SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the Fiscal Year Ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities 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
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
on which registered
Title of each class Nasdaq National Market
Common Stock, $.001 par value
Securities registered pursuant to Section 12(g) of the Act: None
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___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant, based upon the closing price of
$20.44 for shares of the registrant's Common Stock on March 13,
1998 as reported on the Nasdaq National Market, was approximately
$566,459,523. In calculating such aggregate market value, shares
of Common Stock owned of record or beneficially by officers,
directors, and persons known to the registrant to own more than
five percent of the registrant's voting securities (other than
such persons of whom the Company became aware only through the
filing of a Schedule 13G filed with the Securities and Exchange
Commission) were excluded because such persons may be deemed to
be affiliates. The registrant disclaims the existence of control
or any admission thereof for any other purpose.
Number of shares of Common Stock outstanding as of March 13,
1998: 28,808,978.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in
Parts I, II, III and IV of this Annual Report on Form 10-K:
portions of registrant's proxy statement for its annual meeting
of stockholders to be held on May 15, 1998 (Part III).
CYMER, INC.
1997 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I 1
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security-Holders 10
PART II 11
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplemental Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III 27
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV 28
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 28
CYMER is a registered trademark of Cymer, Inc.
AN ASTERISK ("*") DENOTES A FORWARD-LOOKING STATEMENT
REFLECTING CURRENT EXPECTATIONS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER FROM THOSE DISCUSSED IN
SUCH FORWARD-LOOKING STATEMENTS, AND STOCKHOLDERS OF CYMER, INC.
(THE "COMPANY" OR "CYMER") SHOULD CAREFULLY REVIEW THE CAUTIONARY
STATEMENTS SET FORTH IN THIS FORM 10K, INCLUDING "RISK FACTORS"
BEGINNING ON PAGE 18 HEREOF. 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. 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.
PART I
Item 1. Business
General
Cymer Inc., its wholly-owned subsidiaries, Cymer Japan, Inc.
(Cymer Japan) and Cymer Singapore, Pte Ltd. (Cymer Singapore) and
its majority-owned subsidiaries, Cymer Korea, Inc. (Cymer Korea)
and Cymer Southeast Asia, Inc. (Cymer SEA) (collectively, the
"Company" or "Cymer"), is the leading provider of excimer laser
illumination sources for use in deep ultraviolet ("DUV")
photolithography systems targeted at the pilot and volume
production segments of the semiconductor manufacturing market.
The Company's lasers are incorporated into step-and-repeat and
step-and-scan photolithography systems for use in the manufacture
of semiconductors with critical feature sizes below 0.35 microns.
The Company believes that its excimer lasers constitute a
substantial majority of all excimer lasers incorporated in DUV
photolithography tools. The Company's customers include all five
manufacturers of DUV photolithography systems: ASM Lithography,
Canon, Integrated Solutions, Nikon and SVG Lithography.
Photolithography systems incorporating the Company's excimer
lasers have been purchased by each of the world's 15 largest
semiconductor manufacturers: Intel, NEC, Motorola, Toshiba,
Hitachi, Texas Instruments, Samsung, Fujitsu, Philips, SGS-
THOMSON, Mitsubishi, Siemens, Matsushita, IBM and National
Semiconductor.
Products
The Company's products consist of photolithography lasers,
industrial high power lasers and replacement parts.
Photolithography Laser Products
The Company's photolithography lasers produce narrow
bandwidth pulses of short wavelength light. The lasers permit
very fine feature resolution and high throughput. The Company
has designed its lasers to be highly reliable, easy to install
and compatible with existing semiconductor manufacturing
processes.
Introduced in the third quarter of 1995, the Company's ELS-
4000F KrF excimer laser is designed to meet the requirements of
photolithography tool and semiconductor manufacturers. The laser
operates at a 600Hz pulse repetition rate and provides power
output of 7.2 watts of 248nm wavelength light. The ELS-4000F
incorporates advanced discharge chamber technology and solid
state pulse power technology to excite the laser gas efficiently,
reducing the cost of ownership. The ELS-4000F achieves high
resolution and stable focus through proprietary optical modules
that perform line-narrowing and wavelength stabilization, thereby
optimizing the light emitted by the laser for the
photolithography application.
The Company's 5000 series KrF excimer lasers, introduced in
the first quarter of 1996, are offered in both narrowband, ELS-
5000, and broadband, EX-5000, configurations. The 5000 series
lasers incorporate the advanced technological features of the
Company's ELS-4000F laser but operate at a higher pulse
repetition rate and provide higher power outputs that shorten
exposure time and increase throughput, and in the case of the ELS-
5000, a narrower bandwidth. The 5000 series lasers incorporate
the Company's proprietary line narrowing and wavelength
stabilization modules together with an atomic reference for long-
term accuracy of the wavemeter calibration. The 5000 series
lasers utilize a modular design that allows the Company to
outsource many of the system's subassemblies, thereby reducing
manufacturing cycle times. The Company believes the 5000 series
lasers will be capable of producing critical feature sizes down
to 0.18 microns.
The Company's lasers incorporate advanced software control
and diagnostic systems. The control system provides users with
on-line monitoring of laser operating conditions, with
approximately 75 diagnostic readings (including flow rate,
temperatures, pressures and light quality), that are
automatically monitored by the photolithography tool's control
system. Additionally, approximately 140 configurable parameters
can be adjusted to optimize the laser's performance for each
customer's system. A portable computer attached to the laser
logs this data, automatically providing critical information
about performance and reliability. The lasers are also designed
for easy serviceability, with most major modules and components
articulated for easy swing-out or roll-out motion to facilitate
inspection and replacement.
The Company continues to develop, and has begun to offer for
sale to its customers, its next generation ArF excimer laser.
The ArF laser incorporates the advanced technological features
and modular design of the 5000 series lasers providing power
output of 6 to 10 watts of 193nm wavelength light. The Company
believes its ArF laser will be capable of producing critical
feature sizes below 0.15 microns. *
Industrial High Power Laser Products
The Company's HPL-100K/110K series KrF excimer lasers are
designed to meet the rigors of high duty cycle industrial usage,
such as microdrilling, micromachining and annealing applications.
The laser operates at a 200 to 250Hz pulse repetition rate and
provides average power output of 100 watts for the HPL-100K and
110 watts for the HPL-110K. The pulse repetition rate and high
power makes these lasers well suited for micro-fabrication
processes. The Company is currently focusing its development and
marketing efforts on its photolithography laser products, and the
Company expects minimal revenues from industrial laser products
in 1998. *
Replacement Parts
Certain components and subassemblies included in the
Company's lasers require replacement or refurbishment following
continued operation. For example, the discharge chamber of the
Company's lasers has a component life of approximately two to
three billion pulses, depending on the model. The Company
estimates that a laser used in a semiconductor production
environment will require one to three replacement chambers per
year. Similarly, certain optical components of the laser will
deteriorate with continued exposure to DUV light and will require
periodic replacement. The Company provides these and other spare
and replacement parts for its photolithography lasers as needed
by its customers. On a limited basis, the Company also
refurbishes and resells complete laser systems.
Customers and End Users
The Company sells its photolithography laser products to
each of the five manufacturers of DUV photolithography tools:
ASM Lithography Integrated Solutions SVG Lithography
Canon Nikon
The Company believes that maintaining and strengthening
these customer relationships will play an important role in
maintaining its leading position in the photolithography market.*
The Company works closely with its customers to integrate the
Company's products into their photolithography tools and is
collaborating with certain of its customers on advanced
technology developments under jointly funded programs. Sales to
ASM Lithography, Canon and Nikon accounted for 24%, 25% and 39%,
respectively, of total revenue in 1997.
End users of the Company's lasers include the world's 15
largest semiconductor manufacturers. The following semiconductor
manufacturers have purchased one or more DUV photolithography
tools incorporating the Company's laser:
United States Japan Europe
Advanced Micro Devices ASET C-Net
Cypress Epson IMEC
Digital Equipment Corporation Fujitsu LETI
Dominion Semiconductor Hitachi Philips
Hewlett Packard Matsushita SGS THOMSON
IBM Mitsubishi Electric Siemens
Integrated Device Technology NEC
Intel NTT
Lucent Oki Electric
Micron Technology Rohm
Micrus Sanyo
Motorola Sharp
National Semiconductor Sony
Rockwell Toshiba
SEMATECH*
Texas Instruments
VLSI
Korea Taiwan/Southeast Asia
Anam-TI Chartered
ETRI ERSO/ITRI
Hyundai Macronix
LG Semicon Mosel
Samsung Nan-Ya
NSH
ProMOS
Tech Semiconductor
TSMC
UMC
USC
Winbond
Vanguard International
*A semiconductor industry consortium.
