gross margin on product sales 42.4% 38.0% 40.4% 39.1%
----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
Revenues. The Company's total revenues consist of product sales, which
include sales of laser systems and spare parts and service and training,
and other revenues, which primarily include 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
10
<PAGE> 11
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 345% from $11.2 million in the three months ended
June 30, 1996 to $50.0 million in the three months ended June 30, 1997,
primarily due to increased sales of DUV photolithography laser systems. A
total of 117 laser systems were sold in the three month period ended June
30, 1997 compared to 27 laser systems in the three month period ended June
30, 1996. Funded development revenues decreased 87% from $780,000 for the
three months ended June 30, 1996 to $102,000 in the three months ended
June 30, 1997, primarily due to substantial completion of various laser
research projects sponsored by customers and SEMATECH.
The Company's sales are generated primarily by shipments to customers in
Japan, the Netherlands, and the United States. Approximately 69%, 81% and
89% of the Company's sales in 1995, 1996 and the first six months of 1997,
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 50%, 61% and 66% of revenues
from 1995, 1996 and the first six months of 1997, 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, and foreign exchange gains and losses on foreign currency
exchange contracts associated with purchases of the Company's products by
the Japanese subsidiary for resale under firm third-party sales
commitments.
Cost of product sales rose 379% from $6.5 million for the three months
ended June 30, 1996 to $31.0 million for the three months ended June 30,
1997. The gross margin on these sales decreased from 42.4% for the three
months ended June 30, 1996 to 38.0% for the same three month period in
1997 as the Company recorded an additional warranty reserve in 1997 to
cover specific configuration and performance activities being undertaken
on lasers previously sold.
Warranty reserve expenses are included in cost of product sales as the
related sales are reported. For the three months ended June 30, 1997, an
additional specific warranty reserve of $2.6 million was expensed to
address certain lasers previously shipped. This additional warranty
expense was to incorporate changes in these lasers to ensure that they
meet the current product configuration and specifications. The Company has
undertaken a proactive approach through which it intends to make the
necessary hardware and software changes to the laser systems as a
preventive maintenance measure to meet performance levels warranted by the
Company. These changes are currently in varying stages of implementation.
The gross margin on product sales prior to this specific reserve was 43.0%
for the three months ended June 30, 1997.
For the three months ended June 30, 1997, the Company continued to incur
an increase in field support overhead costs of $1.7 million as it builds
its world wide field support infrastructure, including the recruitment and
training of highly skilled field engineers in order to provide fast and
responsive service to the semiconductor manufacturers.
11
<PAGE> 12
Net gains or losses from foreign currency exchange contracts are included
in cost of product sales in the consolidated statements of operations as
the related foreign sales are recognized. The Company recognized net gains
on such contracts of $1.4 million for the three months ended June 30, 1997
as compared to $244,000 for the same period in 1996.
Research and Development. Research and development expenses include costs
of internally-funded and customer-funded projects as well as continuing
research support expenses which primarily include employee and material
costs, depreciation of equipment and other engineering related costs.
Research and development expenses increased 177% from $2.3 million in the
three months ended June 30, 1996 to $6.3 million in the three months ended
June 30, 1997, 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 19.1% to 12.7% 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 158% from $1.1 million
for the three months ended June 30, 1996 to $2.8 million in the three
months ended June 30, 1997 due primarily to increased product management
and sales support efforts and marketing activities as more lasers were
placed in the field over the period. As a percentage of total revenues,
such expense declined from 8.9% to 5.5% 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 174%
from $752,000 in the three months ended June 30, 1996 to $2.1 million for
the three months ended June 30, 1997 due to an increase in general and
administrative support as the Company's sales volume, manufacturing
capacity, employee recruiting requirements, and overall level of business
activity increased. As a percentage of total revenues, such expenses
decreased from 6.3% to 4.1% in the respective periods.
