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, 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)
Nevada 33-0175463
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16750 Via Del Campo Court, San Diego, CA 92127
(Address of principal executive offices) (Zip Code)
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 September 30, 1997 was 28,573,313.
CYMER, INC.
FORM 10-Q
For the Quarter Ended September 30, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 3
1996 and September 30, 1997
Consolidated Statements of Income for the 4
three and nine months ended September 30,
1996 and 1997
Consolidated Statements of Cash Flows for the 5
nine months ended September 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 26
ITEM 2. Changes in Securities 26
ITEM 3. Defaults upon Senior Securities 26
ITEM 4. Submission of Matters to a Vote of Security
Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
SIGNATURE PAGE 27
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CYMER, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
December 31, September 30,
ASSETS 1996 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $55,405 $125,983
Short-term investments 10,449 41,113
Accounts receivable - net 18,833 55,462
Foreign exchange contracts receivable 9,317 28,095
Inventories 15,678 43,713
Deferred income taxes 1,432 4,578
Prepaid expenses and other 1,880 5,763
Total current assets $112,994 $304,707
PROPERTY - net 11,707 38,495
LONG-TERM INVESTMENTS 1,361 23,032
OTHER ASSETS 3,405 9,674
TOTAL ASSETS $129,467 $375,908
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,095 $26,077
Accrued and other liabilities 8,401 26,258
Foreign exchange contracts payable 8,396 27,264
Income taxes payable 2,609 2,002
Revolving loan and security agreements 1,750
Total current liabilities 28,251 81,601
LONG-TERM LIABILITIES:
Convertible subordinated notes 172,500
Other liabilities 2,396 3,033
MINORITY INTEREST 1,052
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
STOCKHOLDERS' EQUITY:
Preferred Stock - authorized 5,000,000 shares;
$.001 par value, no shares issued or outstanding
Common stock - authorized 50,000,000 shares;
$.001 par value, issued and outstanding
27,560,000 and 28,573,000 shares 28 29
Paid-in capital 106,658 107,048
Net unrealized loss on investments 7
Retained earnings (accumulated deficit) (7,421) 11,463
Cumulative translation adjustment (445) (825)
Total stockholders' equity 98,820 117,722
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $129,467 $375,908
See notes to consolidated financial statements.
</TABLE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30 ended September 30
1996 1997 1996 1997
<S> <C> <C> <C> <C>
REVENUES:
Product sales $17,785 $56,062 $35,553 $142,538
Other 461 1,406 1,875 2,033
Total revenues 18,246 57,468 37,428 144,571
COSTS AND EXPENSES:
Cost of product sales 9,845 35,773 20,433 88,473
Research and development 3,229 6,760 7,478 17,352
Sales and marketing 1,678 3,306 3,503 8,321
General and administrative 964 2,024 2,267 5,880
Total costs and expenses 15,716 47,863 33,681 120,026
OPERATING INCOME 2,530 9,605 3,747 24,545
OTHER INCOME (EXPENSE):
Foreign currency exchange
gain (loss) - net 69 (311) 116 (396)
Interest and other income 16 1,679 43 2,883
Interest and other expense (227) (1,743) (375) (2,018)
Total other income
(expense) - net (142) (375) (216) 469
Income before provision for
income taxes
and minority interest 2,388 9,230 3,531 25,014
Provision for income taxes (382) (2,307) (568) (6,253)
Minority interest 124 124
NET INCOME $2,006 $7,047 $2,963 $18,885
EARNINGS PER SHARE:
Earnings per share $0.10 $0.23 $0.15 $0.62
Weighted average common
and common equivalent
shares outstanding 20,110 30,503 20,110 30,329
See notes to consolidated financial statements.