Backlog
The Company schedules production of lasers based upon order
backlog and informal customer forecasts. The Company includes in
backlog only those orders to which a purchase order number has
been assigned by the customer and for which delivery has been
specified within 12 months. Because customers may cancel or
delay orders with little or no penalty, the Company's backlog as
of any particular date may not be a reliable indicator of actual
sales for any succeeding period. At December 31, 1997, the
Company had a backlog of approximately $108.7 million, compared
with a backlog of $98 million at December 31, 1996.
Manufacturing
The Company's manufacturing activities consist of material
management, assembly, integration and test. These activities are
performed in a 111,000 square foot facility in San Diego,
California that includes approximately 36,000 square feet of
class 1000 clean room manufacturing and test space. In order to
focus its own resources, capitalize on the expertise of its key
suppliers and respond more efficiently to customer demand, the
Company has outsourced many of its subassemblies. The Company's
outsourcing strategy is exemplified by the modular design of the
Company's 5000 series laser, for which substantially all of the
nonproprietary subassemblies have been outsourced. The Company
believes that the highly outsourced content and manufacturable
design of the 5000 series lasers allows for reduced manufacturing
cycle times and increased output per employee.
To meet current and anticipated demand for its products, the
Company must continue to increase the rate by which it
manufactures and tests modules, spares and replacement parts for
its photolithography laser systems.* In order to accomplish this
objective, the Company intends to continue to provide additional
training to manufacturing personnel, improve its assembly and
test processes in order to reduce cycle time, invest in
additional manufacturing tooling and further develop its supplier
management and engineering capabilities.* 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.
In addition to increasing manufacturing capacity at its
facilities in San Diego, California, the Company has qualified
Seiko of Japan as a contract manufacturer of its photolithography
excimer lasers. In order to ensure uniformity of product for all
customers, the Company maintains control of all work flow design,
manufacturing process, engineering changes and component sourcing
decisions. The Company manufactures and seals all core
technology modules in San Diego. The agreement expires in 2001,
but will automatically renew every two years thereafter, unless
one year's notice to terminate is given by either party. Seiko
began production of lasers for the Company in the first quarter
of 1997.
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 only recently
commenced volume production of laser systems, which has caused
many of its suppliers to also commence volume production of the
Company's components and subassemblies. If the Company is unable
to obtain sufficient quantities of required 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 could have a material adverse effect on the
Company's business, financial condition and results of
operations.
Sales and Marketing
The Company's sales and marketing efforts have been
predominately focused on DUV photolithography tool manufacturers.
The Company markets and sells its products through four account
managers located in the United States and Japan. The Company is
in the process of developing product and applications engineering
teams to support the account managers and the Company's
customers. The Company believes that to facilitate the sales
process it must work closely with and understand the requirements
of semiconductor manufacturers, the end users of the Company's
products. The Company visits major semiconductor manufacturers,
and their representatives attend Company-sponsored seminars on
advanced excimer photolithography. In Japan, the Company
sponsors an annual seminar with Seiko in conjunction with Semicon
Japan. This seminar has attracted representatives of
semiconductor manufacturers from Japan, Korea, the United States
and SEMATECH, as well as photolithography tool manufacturers and
other photolithography process suppliers.
Service and Support
The Company believes its success in the semiconductor
photolithography market is highly dependent upon after-sales
support of both the customer and the end user. The Company
supports its customers with field service, technical service
engineers and training programs, and in some cases provides
ongoing on-site technical support at the customer's manufacturing
facility. Prior to shipment, the Company's support personnel
typically assist the customer in site preparation and inspection
and provide customers with training at the Company's facilities
or at the customer's location. Customers and end users are also
provided with a comprehensive set of manuals, including
operations, maintenance, service, diagnostic and safety manuals.
The Company's field engineers and technical support
specialists are based at its San Diego headquarters, and at its
field service offices in Santa Clara, Austin, near Boston, and
various European cities. Support in Japan, Korea, Singapore and
Southeast Asia are provided by the Company's subsidiaries located
within those regions. As part of its customer service, the
Company maintains an inventory of spare parts at each of its
service facilities. As the Company's installed base grows so
does the demand for replacement parts to satisfy world wide
support requirements for direct customers' support organizations,
as well as Cymer's own logistics organization. In order to meet
this demand, the Company must continue to expand its production
of component modules which are required for new systems as well
as support and warranty requirements.*
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 customers throughout the
world. Accordingly, the Company intends to expand its direct
support infrastructure in Japan, Korea, Taiwan and Southeast
Asia, Singapore and Europe.* The establishment of these
activities will entail recruiting and training qualified
personnel or identifying qualified independent firms and building
effective and highly trained organizations that can provide
service to customers in various countries in their assigned
regions. There can be no assurance that the Company will be able
to attract qualified personnel to establish these operations
successfully or that the costs of such operations will not be
excessive. A failure to implement this plan effectively could
have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company generally warrants its products against defects
in design, materials and workmanship for the earlier to occur of
17 months from the date of shipment or 12 months after acceptance
by the end user.
Research and Development
The semiconductor industry is subject to rapid technological
change and new product introductions and enhancements. The
Company believes that continued and timely development and
introduction of new and enhanced laser products are essential for
the Company to maintain its competitive position. The Company
intends to continue to develop its technology and innovative
products to meet customer demands.* Current projects include
enhancements to the Company's KrF and ArF lasers and the
development of the next generation of photolithography lasers.
Other research and development efforts are currently focused on
reducing manufacturing costs, lowering the cost of laser
operation, enhancing laser performance and developing new
features for existing lasers.
The Company has historically devoted a significant portion
of its financial resources to research and development programs
and expects to continue to allocate significant resources to
these efforts. As of December 31, 1997, the Company had 158
employees engaged in research and development. Research and
development expenses for 1995, 1996 and 1997 were approximately
$6.2 million, $11.7 million and $25.0 million, respectively.
In addition to funding its own research and development
projects, the Company has pursued a strategy of securing research
and development contracts from customers, government agencies and
SEMATECH in order to develop advanced technology for current and
future laser systems based on the Company's core technology.
Revenues generated from research and development contracts
amounted to approximately $3.2 million, $2.5 million and $2.5
million during 1995, 1996, and 1997, respectively.
Intellectual Property Rights
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 December 31, 1997, the Company owned 22 United States patents
covering certain aspects of technology associated with excimer
lasers which expire from January 2008 to February 2016 and had
applied for 34 additional patents in the United States, three of
which have been allowed. As of December 31, 1997, the Company
also had filed 76 patent applications in other countries. There
can be no assurance that the Company's pending patent
applications or any future applications will be approved, that
any issued patents will provide it with competitive advantages or
will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the Company's ability
to do business. In this regard, due to cost constraints, the
Company did not begin filing for patents in Japan or other
countries with respect to inventions covered by its United States
patents and patent applications until recently and has therefore
lost the right to seek patent protection in those countries for
certain of its inventions. Additionally, because foreign patents
may afford less protection under foreign law than is available
under United States patent law, there can be no assurance that
any such patents issued to the Company will adequately protect
the Company's proprietary information. Furthermore, there can be
no assurance that others will not independently develop similar
products, duplicate the Company's products or, if patents are
issued to the Company, design around the patents issued to the
Company.
Others may have filed and in the future may file patent
applications that are similar or identical to those of the
Company. To determine the priority of inventions, the Company
may have to participate in interference proceedings declared by
the United States Patent and Trademark Office that could result
in substantial cost to the Company. No assurance can be given
that any such patent application will not have priority over
patent applications filed by the Company.
The Company also relies upon trade secret protection,
employee and third-party nondisclosure agreements and other
intellectual property protection methods to protect its
confidential and proprietary information. Despite these efforts,
there can be no assurance that others will not independently
develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade
secrets or disclose such technology or that the Company can
meaningfully protect its trade secrets.
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 Ltd., ("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 continues to engage 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 the Komatsu Patents and the
applications in the Japanese Patent Office. The Company has been
advised by its patent counsel in this matter, 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 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 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.
Effective August 1, 1989 and lasting until the expiration of
the licensed patents, the Company entered into an agreement for a
nonexclusive worldwide license to use or sell certain patented
laser technology with Patlex Corp., a patent holding company
("Patlex"). Under the terms of the agreement, the Company is
required to pay royalties ranging from 0.25% to 5.0% of gross
sales and leases of its lasers. Beginning in 1997, the
royalties are subject to an annual cap of $100,000 per year.