Other Income (Expense) - net. Net 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. Net other expense of $41,000 was
reported for the three months ended June 30, 1996 compared to net other
income of $819,000 for the three months ended June 30, 1997, primarily due
to the increase in interest income associated with the investment of
excess cash, and a foreign currency exchange gain for 1997. Foreign
currency exchange gains totaled $47,000, interest income totaled $10,000
and interest expense totaled $98,000 for the three months ended June 30,
1996, compared to an exchange gain of $470,000, interest income of
$507,000 and $158,000 in interest expense for the three months ended June
30, 1997. Interest expense for the three months ended June 30, 1997 was
attributable primarily to the discounting of commercial drafts in Japan
and interest associated with the bank term loan.
The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar. 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
12
<PAGE> 13
commitments to the Company. The gains or losses from these contracts are
recorded as a component of cost of product sales, while the remaining
foreign currency exposure is recorded as other income (expense) in the
consolidated statements of operations. Gains and losses resulting from
foreign currency translation are accumulated as a separate component of
consolidated stockholders' equity.
Provision for Income Taxes. The provision for income taxes was
insignificant for the three month period ended June 30, 1996 as the
Company had net operating loss carryforwards which absorbed any income tax
effect. The tax provision of $1.4 million for the three months ended June
30, 1997 was primarily attributable to the substantial growth in the
Company's pretax income offset by the adjustment to the annual effective
tax rate from 39% to 25% due to the partial reduction of the deferred tax
asset valuation allowance carried over from 1996 in the three month period
ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
Revenues. Product sales increased 387% from $17.8 million in the six
months ended June 30, 1996 to $86.5 million in the six months ended June
30, 1997, primarily due to increased sales of DUV photolithography laser
systems. A total of 201 laser systems were sold in the six month period
ended June 30, 1997 compared to 42 laser systems in the six month period
ended June 30, 1996. Funded development revenues decreased 56% from $1.4
million for the six months ended June 30, 1996 to $627,000 in the six
months ended June 30, 1997, primarily due to substantial completion of
various laser research projects sponsored by customers and SEMATECH.
Cost of Product Sales. Cost of product sales rose 398% from $10.6 million
for the six months ended June 30, 1996 to $52.7 million for the six months
ended June 30, 1997. The gross margin on these sales decreased from 40.4%
for the six months ended June 30, 1996 to 39.1% for the same six month
period in 1997 primarily due to the increase in additional specific
warranty reserves of $4.9 million and an increase in field support
overhead costs of $2.6 million as it continued to build its world wide
field support infrastructure in order to provide fast and responsive
service to the semiconductor manufacturers. The gross margin on product
sales prior to this specific warranty provision was 44.7% for the six
months ended June 30, 1997.
The Company recognized net gains on foreign currency exchange contracts
associated with the sale of laser systems of $3.4 million for the six
months ended June 30, 1997 as compared to $244,000 for the six months
ended June 30, 1996.
Research and Development. Research and development expenses increased 149%
from $4.2 million in the six months ended June 30, 1996 to $10.6 million
in the six months ended June 30, 1997, 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 22.2% to 12.2% in the
respective periods due to the growth in the Company's revenues.
Sales and Marketing. Sales and marketing expenses increased 175% from $1.8
million for the six months ended June 30, 1996 to $5.0 million in the six
months ended June 30, 1997 due primarily to increased product management
and sales support efforts and marketing activities as more lasers were
placed in the field over the period. As a percentage of total revenues,
such expense declined from 9.5% to 5.8% in the respective periods due to
the growth in the Company's revenues.
13
<PAGE> 14
General and Administrative. General and administrative expenses increased
196% from $1.3 million in the six months ended June 30, 1996 to $3.9
million for the six months ended June 30, 1997 due to an increase in
general and administrative support as the Company's sales volume,
manufacturing capacity, employee recruiting requirements, and overall
level of business activity increased. As a percentage of total revenues,
such expenses decreased from 6.8% to 4.4% in the respective periods.