</TABLE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30
1996 1997
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,963 $18,885
Minority interest (124)
Adjustments to reconcile net income
to net cash used for operating
activities:
Depreciation and amortization 1,405 4,866
Deferred income taxes (3,159)
Change in assets and liabilities:
Accounts receivable (12,180) (37,190)
Foreign exchange contracts receivable (19,267)
Inventories (9,914) (28,147)
Prepaid expenses and other assets (757) (4,893)
Accounts payable 4,079 14,930
Foreign exchange contracts payable 19,324
Accrued and other liabilities 2,657 21,929
Income taxes payable 554 (583)
Other 49 255
Net cash used for operating activities (11,144) (13,174)
INVESTING ACTIVITIES:
Acquisition of property (7,054) (30,587)
Purchases of investments (78,532)
Proceeds from sold or matured investments 26,179
Net cash used for investing activities (7,054) (82,940)
FINANCING ACTIVITIES:
Net payments under revolving
loan and security agreements (786) (1,750)
Proceeds from issuance of convertible
subordinated notes 172,500
Debt issue costs (5,500)
Proceeds from issuance of redeemable
convertible preferred stock 5,833
Proceeds from issuance of common stock 29,981 1,608
Net advances against commercial drafts 2,177
Payments on capital lease obligations (105) (250)
Net cash provided by financing activities 37,100 166,608
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 131 84
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,033 70,578
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,015 55,405
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,048 $125,983
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $340 $ 617
Income taxes paid $ 11 $ 7,855
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred for
furniture and equipment $573 $ 1,065
</TABLE>
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial information has been prepared
by Cymer, Inc., its wholly-owned subsidiary, Cymer Japan, Inc., and its
majority owned subsidiaries, Cymer Korea, Inc. (Cymer Korea) and Cymer
Southeast Asia, Inc. (Cymer SEA), (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.,
its wholly-owned subsidiary, Cymer Japan, and its majority-
owned subsidiaries, Cymer Korea and Cymer SEA (collectively,
the "Company"). Cymer, Inc. owns 70% of Cymer Korea and 75%
of Cymer SEA. Such subsidiaries were established during the
quarter ended September 30, 1997. The Company sells its
excimer lasers in Japan primarily through Cymer Japan, Inc.
Cymer Korea and Cymer SEA are field service offices for
customers in those regions. 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 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 Reports on Form 10-Q for the fiscal quarters
ended March 31, 1997 and June 30, 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.
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 Nine Months Ended
September 30, 1997 September 30, 1997
(shares in thousands) (shares in thousands)
<S> <C> <C>
Basic:
Weighted average number of
common shares 28,469 28,111
Earnings per share $0.25 $0.67
Diluted:
Weighted average number of
common shares and common share
equivalents outstanding 30,503 30,329
Earnings per share $0.23 $0.62
</TABLE>
3. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
(in thousands)
<S> <C> <C>
INVENTORIES:
Raw Materials $ 6,243 $20,587
Work-in-progress 6,680 15,734
Finished goods 2,755 7,392
Total $15,678 $43,713
Accrued and other liabilities:
Warranty and installation reserves $ 4,950 $18,450
Payroll and payroll related 932 4,858
Interest 1,467
Other 2,519 1,483
Total $ 8,401 $26,258
</TABLE>
4. STOCKHOLDERS' EQUITY
Stock Split - On August 7, 1997, the Company declared a
2-for-1 stock split of its Common Stock effective August 21,
1997. All share amounts and earnings per share for all
periods presented have been adjusted to give effect to this
stock split.
5. CONVERTIBLE SUBORDINATED NOTES
In the third quarter of 1997, the Company issued $172.5
million aggregate principal amount of Step-Up Convertible
Subordinated Notes (the "Notes") due August 6, 2004 with
interest payable semi-annually February 6 and August 6,
commencing February 6, 1998. Interest on the Notes will
accrue at the rate per annum of 3 1/2% from August 6, 1997
through August 5, 2000 and will accrue at the rate per annum
of 7 1/4% from August 6, 2000 to maturity or earlier
redemption, representing a yield to maturity of
approximately 5.47%. The Notes are convertible at the
option of the holder into shares of Common Stock of the
Company at any time on or after November 5, 1997 and prior
to redemption or maturity, at a conversion rate of 21.2766
shares per $1,000 principal amount of Notes, subject to
adjustment under certain conditions. The Company cannot
redeem the Notes prior to August 9, 2000. Thereafter, the
Company can redeem the Notes from time to time, in whole or
in part, at specified redemption prices. The Notes are
unsecured and subordinated to all existing and future senior
indebtedness of the Company. The indenture governing the
Notes does not restrict the incurrence of senior
indebtedness or other indebtedness by the Company.
6. CONTINGENCIES
The Company's Japanese manufacturing partner has been
notified that its manufacture of the Company's laser systems
in Japan may infringe certain Japanese patents held by
another Japanese company. The Company has agreed to
indemnify its Japanese manufacturing partner against patent
infringement claims under certain circumstances. The
Company believes that the Company's products do not infringe
any valid claim of the asserted patents.