During 1995, 1996 and 1997, royalty fees totaled $64,000,
$226,000 and $49,000, respectively.
The Company has granted to Seiko the exclusive right in
Japan and the non-exclusive right outside of Japan to manufacture
and sell the Company's industrial high power laser and subsequent
enhancements thereto. The Company has also granted Seiko a right
of first refusal to fund the Company's development of, and
receive a license to, new industrial laser technologies not
developed with funding from other parties. In exchange for these
rights, the Company received up-front license fees of $3.0
million. The Company is also entitled to royalties of 5% on
related product sales through September 1999, after which the
royalty rate is subject to renegotiation. The license agreement
also provides that product sales between the Company and Seiko
will be at a 15% discount from the respective companies' list
prices. The agreement terminates in August 2012.
Competition
The Company believes that the principal elements of
competition in the Company's markets are the technical
performance characteristics of the excimer laser products; the
cost of ownership of the system, which is based on price,
operating cost and productivity; customer service and support;
and product availability. The Company believes that it competes
favorably with respect to these factors.
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. and Komatsu 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 application, the Company believes
that both companies are aggressively seeking to gain larger
positions in the market. The Company believes that its customers
have each purchased one or more products offered by these
competitors and that its customers may consider further
purchases, in part as a result of delays in deliveries by the
Company 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 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 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
relatively 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. See
"Risk Factors-Competition."
Employees
On December 31, 1997, there were 809 persons employed by the
Company, including 58 in Japan. No employees are currently
covered by collective bargaining agreements or are members of any
labor organization as far as the Company is aware. The Company
has not experienced any work stoppages and believes that its
employee relations are good.
Executive Officers
Set forth below is certain information regarding the
executive officers of the Company and their ages as of
December 31, 1997.
Name Age Position
Robert P. Akins 46 Chairman of the Board, Chief Executive
Officer and President
William A. Angus, III 51 Senior Vice President, Chief Financial
Officer and Secretary
G. Scott Scholler 47 Senior Vice President, Operations
Pascal Didier 39 Senior Vice President, Worldwide
Customer Operations
Robert P. Akins, a co-founder of the Company, has served
as its President, Chief Executive Officer and Chairman of the
Board since its inception in January 1986. From 1980 to 1985,
Mr. Akins was a Senior Program Manager for HLX, Inc., a
manufacturer of laser and defense systems, where he was
responsible for managing the development of compact excimer
lasers for military communications applications and an excimer
laser trigger for the particle beam fusion accelerator at Sandia
National Laboratories. Mr. Akins received a B.S. in Physics and
a B.A. in Literature in 1974, and a Ph.D. in Applied Physics in
1983, from the University of California, San Diego.
William A. Angus, III has served as Senior Vice President
and Chief Financial Officer since February 1996 and Secretary of
the Company since July 1990. From July 1990 to February 1996,
Mr. Angus served as Vice President of Finance and Administration.
From April 1988 to June 1990, Mr. Angus was Executive Vice
President and Chief Operating Officer, and from May 1985 to April
1988, Chief Financial Officer, of Avant-Garde Computing Inc., a
manufacturer of data communications network management systems.
Mr. Angus graduated from the Wharton School of the University of
Pennsylvania with a B.S. in Economics in 1968.
G. Scott Scholler has served as Senior Vice President of
Operations of the Company since March 1996. From June 1995 to
February 1996, Mr. Scholler served as a consultant in product
development and program management for Electro Scientific
Industries, a manufacturer of semiconductor capital equipment.
From March 1994 until October 1995, Mr. Scholler was a co-founder
and President of Black Rose Ltd., a developer of computer
telephone software for automated commerce applications. From
August 1992 to September 1994, he was Senior Vice President of
Operations for Whittaker Communications, Inc., a wholly-owned
subsidiary of Whittaker Corporation, and a manufacturer of high-
performance multimedia servers. From October 1988 to August
1992, Mr. Scholler served as Vice President of Operations for
Etec Systems, Inc., a manufacturer of semiconductor capital
equipment and as General Manager of its Laser Lithography
subsidiary. From 1986 to 1988, Mr. Scholler was Director of
Engineering, and from 1983 to 1986, Director of Manufacturing, of
the Etch Products Division of Applied Materials Inc., a supplier
of equipment to the semiconductor industry. Mr. Scholler
received a B.S. in Nuclear Engineering from the United States
Military Academy at West Point in 1972 and an M.S. in Research
and Development Management in 1978 from the University of
Southern California.
Pascal Didier has served as Senior Vice President, Worldwide
Customer Operations since October 1997. From July 1997 to
October 1997, he served as Vice President, Marketing and Sales.
From June 1996 to July 1997, Mr. Didier was Vice President of
Worldwide Sales & Field Operations, and from June 1995 to June
1996, Vice President of Asia/Pacific of GaSonics International, a
supplier of capital equipment for photoresist removal and
isotropic etching for the semiconductor industry. From 1983 to
1995, Mr. Didier served in various marketing and management
positions at Megatest Corporation, a supplier of test equipment
for the semiconductor industry. From June 1993 to June 1995, he
was its Vice President of International Operations, from June
1990 to June 1993, Director of International Operations, from
July 1989 to June 1990, a Software Marketing Manager and from
1983 to 1989, European Technical Manager. Mr. Didier received a
Bacalaureat in Business and Administration in 1978 from College
de Paris and a Bacalaureat Superior in 1979 from Electronique
Institut Universitaire de Lyon.
Executive officers serve at the discretion of the Board of
Directors. There are no family relationships between any of the
directors and executive officers of the Company.
Item 2. Properties
Cymer's headquarters are located at 16750 Via Del Campo
Court in an approximate 37,000 square foot facility and
manufacturing, engineering and R&D facilities are housed in
multiple buildings approximating 216,000 square feet located in
San Diego, California which the Company leases under leases
expiring from August 15, 2002 to January 2010. For use as field
service offices, the Company also leases a 400 square foot
facility near Boston, Massachusetts under a lease expiring August
1998; a 1,857 square foot facility in Santa Clara, California
expiring September 2000 and a 1,627 square foot facility in
Austin, Texas expiring September 2000. For use as field service
and sales offices, the Company leases 6,390 square feet of
facilities in Ichikawa, Japan under four renewable one and two
year leases expiring at various times but cancelable by the
Company upon three months notice; 4,184 square feet in Pundang,
Korea expiring August 1999 and 1,754 square feet in Hsin Chu,
Taiwan expiring July 1999. The Company intends to add additional
field service offices as necessary to service its customers.
Item 3. Legal Proceedings
For a description of certain patent infringement claims
against the Company and its Japanese manufacturing partner, see
the fourth, fifth and sixth paragraphs under "Intellectual
Property Rights" in Item 1 of this Annual Report. Neither the
Company, nor any of its subsidiaries, is a party to any
litigation, other than non-material litigation incidental to the
Company's business.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the security holders
of the Company during the fourth quarter of the fiscal year ended
December 31, 1997.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
The Company's Common Stock is publicly traded on the Nasdaq
National Market under the symbol "CYMI" since September 19, 1996.
The Company's initial public offering price was $4.75 per share.
The following table sets forth, for the periods indicated, the
high and low closing sales prices of the Company's Common Stock
as reported by the Nasdaq National Market. All per share prices
reflect a 2-for-1 stock split effected in August 1997.
Year ended December 31, 1996 High Low
Third quarter (beginning $8 7/8 $6 13/16
September 19, 1996)
Fourth quarter $24 1/16 $7 7/8
Year ended December 31, 1997
First quarter $27 3/16 $15 1/2
Second quarter $29 $17 11/16
Third quarter $48 3/4 $24 3/8
Fourth quarter $30 7/8 $14 15/16
Item 6. Selected Financial Data
The following selected consolidated financial data should be
read in conjunction with the Company's consolidated financial
statements and notes thereto and with Management's Discussion
and Analysis of Financial Condition and Results of Operations,
which are included elsewhere in this Annual Report on Form 10-K.
The consolidated statement of operations data for the years ended
December 31, 1995, 1996 and 1997 and the consolidated balance
sheet data at December 31, 1996 and 1997 are derived from, and
are qualified by reference to, the consolidated financial
statements included elsewhere in this Annual Report on Form 10-K,
which have been audited by Deloitte & Touche LLP. The
consolidated statement of operations data for the years ended
December 31, 1993 and 1994, and the consolidated balance sheet
data at December 31, 1993 and 1994 are derived from consolidated
financial statements not included in this Annual Report on Form
10-K, which have also been audited by Deloitte & Touche LLP.