Other Income (Expense) - net. Net other income (expense) increased from
$74,000 of net other expense for the six months ended June 30, 1996 to
$844,000 of net other income for the six months ended June 30, 1997,
primarily due to the increase in interest income associated with the
investment of excess cash, off set by a foreign currency exchange loss for
1997. Foreign currency exchange gains totaled $47,000, interest income
totaled $27,000 and interest expense totaled $148,000 for the six months
ended June 30, 1996, compared to an exchange loss of $85,000, interest
income of $1.2 million and $275,000 in interest expense for the six months
ended June 30, 1997. Interest expense for the six months ended June 30,
1997 was attributable primarily to the discounting of commercial drafts in
Japan and interest associated with the bank term loan.
Provision for Income Taxes. The provision for income taxes was
insignificant for the six month period ended June 30, 1996 as the Company
had net operating loss carryforwards which absorbed any income tax effect.
The tax provision of $3.9 million for the six months ended June 30, 1997
was primarily attributable to the substantial growth in the Company's
pretax income offset by the reduction of the deferred tax asset valuation
allowance carried over from 1996.
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, resulting
in net proceeds to the Company of approximately $29.7 million and the
public offering on December 12, 1996, resulting in net proceeds of
approximately $50.0 million, 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 June 30, 1997, the Company had
approximately $19.0 million in cash and cash equivalents, $11.1 million in
short term investments, $6.1 million in long term investments, $78.9
million in working capital and $1.3 million in bank debt.
Net cash used in operating activities was approximately $5.7 million for
the six months ended June 30, 1996 and $13.8 million for the six months
ended June 30, 1997. The increase in cash used in operations in the six
months ended June 30, 1997 was primarily attributable to an increase in
accounts receivable and inventory as the working capital requirements of
the Company increased due to the business expansion during the period.
Net cash used for investing activities was approximately $5.0 million for
the six months ended June 30, 1996 as compared to $20.8 million for the
six months ended June 30, 1997. The increase in cash used for investing
activities during 1997 primarily reflects the investment activity of funds
received through the Company's public offerings and the purchase of
computer equipment, test equipment, research and development tools,
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
$10.7 million for the six months ended June 30, 1996, and the Company used
net cash for financing activities for the six months ended June 30, 1997
of approximately $387,000. During the
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six months ended June 30, 1996, the Company sold Redeemable Convertible
Preferred Stock for approximately $5.8 million, increased its bank
borrowings by $4.5 million and increased advances against commercial
drafts by $459,000. Upon the Company's initial public offering in
September 1996, all Redeemable Convertible Preferred Stock (approximately
7.7 million shares) and Redeemable Convertible Preferred Stock Warrants
(to purchase 283,000 shares of such stock) were automatically converted
into the Company's common stock or warrants to purchase common stock. In
the six months ended June 30, 1997, the Company decreased it bank
borrowings by $500,000.
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 anticipates that with the existing cash balance together with
anticipated cash provided by operations and available bank credit are
adequate to meet its cash needs at its current operating level for at
least the next 12 months. However, the Company may require additional
funds to support its future working capital requirements or for other
purposes and may seek to raise such additional funds through public or
private equity financings or other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company and would
not be dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. SFAS No. 128 requires all companies whose capital structures include
convertible securities and options to make a dual presentation of basic and
diluted earnings per share. The new standard becomes effective for the Company
for the year ending December 31, 1997. The pro forma effect on earnings per
share for the three and the six months ended June 30, 1997 is included in Note 2
of Notes to Consolidated Financial Statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for the year ending December 31,
1998. Comprehensive income includes such items as foreign currency translation
adjustments and unrealized holding gains and losses on available for sale
securities that are currently being presented by the Company as a component of
stockholders' equity (deficit). The Company does not expect this pronouncement
to materially impact the Company's results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about
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operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. The new standard becomes effective for the Company for the year
ending December 31, 1998, and requires that comparative information from earlier
years be restated to conform to the requirements of this standard. The Company
does not expect this pronouncement to materially change the Company's current
reporting and disclosures.