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 Nine months ended
September 30, September 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Revenues:
Product sales 97.5% 97.6% 95.0% 98.6%
Other 2.5 2.4 5.0 1.4
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of product sales 53.9 62.2 54.6 61.2
Research and development 17.7 11.8 20.0 12.0
Sales and marketing 9.2 5.8 9.3 5.7
General and administrative 5.3 3.5 6.1 4.1
Total costs and expenses 86.1 83.3 90.0 83.0
Operating income 13.9 16.7 10.0 17.0
Other income (expense) -net (0.8) (0.6) (0.6) 0.3
Income before provision for
income taxes and minority
interest 13.1 16.1 9.4 17.3
Provision for income taxes (2.1) (4.0) (1.5) (4.3)
Minority interest .2 .1
Net income 11.0% 12.3% 7.9% 13.1%
Gross margin on product sales 44.6% 36.2% 42.5% 37.9%
</TABLE>
Three Months Ended September 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 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 215% from $17.8 million in the
three months ended September 30, 1996 to $56.1 million
in the three months ended September 30, 1997, primarily
due to increased sales of DUV photolithography laser
systems. A total of 126 laser systems were sold in the
three month period ended September 30, 1997 compared to
41 laser systems in the three month period ended
September 30, 1996. Funded development revenues
increased 205% from $461,000 for the three months ended
September 30, 1996 to $1.4 million in the three months
ended September 30, 1997, primarily due to substantial
completion of milestones in laser research projects
during the three month period ended September 30, 1997.
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 nine
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 65% of revenues
from 1995, 1996 and the first nine 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 263% from $9.8 million for
the three months ended September 30, 1996 to $35.8
million for the three months ended September 30, 1997.
The gross margin on these sales decreased from 44.6%
for the three months ended September 30, 1996 to 36.2%
for the same three month period in 1997 as the Company
recorded one time charges associated with bringing the
Company's new manufacturing facility more fully on line
and charges to cover additional specific warranty costs
associated with the Company's Continuous Improvement
Program (CIP) originally initiated in the first quarter
of 1997.
Warranty reserve expenses are included in cost of
product sales as the related sales are reported. For
the three months ended September 30, 1997, an
additional specific warranty reserve of $1.5 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 38.9% for the three
months ended September 30, 1997.
For the three months ended September 30, 1997, the
Company continued to incur an increase in field support
overhead costs of $2.6 million as it builds its world
wide field support infrastructure, including the start
up of service subsidiaries in Korea and Taiwan, and the
recruitment and training of field engineers in order to
provide service to semiconductor manufacturers.
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 loss on such contracts of $52,000 for the three
months ended September 30, 1997 as compared to $187,000
net gain 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 109% from $3.2 million in the three
months ended September 30, 1996 to $6.8 million in the
three months ended September 30, 1997, due primarily to
increased product support efforts associated with the
release of the Company's 5000 series lasers, the
continued development of new laser models, and the
hiring of additional technical personnel. As a
percentage of total revenues, such expenses declined
from 17.7% to 11.8% 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 97% from $1.7
million for the three months ended September 30, 1996
to $3.3 million in the three months ended September 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 9.2% to 5.8% 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 110% from $964,000 in the three months ended
September 30, 1996 to $2.0 million for the three months
ended September 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 5.3% to 3.5% 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 $142,000 was reported for the three months ended
September 30, 1996 compared to $375,000 for the three
months ended September 30, 1997, primarily due to the
net effect of interest income and expense associated
with the investment of excess funds received for the
Convertible Subordinated Notes issued in the third
quarter of 1997, and a foreign currency exchange loss for 1997.
Foreign currency exchange gains totaled $69,000,
interest income totaled $16,000 and interest expense
totaled $227,000 for the three months ended September
30, 1996, compared to an exchange loss of $311,000,
interest income of $1.7 million and $1.7 million in
interest expense for the three months ended September
30, 1997.
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 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 income. 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 $382,000 for the
three month period ended September 30, 1996 as the
Company had net operating loss carryforwards which
would absorb any significant income tax effect. The
tax provision of $2.3 million for the three months
ended September 30, 1997 was primarily attributable to
the substantial growth in the Company's pretax income
offset by the partial reduction of the deferred tax
asset valuation allowance carried over from 1996.