These historical results are not necessarily indicative of the
results to be expected in the future.
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1994 1995 1996 1997
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Product sales $3,393 $7,705 $15,576 $62,510 $201,191
Other 2,306 1,216 3,244 2,485 2,456
Total revenues 5,699 8,921 18,820 64,995 203,647
Costs and expenses:
Cost of product sales 2,726 4,797 8,786 35,583 123,654
Research and development 2,733 3,283 6,154 11,742 24,971
Sales and marketing 2,154 1,780 2,353 5,516 11,992
General and administrative 782 849 1,181 4,270 8,586
Total costs and expenses 8,395 10,709 18,474 57,111 169,203
Operating income (loss) (2,696) (1,788) 346 7,884 34,444
Other income (expense) - net (7) (199) (241) (183) 112
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1994 1995 1996 1997
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income (loss) before provision
for income taxes
and minority interest (2,703) (1,987) 105 7,701 34,556
Provision for income taxes (221) (58) (36) (1,191) (8,639)
Minority interest 141
Net income (loss) ($2,924) ($2,045) $69 $6,510 $26,058
Basic earnings per share (1) $0.33 $0.92
Weighted average common shares
outstanding (1) 19,868 28,212
Diluted earnings per share (1) $0.29 $0.86
Weighted average common and
common equivalent shares
outstanding (1) 22,420 30,267
</TABLE>
<TABLE>
<CAPTION>
December 31,
1993 1994 1995 1996 1997
(in thousands)
Consolidated Balance Sheet
Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $715 $2,326 $2,015 $55,405 $51,903
Working capital (122) (1,557) 3,845 84,743 202,539
Total assets 5,805 9,172 15,619 129,467 384,880
Total debt (2) 2,717 6,879 4,164 2,217 176,066
Redeemable convertible
preferred stock 12,989 19,290 28,409 - -
Stockholders' equity (deficit) (11,828) (19,752) (21,830) 98,820 124,540
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for
an explanation of the determination of shares used in computing
earnings per share.
(2) Total debt includes indebtedness for convertible
subordinated notes, borrowed money and capital lease
obligations.
Item 7. Management's 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 operations as a percentage of total revenues for
the periods indicated:
<TABLE>
<CAPTION>
1995 1996 1997
Revenues:
<S> <C> <C> <C>
Product sales 82.8 % 96.2 % 98.8 %
Other 17.2 3.8 1.2
Total revenues 100.0 100.0 100.0
Cost and expenses:
Cost of product sales 46.7 54.7 60.7
Research and development 32.7 18.1 12.3
Sales and marketing 12.5 8.5 5.9
General and administrative 6.3 6.6 4.2
Total costs and expenses 98.2 87.9 83.1
Operating income 1.8 12.1 16.9
Other income (expense) - net (1.3) (0.3) .1
Income before provision for
income taxes and minority
interest 0.5 11.8 17.0
Provision for income taxes (0.2) (1.8) (4.3)
Minority interest - - .1
Net income 0.3 % 10.0 % 12.8 %
Gross margin on product sales 43.6 % 43.1 % 38.5 %
</TABLE>
YEARS ENDED DECEMBER 31, 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
revenue 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 for
costs to complete the development project.
Product sales increased 222% from $62.5 million in 1996 to
$201.2 million in 1997, primarily due to increased sales of DUV
photolithography laser systems. A total of 460 laser systems
were sold in 1997 compared to 145 laser systems in 1996. As a
result of the increase in the Company's installed base of lasers,
the Company believes that revenues from spares, replacement parts
and services will be an increasingly larger component of product
sales.* Funded development revenues remained constant at $2.5
million for 1996 and 1997, primarily due to the laser research
project sponsored by SEMATECH. The Company expects that funded
development revenues will continue to decrease as a percentage of
total revenues as the Company focuses on product sales.*
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 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 in 1995,
1996, and 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,
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 248% from $35.6 million in 1996 to
$123.7 million in 1997 due to the increase in sales volume. The
gross margin on these sales decreased from 43.1% in 1996 to 38.5%
in 1997 primarily due to the increase in additional specific
warranty reserves of $6.4 million, an increase in field support
overhead costs as the Company continued to build its worldwide
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.
Warranty reserve expenses are included in cost of product
sales as the related sales are reported. For 1997, an additional
specific warranty reserve was expensed to 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
took a proactive approach to make the necessary hardware and
software changes to the laser systems as a preventative
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 41.7% for the period ended December 31,
1997.
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 sales are recognized.
The Company recognized net gains on such contracts of $1.9
million and $5.8 million for the years ended December 31, 1996
and 1997, respectively.
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 113% from $11.7 million in 1996 to $25.0
million in 1997, due primarily to increased product support
efforts associated with the release of the Company's 5000 series
lasers, the hiring of additional technical personnel and the
continued development of new laser products. As a percentage of
total revenues, such expenses declined from 18.1% to 12.3% in the
respective periods due to the growth in the Company's revenues.
The Company expects that research and development expenses will
increase in absolute dollars and as a percentage of revenues in
1998 as the Company continues to invest in the development of new
products and product enhancements.*
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
117% from $5.5 million in 1996 to $12.0 million in 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 8.5% to 5.9% 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. General and administrative expenses increased
101% from $4.3 million in 1996 to $8.6 million in 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 revenue, such expenses decreased from
6.6% to 4.2% 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 United
States dollar. Net other income (expense) increased from
$183,000 of net other expense for 1996 to $112,000 of net other
income for 1997, primarily due to the increase in interest income
associated with the investment of excess cash, offset by interest
expense associated with the convertible subordinated notes issued
in 1997 and a foreign currency exchange loss for 1997. Foreign
currency exchange gains totaled $161,000, interest income totaled
$347,000, and interest expense totaled $691,000 for 1996,
compared to a foreign exchange loss of $359,000, interest income
of $5.3 million and interest expense of $4.8 million for 1997.
The Company's results of operations are subject to
fluctuations in the value of the Japanese yen against the United
States 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
Japanese 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 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 in
1996 was primarily attributable to the growth in the Company's
pre tax income offset by net operating loss carryforwards from
prior years. The tax provision of $8.6 million in 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.
YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenues. Product sales increased 301% from $15.6 million
in 1995 to $62.5 million in 1996, primarily due to increased
sales of DUV photolithography laser systems. A total of 145
laser systems were sold in 1996 compared to 34 laser systems in
1995. Funded development revenues decreased 23% from $3.2
million in 1995 to $2.5 million in 1996, primarily due to the
completion in 1995 of a laser research project sponsored by
SEMATECH.
Cost of Product Sales. Net gains from foreign currency
exchange contracts included in cost of product sales were
$496,000 and $1.9 million for the years ended December 31, 1995
and 1996, respectively. Cost of product sales rose 305% from
$8.8 million in 1995 to $35.6 million in 1996 due to the increase
in sales volume. The gross margin on these sales remained
relatively consistent at approximately 43% in 1995 and 1996.
Research and Development. Research and development expenses
increased 91% from $6.2 million in 1995 to $11.7 million in 1996,
due primarily to increased product support efforts associated
with the release of the Company's 5000 series lasers and the
hiring of additional technical personnel. As a percentage of
total revenues, such expenses declined from 32.7% to 18.1% in the
respective periods due to growth in the Company's revenues.
Sales and Marketing. Sales and marketing expenses increased
134% from $2.4 million in 1995 to $5.5 million in 1996, due
primarily to increased sales commissions and increased sales
support efforts and marketing activities associated with the
increase in laser sales. As a percentage of total revenues, such
expense declined from 12.5% to 8.5% in the respective periods due
to the growth in the Company's revenues.
General and Administrative. General and administrative
expenses increased 262% from $1.2 million in 1995 to $4.3 million
in 1996, due to an increase in general and administrative support
as the Company's sales volume, manufacturing capacity and overall
level of business activity increased. These expenses include a
$705,000 receivable reserve recorded in 1996, taken in connection
with concerns over the collectibility of an accounts receivable
with a particular customer. As a percentage of total revenue,
such expenses, including the receivable reserve, increased to
6.6% of revenue in 1996. Excluding the receivable reserve, such
expenses were 5.5% of revenue in 1996.
Other Income (Expense) - net. Net other expense decreased
from $241,000 in 1995 to $183,000 in 1996, primarily due to the
increase in interest income associated with the investment of the
Company's proceeds from its common stock offerings in September
and December 1996, larger exchange gains against the yen,
partially offset by higher interest expense reflective of
borrowing requirements for the first nine months of 1996.