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RISK FACTORS
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 forward-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 Operating Results. The Company's 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; the rate at which semiconductor
manufacturers take delivery of photolithography tools from the Company's
customers; 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 mix of shipments between new lasers and
lower-margin replacement parts; 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 supplies its products in higher
volumes; and the Company's ability to manage effectively its exposure to foreign
currency exchange rate fluctuations, principally with respect to the Japanese
yen (in which sales by the Company's Japanese subsidiary are denominated). In
addition, the Company's operating results may be affected by reductions in
customer laser inventories as customers become more efficient at integrating the
Company's lasers into their photolithography tools.
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 range in price from approximately $400,000 to $600,000. As a
result, the precise timing of the recognition of revenue from an order for 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 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 June 30, 1997 of approximately $122.8 million
for shipment during the next 12 months. 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
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believes that they will continue to invest in DUV photolithography tools to
expand their capacity to manufacture 0.25um devices only to the degree to which
their sales forecasts and 0.25um manufacturing process yields justify such
investment. Accordingly, the Company currently expects that demand for its DUV
excimer lasers, and thus its revenues, will grow subject to such demand and
process development constraints.
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 June 30, 1997, 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 market price of the Company's Common Stock would be materially adversely
affected.
Unpredictability of Future Operating Results. The Company was founded in
1986 and shipped its first prototype laser system in 1988. Although in recent
periods the Company has experienced sequential revenue growth and has been
profitable, 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.
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 manufactures and tests its photolithography
laser systems. Despite recent success in expanding production, the Company has
historically been unable to manufacture and test its photolithography laser
systems fast enough to meet some of its delivery schedules. While the Company is
not aware of any order cancellations as a result of these delays, such delays,
if they were to recur, increase the risk that customers may 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. See
"- Dependence on Key Suppliers". 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 has qualified Seiko Instruments, Inc. ("Seiko")
of Japan as a contract manufacturer of its photolithography lasers. While Seiko
began limited production of lasers for the Company in the first quarter of 1997,
there can be no assurance that Seiko can maintain production on schedule. The
failure of Seiko to maintain production on schedule could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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Seiko has been advised by Komatsu, Ltd. ("Komatsu"), a competitor of the
Company, that certain aspects of the Company's lasers might infringe certain
patents that have been issued to Komatsu in Japan and that Komatsu intends to
enforce its rights under such patents against Seiko, if Seiko engages in
manufacturing activities for the Company. Cymer 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 claims included in the Komatsu patents. In the event that,
notwithstanding its manufacturing agreement with the Company, Seiko should
determine not to continue 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 the
components and subassemblies used in the production of the Company's laser
systems in a timely manner from existing sources, the Company has only recently
commenced volume production of its laser systems which has caused many of its
suppliers to also commence volume production of the Company's components and
subassemblies. 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. In addition,
certain materials necessary for precise optical performance in the Company's
lasers, including the calcium fluoride used in certain of the Company's lasers,
are in short supply. If the Company is unable to obtain sufficient quantities of
such materials, 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 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 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 financial condition and 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
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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.
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 tool
business and collectively accounted for approximately 41%, 65%, 90% and 94% of
the Company's total revenues in 1994, 1995, 1996 and the first six months of
1997, respectively. Sales to ASM Lithography, Canon, Nikon and SVG Lithography
accounted for approximately 22%, 21%, 46% and 5%, respectively, of total
revenues for the first six months of 1997 and 19%, 30%, 31% and 10%,
respectively, of total revenues in 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 at December 31, 1995 to 336 at December 31, 1996 and to 633 at June 30,
1997. The Company installed a new management information system and has also
substantially expanded its facilities and manufacturing capacity. For example,
since December 31, 1996 the Company has occupied three additional buildings
covering approximately 169,400 square feet. 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, its quality control, delivery and field service and customer
support capabilities. The Company will be required to attract, train and retain
key technical personnel, including both hardware and software engineers, in
order to support the Company's growth. The Company will 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 relationship with Seiko as a manufacturer of its photolithography
lasers. The Company must also effect timely deliveries of its products and
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.