Nine Months Ended September 30, 1996 and 1997
Revenues. Product sales increased 301% from $35.6
million in the nine months ended September 30, 1996 to
$142.5 million in the nine months ended September 30,
1997, primarily due to increased sales of DUV
photolithography laser systems. A total of 327 laser
systems were sold in the nine month period ended
September 30, 1997 compared to 83 laser systems in the
nine month period ended September 30, 1996. Funded
development revenues increased 8% from $1.9 million for
the nine months ended September 30, 1996 to $2.0
million in the nine months ended September 30, 1997,
primarily due to substantial completion of various
milestones associated with laser research projects
sponsored by SEMATECH.
Cost of Product Sales. Cost of product sales rose 333%
from $20.4 million for the nine months ended September
30, 1996 to $88.5 million for the nine months ended
September 30, 1997. The gross margin on these sales
decreased from 42.5% for the nine months ended
September 30, 1996 to 37.9% for the same nine month
period in 1997 primarily due to the increase in
additional specific warranty reserves of $6.4 million,
an increase in field support overhead costs of $5.2
million as it continued to build its world wide field
support infrastructure in order to provide fast and
responsive service to the semiconductor manufacturers,
and one time charges associated with bringing the
Company's new manufacturing facility more fully on
line. The gross margin on product sales prior to this
specific warranty provision was 42.4% for the nine
months ended September 30, 1997.
The Company recognized net gains on foreign currency
exchange contracts associated with the sale of laser
systems of $3.3 million for the nine months ended
September 30, 1997 as compared to $528,000 for the nine
months ended September 30, 1996.
Research and Development. Research and development
expenses increased 132% from $7.5 million in the nine
months ended September 30, 1996 to $17.4 million in the
nine months ended September 30, 1997, due primarily to
increased product support efforts associated with the
release of the Company's 5000 series lasers, the
continued development of new laser models and the
hiring of additional technical personnel. As a
percentage of total revenues, such expenses declined
from 20.0% to 12.0% in the respective periods due to
the growth in the Company's revenues.
Sales and Marketing. Sales and marketing expenses
increased 138% from $3.5 million for the nine months
ended September 30, 1996 to $8.3 million in the nine
months ended September 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 9.3% to 5.7% in
the respective periods due to the growth in the
Company's revenues.
General and Administrative. General and administrative
expenses increased 159% from $2.3 million in the nine
months ended September 30, 1996 to $5.9 million for the
nine months ended September 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 6.1% to 4.1% in the
respective periods.
Other Income (Expense) - net. Net other income
(expense) increased from $216,000 of net other expense
for the nine months ended September 30, 1996 to
$469,000 of net other income for the nine months ended
September 30, 1997, primarily due to the increase in
net interest income associated with the investment of
excess cash, off set by a foreign currency exchange
loss for 1997. Foreign currency exchange gains totaled
$116,000, interest income totaled $43,000 and interest
expense totaled $375,000 for the nine months ended
September 30, 1996, compared to an exchange loss of
$396,000, interest income of $2.9 million and $2.0
million in interest expense for the nine months ended
September 30, 1997. Interest expense for the nine
months ended September 30, 1997 was attributable
primarily to the discounting of commercial drafts in
Japan, interest associated with the bank term loan and
interest associated with the Convertible Subordinated
Notes issued in the third quarter 1997.
Provision for Income Taxes. The provision for income
taxes was $568,000 for the
nine month period ended September 30, 1996 as the
Company had net operating loss carryforwards which
would absorb any significant income tax effect. The
tax provision of $6.3 million for the nine months ended
September 30, 1997 was primarily attributable to the
substantial growth in the Company's pretax income
partially 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 total net
proceeds to the Company of approximately $29.7 million,
the public offering on December 12, 1996, resulting in
net proceeds of approximately $50.0 million, the
offering of convertible subordinated notes on August 6,
1997, resulting in net proceeds of approximately $166.8
million, the private sale of equity securities over the
Company's eleven year history totaling approximately
$27.1 million and short term bank borrowings. As of
September 30, 1997, the Company had approximately
$126.0 million in cash and cash equivalents, $41.1
million in short term investments, $23.0 million in
long term investments, $223.1 million in working
capital and no bank debt.
Net cash used in operating activities was approximately
$11.1 million for the nine months ended September 30,
1996 and $13.2 million for the nine months ended
September 30, 1997. The increase in cash used in
operations in the nine months ended September 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 $7.0 million for the nine months ended
September 30, 1996 as compared to $82.9 million for the
nine months ended September 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, the
Convertible Subordinated Notes and the purchase of
computer equipment, test equipment, research and
development tools, manufacturing process machinery and
tenant improvements to the manufacturing facility in
order to accommodate the business expansion for the
period.