Foreign currency exchange gains totaled $10,000, interest income
totaled $32,000, and interest expense totaled $283,000 for 1995,
compared to $161,000, $347,000, and $691,000, respectively, for
1996.
Provision for Income Taxes. The provision for income taxes
was insignificant in 1995 and primarily represented taxes in
Japan for research and development revenues generated from
agreements with Seiko. The tax provision of $1.2 million in 1996
was primarily attributable to the substantial growth in the
Company's pretax income. As of December 31, 1996, the Company
had Federal and state tax business credit carryforwards available
to offset future tax liabilities of $1.8 million and $293,000,
respectively. Such Federal and state tax credit carryforwards
expire at various dates beginning with the year 1997 and 2003,
respectively.
To date, inflation has not had a significant effect on the
Company or its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations
primarily through the private sale of equity securities totaling
approximately $27.1 million, borrowings from certain of its
investors for bridge financing, bank borrowings, its September
18, 1996 initial public offering, which resulted in net proceeds
to the Company of approximately $29.7 million, the public
offering on December 12, 1996, which resulted in net proceeds of
approximately $50.0 million, and more recently, raised a net
$167.3 million in a convertible subordinated note offering on
August 6, 1997. As of December 31, 1997, the Company had
approximately $51.9 million in cash and cash equivalents, $80.4
million in short-term investments, $42.7 million in long-term
investments, $202.5 million in working capital and no bank debt.
Net cash used in operating activities was approximately $2.1
million, $8.0 million and $17.3 million for 1995, 1996 and 1997,
respectively. The increases in cash used in operations for the
periods ended December 31, 1995, 1996 and 1997 was primarily
attributable to increases in accounts receivable and inventory as
the working capital requirements of the Company continued to
increase due to the expansion of the business during these
periods.
Net cash used for investing activities was approximately $2.4
million , $22.9 million, and $153.6 million in 1995, 1996 and
1997. The increase in cash used for investing activities during
the periods ended December 31, 1995, 1996 and 1997 primarily
reflects the investment activity of funds received through the
Company's public offerings in 1996, the convertible subordinated
notes offering in 1997 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 business expansion throughout
the periods.
The Company's financing activities provided net cash of
approximately $4.3 million, $83.6 million and $167.3 million for
1995, 1996 and 1997, respectively. In 1995, the Company sold
Redeemable Convertible Preferred Stock for approximately $3.4
million, increased its bank borrowings by $1.2 million and
reduced discounting of commercial drafts by $390,000. In 1996,
the Company received net proceeds of approximately $79.7 million
from its two public offerings, received net proceeds of
approximately $6.1 million from the sale of Redeemable
Convertible Preferred Stock and decreased bank borrowings by $1.0
million. During the same period, the Company reduced discounting
of commercial drafts in Japan of approximately $1.2 million. In
1997, the Company issued $172.5 million in convertible
subordinated notes with net costs of $5.2 million and, in
addition, received $2.1 million in net proceeds for the issuance
of common stock and reduced bank debt by $1.8 million.
The Company has available credit arrangements with a bank
permitting borrowings of up to $5.0 million. These borrowings are
unsecured and provide for the following facilities: (i) a $2.0
million revolving line of credit; and (ii) a $3.0 million
optional currency line. The Company also has through its
subsidiary in Japan a 10.7 billion yen (approximately $81.9
million) facility for the receipt of funds from three banks in
Japan, without recourse, in connection with the discounting of
certain commercial drafts received from customers as payment for
merchandise. As of December 31, 1997, 3.3 billion yen
(approximately $25.4 million) was being utilized under the
facility. The Company also has three foreign currency exchange
facilities. The Company had forward foreign exchange contracts
at December 31, 1997 to buy $81.3 million for 9.6 billion yen.
The total unrecorded deferred gain and premium on these contracts
as of December 31, 1997 was $4.1 million.
On January 29, 1998, Cymer announced its Board of Directors
authorized the Company to repurchase up to $50.0 million of the
Company's common stock. The purchases will be made from time to
time on the open market or in privately negotiated transactions.*
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 believes that it has sufficient working
capital and available bank credit to sustain operations and
provide for the future expansion of its business during the 1998
fiscal year.*
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 became effective for the
Company for the year ended December 31, 1997. The Company
adopted this standard as of December 31, 1997 and the 1996
financial statements have been restated to reflect the change.
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. 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.*
Impact of Year 2000 Issue
The Company has reviewed its data processing systems as
well as computer applications and has determined that the
Company's data processing will not be materially impacted by any
date-sensitive calculations related to the year 2000.* The
Company has initiated efforts to remedy all currently known
situations and expects all programs to be corrected and tested
prior to the year 2000.* The incremental costs of this project
will not have a material effect on the Company's consolidated
financial statements.*
RISK FACTORS
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. 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 will be 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. 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 four years, and the Company has been profitable for each of
the last seven 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 modules, spares and replacement parts
for 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.
Due to the nature of the Company's product development
requirements, it is often necessary for key suppliers to rapidly
advance their own technologies in order to support the Company's
new product introduction schedule. These suppliers may or may
not be able to satisfy the Company's schedule requirements in
providing new modules and subassemblies to the Company. 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.
There can be no assurance that the Company's products will meet
production specifications over time when subjected to prolonged
and intense use in volume production in semiconductor
manufacturing processes. If any semiconductor manufacturer is
not able to successfully achieve or sustain 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 65%,
90% and 94% of the Company's total revenues in 1995, 1996, and
1997, respectively. Sales to ASM Lithography, Canon, Nikon and
SVG Lithography accounted for approximately 24%, 25%, 39% and 6%,
respectively, of total revenues in 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 809
at December 31, 1997. The Company installed new management
information systems 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 Japan, Korea, Taiwan, and
Singapore subsidiaries, 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. 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. The Company's 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, Singapore,
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 and Komatsu. 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 with 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 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.
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.
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
customers' 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 December 31, 1997, the Company owned
22 United States patents covering certain aspects of technology
associated with excimer lasers which expire from January 2008 to
February 2016 and had applied for 34 additional patents in the
United States, three of which have been allowed. As of December
31, 1997, the Company had filed 76 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 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 the Komatsu Patents and 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
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,
particularly Asia, 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, Taiwan and
Singapore, 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.
Because many of the Company's principal customers, as well as
many of the end-users of the Company's laser systems, are located
in Asia, the recent economic problems and currency fluctuations
affecting that region could intensify the Company's international
risk. 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 3/4
(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 3/4 on August 22,
1997, and declining to $14 7/8 on January 16, 1998. 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.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included in Part IV
Item 14(a)(1) and (2).
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There have been no disagreements with accountants on any
matter of accounting principles and practices or financial
disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding the identification and business
experience of the Company's directors under the caption
"Nominees" under the main caption "Proposal One - Election of
Directors" in the Company's definitive Proxy Statement for the
annual meeting of stockholders to be held, as filed with the
Securities and Exchange Commission within 120 days after the end
of the Company's fiscal year ended December 31, 1997, is
incorporated herein by this reference. For information regarding
the identification and business experience of the Company's
executive officers, see "Executive Officers" at the end of Item 1
in Part I of this Annual Report on Form 10-K. Information
concerning filing requirements applicable to the Company's
executive officers and directors under the caption "Compliance
With Section 16(a) of the Exchange Act" in the Company's Proxy
Statement is incorporated herein by this reference.
Item 11. Executive Compensation
The information under the captions "Executive Compensation"
and "Compensation of Directors" in the Company's Proxy Statement
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information under the caption "Security Ownership of
Principal Stockholders and Management" under the main caption
"Additional Information" in the Company's Proxy Statement is
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions" in
the Company's Proxy Statement is incorporated herein by this
reference.
With the exception of the information specifically
incorporated by reference from the Company's Proxy Statement in
Part III of this Annual Report on Form 10-K, the Company's Proxy
Statement shall not be deemed to be filed as part of this Report.
Without limiting the foregoing, the information under the
captions "Report of the Compensation Committee of the Board of
Directors" and "Company's Stock Performance" under the main
caption "Additional Information" in the Company's Proxy Statement
is not incorporated by reference in this Annual Report on Form 10-
K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K:
(1) Financial Statements. The following Consolidated
Financial Statements of Cymer, Inc. and Independent Auditors'
Report are included in a separate section of this Report
beginning on page F-1:
Description Page Number
Independent Auditors' Report................... F-1
Consolidated Balance Sheets as of December 31, 1996
and 1997.... F-2
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1996 and 1997............. F-3
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years
Ended December 31, 1995, 1996 and 1997......... F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1996 and 1997............. F-5
Notes to Consolidated Financial Statements............ F-7
(2) Financial Statement Schedules. All financial
statement schedules have been omitted because the
required information is not applicable or not present
in amounts sufficient to require submission of the
schedule, or because the information required is
included in the consolidated financial statements or
the notes thereto.