Risks Associated with Laser Warranty; Need to Increase Production of
Component Modules. In the first quarter of 1997, the Company determined that
certain previously-shipped 5000 series lasers required changes in order to meet
the performance levels specified by the Company. As a result, the Company has
undertaken efforts through which it intends to make the necessary hardware and
software changes to such lasers. In connection with these efforts, the Company
has temporarily reallocated management, technical and manufacturing resources
and increased its warranty reserve for the six months ended June 30, 1997 by
approximately $4.9 million. There can be no assurance that such efforts will be
successful, that such warrant reserve
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will be sufficient to cover the costs associated with such efforts, or that
additional reserves will not be required in the future. If such efforts are
unsuccessful, or if the costs associated therewith are greater than anticipated,
the Company's business, financial condition and results of operations could be
materially and adversely affected.
The Company's aforementioned efforts and growing installed base will
require it to increase production of replacement parts and component modules.
Because the Company prioritizes the reliable operation of its installed units at
semiconductor manufacturers above all other requirements, it typically utilizes
available component modules first to support existing systems in the field.
Accordingly, the failure to rapidly expand production of component modules could
results in the delay in shipment of new laser systems, which could have a
material adverse effect on 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 is currently
expanding its direct support infrastructure in Japan, Europe, Korea, Taiwan and
Southeast Asia. This expansion entails recruiting and training qualified
field-service personnel and building effective and highly trained organizations
that can provide service to customers in various countries in their assigned
regions. The Company has historically experienced difficulties in effectively
training field-service personnel. There can be no assurance that the Company
will be able to attract and train 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.
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 competitive demand for DUV photolithography tools
may have caused, and may continue to cause, 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.
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 systems 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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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 extreme ultraviolet ("EUV"), 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 EUV, 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.
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 ability, 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 June 30,
1997, the Company owned 20 United States patents covering certain aspects of
technology associated with excimer lasers which expire from January 2008 to
January 2016 and had applied for 20 additional patents in the United States, two
of which have been allowed. As of July 15, 1997, the Company had filed 72 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 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
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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.
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.
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.
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.
The Company's 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 three patents (the "Komatsu Patents") that have been
issued to Komatsu in Japan, and that Komatsu intends to enforce its rights under
the Komatsu Patents against Seiko if Seiko engages in manufacturing activities
for the Company. In connection with its manufacturing agreement with Seiko, the
Company has agreed to indemnify Seiko against such claims under certain
circumstances. Komatsu has also identified to the Company a number of pending
applications and additional patents without asserting that the Company's lasers
infringe the additional patents, or would infringe the pending applications
should they be issued. The Company in consultation with Japanese patent counsel,
has initiated oppositions to one of the Komatsu Patents and one of the
applications in the Japanese Patent Office. 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 claims of the Komatsu Patents. However, there can be no
assurance that litigation will not ensue with respect to these claims, that the
Company and Seiko would ultimately prevail in an such litigation or that Komatsu
will not assert infringement claims under additional patents.
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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, if 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 there is
intense competition for such personnel, as well as for the highly-skilled
hardware and software engineers the Company requires. The Company has in the
past experienced, and continues to experience, 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, train 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,
train and retain such personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks of International Sales and Operations. Approximately 69%, 81% and
89% of the Company's revenues in 1995, 1996 and the first six months of 1997,
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 subsidiaries in Japan and
Korea, is establishing a Taiwanese subsidiary to provide support in Taiwan and
Southeast Asia, is expanding its field service and support operations worldwide,
and will continue to work with 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
24
<PAGE> 25
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 dominated in dollars, and sales by the subsidiary
to customers in Japan being dominated 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 or hazardous substances could subject
the Company to future liability or could cause its manufacturing operations to
be curtailed or suspended.
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, 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
25
<PAGE> 26
publicity against the Company, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Anti-Takeover Effect of Nevada Law and Charter and Bylaw Provisions;
Availability of Preferred Stock for Issuance. Nevada law and the Company's
Articles of Incorporation and Bylaws contains provisions that could discourage a
proxy contest or make more difficult the acquisition of a substantial block of
the Company's Common Stock. In addition, the Board of Directors is authorized to
issue, without stockholder approval, up to 5,000,000 shares of Preferred Stock
with voting, conversion and other rights and preferences that may be superior to
those of the Common Stock and that could adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of Preferred Stock or
of rights to purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults upon senior securities
None.