The Company's financing activities provided net cash of
approximately $37.1 million for the nine months ended
September 30, 1996, and $166.6 million for the nine
months ended September 30, 1997. During the nine
months ended September 30, 1996, the Company sold
Redeemable Convertible Preferred Stock for
approximately $5.8 million, increased advances against
commercial drafts by $2.2 million and completed the
initial public offering for net proceeds of $30.0
million. Upon the Company's initial public offering in
September 1996, all Redeemable Convertible Preferred
Stock (approximately 7.7 million pre-split shares) and
Redeemable Convertible Preferred Stock Warrants (to
purchase 283,000 pre-split shares of such stock) were
automatically converted into the Company's common stock
or warrants to purchase common stock. In the nine
months ended September 30, 1997, the Company decreased
it bank borrowings by $1.8 million.
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 the proceeds from its
stock and debt offerings together with anticipated cash
provided by operations and available bank credit will
be adequate to meet its cash needs for at least the
next 12 months. Thereafter the Company may require
additional funds to support its 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 nine months ended September 30,
1997 is included in Note 2 of Notes to Consolidated
Financial Statements.
In June 1997, the FASB issues 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. 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
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.
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 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'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
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 September 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 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 the Company's revenues have
increased over the last three years and each of the last
nine quarters, and the Company has been profitable for each
of the last four quarters, 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. Although the Company has
experienced recent success in expanding production, the
Company has historically been unable to manufacture and test
its photolithography laser systems fast enough to fill all
orders and has been behind on some of its delivery
schedules. Should the Company fail to meet delivery orders
in the future, customers could 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 financial condition and 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.
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. 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. See - "Uncertainty Regarding Patents
and Protection of Proprietary Technology."
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 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 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 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 95% of the Company's
total revenues in 1994, 1995, 1996 and the first nine months
of 1997, respectively. Sales to ASM Lithography, Canon,
Nikon and SVG Lithography accounted for approximately 25%,
24%, 41% and 4%, respectively, of total revenues for the
first nine 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 726 at September 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 187,000 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, 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 nine months ended September 30, 1997 by
approximately $6.4 million. There can be no assurance that
such efforts will be successful, that such warranty reserve
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 result 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 direct 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.
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 continue to actively qualify
these competitors lasers in their search for a second
source. If competitors successfully qualify their lasers
for use the Company's customers, the Company could lose
market share and its growth could slow or even decline. 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.
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 is 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.
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 September 30, 1997, the Company owned 21 United States
patents covering certain aspects of technology associated
with excimer lasers which expire from January 2008 to
February 2016 and had applied for 32 additional patents in
the United States, three of which have been allowed. As of
September 30, 1997, the Company had filed 73 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 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, has been notified by Komatsu,
one of the Company's competitors, that certain aspects of
the Company's lasers might infringe 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. The Company has engaged in discussions with
Komatsu with respect to the Komatsu Patents, in the course
of which Komatsu has also identified to the Company a number
of pending applications and additional patents. The Company
in consultation with Japanese patent counsel, has initiated
oppositions to two of the Komatsu Patents and one of the
applications in the Japanese Patent Office. 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 any such litigation or that Komatsu
will not assert infringement claims under additional
patents.
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 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 excimer
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 and service 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 nine 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, Korea and Taiwan, 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 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 United States 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
publicity against the Company, could have a material adverse
effect on the Company's business, financial condition and
results of operations.
Possible Price Volatility of Common Stock. The market
price of the Company's Common Stock has been, and may
continue to be, extremely volatile. The market price of
Common Stock may be significantly affected by factors such
as actual or anticipated fluctuations in the Company's
operating results, announcements of technological
innovations, new products or new contracts by the Company or
its competitors, developments with respect to patents or
proprietary rights, conditions and trends in the laser
device and other technology industries, changes in financial
estimates by securities analysts, general market conditions,
and other factors. In addition, the stock market has
experienced extreme price and volume fluctuations that have
particularly affected the market price for many high
technology companies and that have often been unrelated to
the operating performance of these companies. The market
price of the Company's Common Stock has fluctuated
substantially in recent periods, rising from $4 _ (all
prices are adjusted to reflect the Company's 2-for-1 stock
split effective as of August 21, 1997) at the Company's
initial public offering on September 18, 1996 to $48 _ on
August 22, 1997, and declining to $17 7/8 on November 12,
1997. In the past, following periods of volatility in the
market price of a particular company's securities,
securities class action litigation has often been brought
against that company. Such litigation, if brought against
the Company, could result in substantial costs and a
diversion of management's attention and resources.