(3) Exhibits. The exhibits listed under Item 14(c)
hereof are filed with, or incorporated by reference into,
this Annual Report on Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
by Registrant during the fourth quarter of the fiscal year ended
December 31, 1997.
(c) Exhibits. The following exhibits are filed as part of,
or incorporated by reference into, this Annual Report on Form 10-K:
21.1 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule for the year ended
December 31, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 25, 1998 By: /s/ ROBERT P. AKINS
Robert P. Akins, President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the date indicated.
/s/ ROBERT P. AKINS President, Chief
Robert P. Akins Executive Officer,
and Chairman of the
Board March 25, 1998
/s/ WILLIAM A. ANGUS,III Senior Vice President,
William A. Angus, III Chief Financial Officer
and Secretary March 25, 1998
/s/ NANCY J. BAKER Director, Corporate
Nancy J. Baker Finance, Treasurer and
Chief Accounting
Officer March 25, 1998
/s/ RICHARD P. ABRAHAM Director
Richard P. Abraham March 25, 1998
/s/ KENNETH M. DEEMER Director
Kenneth M. Deemer March 25, 1998
/s/ PETER J. SIMONE Director
Peter J. Simone March 25, 1998
/s/ F. DUWAINE TOWNSEN Director
F. Duwaine Townsen March 25, 1998
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Cymer, Inc.:
We have audited the accompanying consolidated balance sheets of
Cymer, Inc. and subsidiaries (collectively the "Company") as of
December 31, 1996 and 1997, and the related consolidated
statements of income, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended
December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Cymer, Inc. and subsidiaries as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
February 17, 1998
CYMER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $55,405 $51,903
Short-term investments 10,449 80,387
Accounts receivable - net 18,833 59,140
Foreign exchange contracts receivable 9,317 31,267
Inventories 15,678 47,502
Deferred income taxes 1,432 12,690
Prepaid expenses and other 1,880 2,847
Total current assets 112,994 285,736
PROPERTY - net 11,707 48,031
LONG-TERM INVESTMENTS 1,361 42,667
OTHER ASSETS 3,405 8,446
TOTAL ASSETS $129,467 $384,880
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $7,095 $22,615
Accrued and other liabilities 8,401 26,860
Foreign exchange contracts payable 8,396 27,278
Income taxes payable 2,609 6,444
Revolving loan and security agreements 1,750
Total current liabilities 28,251 83,197
CONVERTIBLE SUBORDINATED NOTES 172,500
OTHER LIABILITIES 2,396 3,566
MINORITY INTEREST 1,077
COMMITMENTS AND CONTINGENCIES (NOTES 4, 5, 7, 9
and 10)
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 28,724,000 28 29
Paid-in capital 106,658 109,367
Net unrealized gain on investments 49
Retained earnings (accumulated deficit) (7,421) 18,637
Cumulative translation adjustment (445) (3,542)
Total stockholders' equity 98,820 124,540
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $129,467 $384,880
</TABLE>
See Notes to Consolidated Financial Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
REVENUES:
<S> <C> <C> <C>
Product sales $15,576 $62,510 $201,191
Other 3,244 2,485 2,456
Total revenues 18,820 64,995 203,647
COSTS AND EXPENSES:
Cost of product sales 8,786 35,583 123,654
Research and development 6,154 11,742 24,971
Sales and marketing 2,353 5,516 11,992
General and administrative 1,181 4,270 8,586
Total costs and expenses 18,474 57,111 169,203
OPERATING INCOME 346 7,884 34,444
OTHER INCOME (EXPENSE):
Foreign currency exchange gain
(loss) - net 10 161 (359)
Interest and other income 32 347 5,318
Interest and other expense (283) (691) (4,847)
Total other income (expense)-net (241) (183) 112
INCOME BEFORE PROVISION FOR
INCOME TAXES & MINORITY INTEREST 105 7,701 34,556
PROVISION FOR INCOME TAXES (36) (1,191) (8,639)
MINORITY INTEREST 141
NET INCOME $69 $6,510 $26,058
EARNINGS PER SHARE:
Basic:
Earnings per share $0.33 $0.92
Weighted average common shares
outstanding 19,868 28,212
Diluted:
Earnings per share $0.29 $0.86
Weighted average common and common
equivalent shares 22,420 30,267
</TABLE>
See Notes to Consolidated Financial
Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
Retained
Net Unrealized Cumulative Earnings/
Common Stock Paid-in Gain on Translation (Accumulated Stockholders'
Shares Amount Capital Investments Adjustment Deficit) Equity (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 2,182 22 $153 ($29) ($19,898) ($19,752)
Exercise of common stock
options 138 1 31 32
Cumulative translation
adjustment (176) (176)
Accretion of redemption -
preferred stock (2,003) (2,003)
Net income 69 69
BALANCE, DECEMBER 31, 1995 2,320 23 184 (205) (21,832) (21,830)
Change in par value due to
reincorporation (20) 20
Exercise of common stock
options 254 93 93
Issuance of common stock under
consulting agreement 20 100 100
Initial public offering of
common stock, net of
issuance costs 7,018 7 29,733 29,740
Conversion of preferred stock
and warrants to common stock 15,408 15 26,543 26,558
Secondary public offering of
common stock,
net of issuance costs 2,540 3 49,985 49,988
Cumulative translation
adjustment (240) (240)
Reversal of accretion of
redemption upon
conversion of preferred stock 7,901 7,901
Net income 6,510 6,510
BALANCE, DECEMBER 31, 1996 27,560 28 106,658 (445) (7,421) 98,820
Exercise of common stock
options and warrants 1,045 1 473 474
Issuance of employee stock
purchase plan shares 119 852 852
Income tax benefit from stock
options exercised 1,802 1,802
Deferred issuance costs,
secondary public offering (418) (418)
Net unrealized gain on
available-for-sale
investments 49 49
Cumulative translation
adjustment (3,097) (3,097)
Net income 26,058 26,058
BALANCE, DECEMBER 31, 1997 28,724 $29 $109,367 $49 ($3,542) $18,637 $124,540
</TABLE>
See Notes to Consolidated Financial
Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $69 $6,510 $26,058
Adjustments to reconcile net income
to net cash
used for operating activities:
Depreciation and amortization 820 2,284 7,606
Minority interest (141)
Deferred income taxes (1,432) (11,295)
Loss on disposal of property 223
Change in assets and
liabilities:
Accounts receivable (2,574) (15,436) (43,467)
Foreign exchange contracts
receivable (9,317) (24,819)
Inventories (2,813) (10,512) (32,288)
Prepaid expenses and other
assets 99 (4,919) (1,029)
Accounts payable 1,404 5,501 15,684
Accrued and other liabilities 379 8,769 18,602
Foreign exchange contracts
payable 8,396 21,397
Income taxes payable 2,609 6,166
Other 502 (674) 194
Net cash used for operating
activities (2,114) (7,998) (17,332)
INVESTING ACTIVITIES:
Acquisition of property (2,653) (11,090) (42,209)
Disposal of property 226 16 147
Purchases of investments (13,715) (140,939)
Proceeds from sold or matured
investments 1,900 29,370
Net cash used for investing
activities (2,427) (22,889) (153,631)
FINANCING ACTIVITIES:
Net borrowings (payments) under
revolving loan and
security agreements 1,240 (1,036) (1,750)
Proceeds from issuance of
convertible subordinated notes 172,500
Debt issue costs (5,228)
Proceeds from issuance of redeemable
convertible preferred stock 3,407 6,050
Proceeds from issuance of common
stock 32 79,935 2,125
Net discounting of commercial drafts (390) (1,240)
Payments on capital lease
obligations (27) (159) (395)
Net cash provided by
financing activities 4,262 83,550 167,252
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (32) 727 209
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (311) 53,390 (3,502)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,326 2,015 55,405
CASH AND CASH EQUIVALENTS AT
END OF YEAR $2,015 $55,405 $51,903
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid 219 467 671
Income taxes paid 36 14 11,991
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of Redeemable
Convertible Preferred Stock
to common stock upon initial
public offering $26,558
Capital lease obligations
incurred for furniture and
equipment 100 573 1,950
Net book value of property
transferred to inventory for
resale 177
Conversion of subordinated
promissory notes and related
interest payable to Redeemable
Convertible Preferred Stock 3,755
</TABLE>
See Notes to Consolidated Financial Statements
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Cymer, Inc., its wholly-owned subsidiaries, Cymer
Japan, Inc. (Cymer Japan) and Cymer Singapore, Pte Ltd. (Cymer Singapore)
and its majority-owned subsidiaries, Cymer Korea, Inc. (Cymer Korea) and
Cymer Southeast Asia, Inc. (Cymer SEA) (collectively, the "Company") is
engaged primarily in the development, manufacturing and marketing of excimer
lasers for sale to manufacturers of photolithography tools in the
semiconductor equipment industry. The Company sells its product to
customers primarily in Japan, the Netherlands and the United States.