ITEM 4. Submission of matters to a vote of security holders
The Company held its Annual Meeting of Stockholders on April 24, 1997. Out
of 13,810,072 shares of Common Stock entitled to vote at such meeting, there
were present or by proxy 9,500,429 shares. At the Annual Meeting, the
stockholders of the Company approved the following matters:
(a) The election of Dr. Robert P. Akins, Richard P. Abraham, Kenneth
M. Deemer, Peter J. Simone and F. Duwaine Townsen as directors
of the Company for the ensuing year and until their successors
are elected. The vote for the nominated directors was as
follows:
Dr. Robert P. Akins, 9,496,274 votes cast for and 4,155 votes
withheld; Richard P. Abraham, 9,497,664 votes cast for and 2,765
votes withheld; Kenneth M. Deemer, 9,247,764 votes cast for and
252,665 votes withheld; Peter J. Simone, 9,496,714 votes cast
for and 2,715 votes withheld; F. Duwaine Townsen, 9,247,664
votes cast for and 252,765 votes withheld;
(b) Ratification of the appointment of Deloitte & Touche LLP as the
independent accountants of the Company for the year ending
December 31, 1997. 9,470,279 votes were cast for approval; 5,640
votes were cast against and 24,500 votes abstained.
ITEM 5. Other Information
None.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
26
<PAGE> 27
11.1 Calculation of Earnings Per Share
27.0 Financial Data Schedule (submitted for SEC use only)
(b) Reports on Forms 8-K.
None.
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: July 28, 1997 By: /s/ WILLIAM A. ANGUS, III
----------------------------
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
27
<PAGE> 28
Exhibit Index
Exhibit Description
------- -----------
11.1 Calculation of Earnings Per Share
27.0 Financial Data Schedule (submitted for SEC use only)
<PAGE> 1
Exhibit 11.1
CYMER, INC.
CALCULATION OF
EARNINGS PER SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
<S> <C> <C>
EARNINGS PER SHARE
Weighted average shares of common stock
outstanding during the period 14,067 13,980
Assumed exercise of outstanding stock
options and warrants(1) 1,280 1,299
------------- -------------
Weighted average common and
common equivalent shares 15,347 15,279
============= =============
Net income $7,430 $11,838
============= =============
Earnings per share $0.48 $0.77
============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1996 June 30, 1996
------------- -------------
<S> <C> <C>
PRO FORMA EARNINGS PER SHARE
Pro forma weighted average shares of
common stock outstanding during the period 8,766 8,766
Pro forma assumed exercise of outstanding
stock options and warrants(1) 900 900
------------- -------------
Pro forma weighted average common and
common equivalent shares 9,666 9,666
============= =============
Net income $1,217 $957
============= =============
Pro forma earnings per share $0.13 $0.10
============= =============
</TABLE>
(1) Computed using the treasury stock method.
See Note 2 of Notes to Consolidated Financial Statements
Note: Based on the Company's capital
structure, there is no difference between
primary and fully diluted earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,980
<SECURITIES> 11,129
<RECEIVABLES> 49,999
<ALLOWANCES> 807
<INVENTORY> 36,752
<CURRENT-ASSETS> 151,098
<PP&E> 33,317
<DEPRECIATION> 8,142
<TOTAL-ASSETS> 185,782
<CURRENT-LIABILITIES> 72,196
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 106,944
<TOTAL-LIABILITY-AND-EQUITY> 185,782
<SALES> 50,030
<TOTAL-REVENUES> 50,132
<CGS> 31,003
<TOTAL-COSTS> 31,003
<OTHER-EXPENSES> 11,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> 8,789
<INCOME-TAX> 1,359
<INCOME-CONTINUING> 7,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,430
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