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 contain 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 shareholder 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
None.
ITEM 2. Changes in Securities
On September 18, 1996, the Company's Registration Statement on Form S-1,
file number 333-08383, was declared effective by the Commission. The initial
public offering of the Company's Common Stock commenced on September 19, 1996
and terminated upon the sale of all of the shares of Common Stock so
registered. The managing underwriters for the offering included Morgan
Stanley & Co., Montgomery Securities and Needham & Company, Inc. Of the
3,841,000 shares of Common Stock sold in the offering, 3,007,532 shares of
Common Stock were sold by the Company pursuant to an underwriting agreement,
501,000 shares were sold by the Company upon the exercise of the underwriters'
over-allotment option and 332,468 shares of Common Stock were sold by
certain selling stockholders pursuant to the underwriting agreement. The
aggregate price of the offering amount registered and sold on behalf of the
Company, including the shares sold by the Company upon exercise of the
over-allotment option, was $33,331,054 and the aggregate price of the offering
amount registered and sold on behalf of the selling stockholders was
$3,158,446. The Company incurred approximately $3,633,174 in total expenses,
of which $2,333,174 consisted of underwriting discounts and commissions and
approximately $1,300,000 consisted of other expenses associated with the
offering. After deducting expenses, the Company received net offering
proceeds of approximately $29,700,000. The Company used approximately
$10 million of such proceeds to retire outstanding indebtedness. Approximately
$2.0 million of the net proceeds to the Company were used for capital
expenditures, primarily for factory expansion and improvements, test
equipment, research tools and computer equipment. The remaining proceeds
were used primarily for general corporate purposes, including working capital.
ITEM 3. Defaults upon senior securities
None.
ITEM 4. Submission of matters to a vote of security holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits And Reports On Form 8-K
(a)Exhibits
11.1 Calculation of Earnings Per Share
27.1 Financial Data Schedule (submitted for SEC use only)
(b) Reports on Forms 8-K.
1. Current Report on Form 8-K filed on August 7, 1997, reporting the
information set forth in the Company's press release dated August 1, 1997,
which announced the completion of pricing of a private placement of $150,000,000
of its 3 1/2% / 7 1/4% step-up convertible subordinated notes due 2004.
2. Current Report on Form 8-K filed on August 19, 1997, reporting the
sale of equity securities pursuant to Regulation S of the Securities Act.
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 13, 1997 By: /s/ WILLIAM A. ANGUS, III
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
Exhibit 11.1
CYMER, INC.
CALCULATION OF
EARNINGS PER SHARE
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
Sept. 30, Sept. 30,
1997 1997
Earnings Per Share
<S> <C> <C>
Weighted average shares of
common stock outstanding
during the period 28,469 28,111
Assumed exercise of
outstanding stock
options and warrants (1) 2,034 2,218
Weighted average common and
common equivalent shares 30,503 30,329
Net income $7,047 $18,885
Earnings per share $0.23 $0.62
</TABLE>
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
Sept. 30, Sept. 30,
1996 1996
Earnings Per Share
<S> <C> <C>
Weighted average shares of
common stock outstanding
during the period 18,031 18,031
Assumed exercise of
outstanding stock
options and warrants (1) 2,079 2,079
Weighted average common and
common equivalent shares 20,110 20,110
Net income $2,006 $2,963
Earnings per share $0.10 $0.15
(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>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 125,983
<SECURITIES> 41,113
<RECEIVABLES> 56,264
<ALLOWANCES> 802
<INVENTORY> 43,713
<CURRENT-ASSETS> 304,707
<PP&E> 48,594
<DEPRECIATION> 10,099
<TOTAL-ASSETS> 375,908
<CURRENT-LIABILITIES> 81,601
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 117,693
<TOTAL-LIABILITY-AND-EQUITY> 375,908
<SALES> 56,062
<TOTAL-REVENUES> 57,468
<CGS> 35,773
<TOTAL-COSTS> 35,773
<OTHER-EXPENSES> 12,090
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,743
<INCOME-PRETAX> 9,230
<INCOME-TAX> 2,307
<INCOME-CONTINUING> 7,047
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,047
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