Reincorporation and Recapitalization - The Company's Board of Directors
and stockholders approved a reincorporation into the State of Nevada that
became effective on August 21, 1996. In connection with the reincorporation,
the Company increased its authorized common stock to 50,000,000 shares.
The Board of Directors and stockholders also approved the creation of a new
class of 5,000,000 shares of undesignated preferred stock, which was
authorized on the closing of the Company's initial public offering.
The Company completed its initial public offering of 7,018,000 shares of
common stock on September 18, 1996, resulting in net proceeds to the Company
of approximately $29.7 million. In connection with the offering, all
outstanding Redeemable Convertible Preferred Stock and related outstanding
warrants were converted into 15,408,000 shares of common stock (see Note 6).
On December 12, 1996, the Company completed a secondary public offering
of 2,540,000 shares of common stock, resulting in net proceeds to the
Company of approximately $50 million.
Principles of Consolidation - The consolidated financial statements include
the accounts of Cymer, Inc., its wholly-owned subsidiaries, Cymer Japan and
Cymer Singapore, and its majority-owned subsidiaries, Cymer Korea and Cymer
SEA. Cymer, Inc. owns 70% of Cymer Korea and 75% of Cymer SEA. The Company
sells its excimer lasers in Japan primarily through Cymer Japan. Cymer
Korea, Cymer SEA and Cymer Singapore 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.
Cash Equivalents - Cash equivalents consist of money market instruments,
commercial paper and other highly liquid investments purchased with an
original maturity of three months or less.
Investments - The Company's investments are composed primarily of
government and corporate fixed income securities, certificates of deposit
and commercial paper. While it is the Company's general intent to hold
such securities until maturity, management will occasionally sell
particular securities for cash flow purposes. Therefore, the Company's
investments are classified as available-for-sale and are carried at fair
value. Net unrealized holding gains were $49,000 at December 31, 1997 and
are included in stockholders' equity. Such amounts were not material in
1996. See Note 3.
Inventories - Inventories are carried at the lower of cost (first-in,
first-out) or market. Cost includes material, labor and manufacturing
overhead costs.
Property - Property is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets
(generally three to five years). Leasehold improvements are amortized,
using the straight-line method, over the shorter of the life of the
improvement or the remaining lease term. Lasers built for internal use are
capitalized and depreciated using the straight-line method over three years.
Impairment of Long-Lived Assets - Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". SFAS No. 121 requires that long-lived assets
be reviewed for impairment and written down to fair value whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. Under the provisions of SFAS No. 121, impairment losses are
recognized when expected future cash flows are less than the assets'
carrying value. In 1996, the Company recorded expenses related to
impairment losses totaling $223,000. No such losses occurred in 1997.
Fair Value of Financial Instruments - The following methods and assumptions
were used to estimate the fair value of each class of financial instruments
for which it is practicable to estimate that value:
Cash and Cash Equivalents - The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates fair value
because of the short maturity of those instruments.
Investments - Investments consist primarily of government and corporate
fixed income securities, certificates of deposit and commercial paper (see
"Investments" and Note 3). Such assets are carried at fair value which
is based on quoted market prices for such securities.
Foreign Exchange Contracts - The fair value of foreign exchange contracts
is determined using the quoted exchange rate (see "Foreign Exchange
Contracts").
Convertible Subordinated Notes - Convertible Subordinated Notes are
recorded at face value of $172.5 million (see Note 5). The fair value
of such debt, based on quoted market prices at December 31, 1997 was $139.0
million.
Revenue Recognition - 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. Product sales include sales of lasers, replacement parts,
and product service contracts. Other revenue primarily represents revenue
earned from funded development activities and license fees. Such revenue
is recognized on a basis consistent with the performance requirement of the
agreements. Payments received in advance of performance are recorded as
deferred revenue. Long-term contracts are accounted for on the
percentage-of-completion method based upon the relationship of costs incurred
to total estimated costs, after giving effect to estimates of costs to
complete.
Research and development revenues totaled $3,244,000, $2,485,000 and
$2,456,000 for the years ended December 31, 1995, 1996 and 1997
respectively.
Warranty Expense - The Company generally warrants its products against
defects for the earlier to occur of 17 months from the date of shipment or
12 months after acceptance by the end-user. The Company accrues a provision
for warranty expense for all products sold. The amount of the provision is
based on actual historical expenses incurred and estimated probable future
expenses related to current sales. Warranty costs incurred are charged
against the provision.
Stock-Based Compensation - Effective January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock. See Note 7.
Foreign Currency Translation - Gains and losses resulting from foreign
currency translation are accumulated as a separated componenet of
consolidated stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements
of operations.
Foreign Exchange Contracts - The Company enters into foreign currency
exchange contracts in order to reduce the impact of currency fluctuations
related to purchases of the Company's inventories by Cymer Japan for resale
under firm third-party sales commitments. Net gains or losses are
recorded on the date the inventories are received by Cymer Japan (the
transaction date) and are included in cost of product sales in the
consolidated statements of operations as the related sale is consummated.
Amounts due from/to the bank on contracts not settled as of the transaction
date are recorded as foreign exchange contracts receivable/payable in the
consolidated balance sheets.
The Company recognized net gains from the above foreign currency exchange
contracts of $496,000, $1,920,000 and $5,758,000 for the years ended
December 31, 1995, 1996 and 1997, respectively. The face amount of the
underlying contracts was $4,048,000, $16,123,000 and $88,339,000 at
December 31, 1995, 1996 and 1997, respectively. The Company also had
outstanding forward foreign exchange contracts at December 31, 1997 to buy
$81.3 million for 9.6 billion yen under foreign currency exchange
facilities with banks in Japan and the United States (see Note 4). The
total unrecorded deferred gain and premium on these contracts as of
December 31, 1997, was $4,125,000. Such contracts expire on various dates
through November 1998.
Concentration of Credit Risk - The Company invests its excess cash in an
effort to preserve capital, provide liquidity, maintain diversification and
generate returns relative to the Company's corporate investment policy and
prevailing market conditions. The Company has not experienced any losses
on its cash accounts. The Company has a small number of significant
customers and maintains a reserve for potential credit losses and such
losses, to date, have been minimal (see "Major Customers and Related
Parties").
Major Customers and Related Parties - Revenues from major customers are
detailed as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
Customer (in thousands)
<S> <C> <C> <C>
A $5,035 $20,123 $80,156
B 3,557 19,134 51,480
C 3,395 12,586 49,441
D 6,555 11,697
</TABLE>
Receivables from these customers totaled $16,183,000 and $51,467,000 at
December 31, 1996 and 1997, respectively.
Revenues from Japanese customers, generated primarily by Cymer Japan,
accounted for 50%, 61% and 65% of revenues for the years ended December 31,
1995, 1996 and 1997, respectively. Revenues from a customer in the
Netherlands accounted for 18%, 19% and 24% of revenues for the years
ended December 31, 1995, 1996 and 1997, respectively.
Revenues from stockholders totaled $9,085,000, $52,114,000 and $131,636,000
for the years ended December 31, 1995, 1996 and 1997, respectively.
Earnings Per Share - In February 1997, the Financial Accounting Standards
Board issued 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 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 adopted the new method
of reporting EPS for the year ended December 31, 1997 and the 1996 financial
statements have been restated to reflect the change. Reconciliation of the
basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997
(in thousands, except
per share amounts)
<S> <C> <C>
Net income $6,510 $26,058
Basic earnings per share $0.33 $0.92
Basic weighted average common shares
outstanding 19,868 28,212
Effect of dilutive securities:
Warrants 560 121
Options 1,992 1,934
Diluted weighted average common and
commmon equivalent shares outstanding 22,420 30,267
Diluted earnings per share $0.29 $0.86
</TABLE>
Weighted average options to purchase 9,764 and 412,000 shares of common
stock, which expire at various dates through October 1, 2007 were
outstanding for the period ended December 31, 1996 and 1997, respectively,
and were not included in the computation of diluted earnings per share
as the options' exercise prices were greater than the average market price
of the common shares. In addition, for the period ended December 31, 1997,
Convertible Subordinated Notes and related interest expense of $4,249,000
were not included in the diluted earnings per share computation as they were
also anti-dilutive.
Stock Split - On August 7, 1997, the Company declared a 2-for-1 stock split
of its Common Stock effective August 21, 1997. The Company's par value of
$.001 per share remained unchanged. All common share amounts and earnings
per share for all periods presented have been adjusted to give effect to
this stock split.
Reclassifications - Certain amounts in the prior years' financial statements
have been reclassified to conform to current period presentation.
2. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
December 31,
1996 1997
(in thousands)
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Trade $19,072 $56,856
Other 466 3,030
19,538 59,886
Less allowance for doubtful accounts (705) (746)
Total $18,833 $59,140
INVENTORIES:
Raw materials $6,243 $24,365
Work-in-progress 6,680 18,394
Finished goods 2,755 4,743
Total $15,678 $47,502
PROPERTY - at cost:
Furniture and equipment $10,888 $30,202
Capitalized lasers 3,474 10,163
Leasehold improvements 1,713 19,083
Construction in process 1,229 1,435
17,304 60,883
Less accumulated depreciation and
amortization (5,597) (12,852)
Total $11,707 $48,031
ACCRUED AND OTHER LIABILITIES:
Warranty and installation reserves $ 4,950 $15,730
Payroll and payroll related 932 2,735
Interest 3,920
Other 2,519 4,475
Total $ 8,401 $26,860
</TABLE>
3. INVESTMENTS
Investments consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1997
(in thousands)
<S> <C> <C>
Short-term:
Municipal Bonds $3,706 $32,923
Corporate Bonds 14,151
Certificates of Deposit 14,113
Commercial Paper 591 8,900
Auction Market Preferred 5,000
U.S. Government Agencies 300 3,000
Weekly Municipal Floater 4,602 500
Other 1,250 1,800
Total $10,449 $80,387
Long-term:
Municipal Bonds $ 1,061 $29,670
Corporate Bonds 12,997
Medium-Term Notes 300
Total $1,361 $42,667
</TABLE>
Investments are recorded at fair value. Short-term investments mature
within one year and long-term investments mature in one year to 23 months.
See also "Investments" in Note 1.
4. CREDIT FACILITIES
Revolving Loan Facility - The Company had a revolving loan facility
("Loan Facility") providing for borrowings of up to $1,000,000 and
guaranteed by a preferred stockholder of the Company (see Note 10).
Interest was payable quarterly, and the balance was due on the earlier
of March 31, 1997 or the completion of the Company's initial public
offering. The $1,000,000 balance owed plus accrued interest due against
the Loan Facility was paid upon completion of the Company's initial public
offering in September 1996.
Loan and Security Agreement - In 1996, the Company had a Loan and Security
Agreement (the "Agreement") that provided for three revolving loan
facilities and a loan with a bank to provide for combinned borrowings of up
to a maximum of $11,000,000 with interest on outstanding borrowings ranging
from prime to prime plus 0.25% (8.25% and 8.50%, respectively, at December
31, 1996). Borrowings under the Agreement were secured by substantially all
of the Company's assets. There was $1,750,000 outstanding under the
Agreement at December 31, 1996.
The Agreement required the Company to maintain compliance with certain
financial statement and other covenants including, among other items,
limitation on additional debt, total liabilities to tangible net worth and
minimum tangible net worth. As of December 31, 1996, the Company was in
compliance with all such covenants. In 1997, the outstanding balance was
paid off and the Agreement was terminated.
Revolving Loan Agreement - The Company has a Loan Agreement (the "Agreement")
which provides two revolving loan facilities with a bank to provide for
combined borrowings of up to a maximum of $5.0 million with interest on
outstanding borrowings at prime less 0.50% or LIBOR plus 2.25%. The
Agreement provides for the following: (i) an unsecured $2.0 million
revolving bank line of credit and (ii) an unsecured $3.0 million Optional
Currency revolving line of credit. There were no borrowings outstanding
under this Agreement at December 31, 1997.
The Agreement requires the Company to maintain compliance with certain
financial statement and other covenants including, among other items,
tangible net worth and cash flow ratio requirements. As of December 31,
1997, the Company was in compliance with all such covenants.
Advances Against Commercial Drafts - Advances against commercial drafts
represent funds advanced by two banks in Japan, without recourse, in
connection with the discounting of certain commercial drafts received
from customers as payment for the purchase of merchandise. The advances
against commercial drafts are for a maximum of 2.1 billion yen
(approximately $18.1 million) as of December 31, 1996 and 10.7 billion yen
(approximately $81.9 million) as of December 31, 1997, are discounted
at the bill discount rate plus 0.25% to 0.5% (1.875% at December 31, 1996
and 2.125% at December 31, 1997) and generally mature within 120 days.
The Company had deposited $459,000 with a bank under lien to the bank as
security under the agreement in 1996. No such deposit was required in 1997.
Foreign Exchange Facilities - The Company has foreign exchange facilities
with banks in Japan and a bank in the United States. The first facility with
a bank in Japan provides up to $43.2 million in 1996 and 14.3 billion yen in
1997 to be utilized for forward contracts for periods of up to one year.
As of December 31, 1996 and 1997, respectively, $18.7 million and 4.2 billion
yen ($36.4 million) was being utilized under the foreign exchange facility
(see "Foreign Exchange Contracts" in Note 1).
The second foreign exchange facility with another bank in Japan provides up
to $32.4 million in 1996 and $50.0 million in 1997 to be utilized for forward
contracts for periods of up to nine months. As of December 31, 1996, $24.5
million was being utilized under this facility. There were no foreign
exchange contracts outstanding under this agreement at December 31, 1997.
The foreign exchange facility with the United States bank provides up to
$3.5 million in 1996 and $100.0 million in 1997 to be utilized for spot and
future foreign exchange contracts for periods of up to one year. There
were no foreign exchange contracts outstanding under this agreement at
December 31, 1996. As of December 31, 1997, $44.9 million was being
utilized under the foreign exchange facility. This facility is part of the
Revolving Loan Agreement discussed above and is subject to the same
covenants.
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, commmencing February 6, 1998. Interest on the notes is stated at
3 1/2% per annum from August 6, 1997 through August 5, 2000 and at
7 1/4% per annum from August 6, 2000 to maturity or earlier redemption,
representing a yield to maturity accrued at 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. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon the Company's initial public offering in September 1996, all Redeemable
Convertible Preferred Stock (approximately 15.4 million shares) and
Redeemable Convertible Preferred Stock warrants (to purchase 566,000 shares
of such stock) were automatically converted into the Company's common stock
or warrants to purchase common stock. The conversion of the preferred stock
and warrants to common was on a 1 for 1 basis, except for the Series E
preferred stock and warrants, which were converted on an approximate 1.5 to
1 basis. Upon conversion of the preferred stock and warrants, all preferred
stock dividends and other rights previously assigned ceased. In addition,
upon the September 1996 conversion discussed above, the cumulative accretion
of the Redeemable Convertible Preferred Stock of $7,901,000 was recorded
as a reduction of the acumulated deficit.
7. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock - Pursuant to the Company's Articles of Incorporation, the
Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or
more series and to fix the designations, powers, preferences, privileges,
and relative participation, optional or special rights and the
qualifications, limitations or restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, any or all of which may be greater than the
rights of the common stock.
Common Stock Warrants - At December 31, 1997, the Company had warrants
outstanding to purchase 130,000 shares of its common stock at a weighted
average purchase price of $1.69 per share. The warrants expire in 2000
and 2001.
Stock Option and Purchase Plans - The Company has three plans as follows:
Common Shares
Designated for
Issuance
(i) 1987 Stock Plan 3,000,000
(ii) 1996 Stock Option Plan 3,000,000
(iii) 1996 Employee Stock Purchase Plan 500,000
Total 6,500,000
(i) 1987 Stock Option Plan (the "1987 Plan") - The 1987 Plan provides that
incentive and nonstatutory options to purchase shares of common stock may be
granted to employees and consultants at prices that are not less than 100%
(85% for nonstatutory options) of the fair market value of the Company's
common stock on the date the options are granted. The 1987 Plan also provides
for various restrictions regarding option terms, prices, transferability and
other matters. Options issued under the 1987 Plan expire five to ten years
after the options are granted and generally become exercisable ratably over
a four-year period following the date of grant.
(ii) 1996 Stock Option Plan (the "1996 Stock Plan") - The 1996 Stock Plan
provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and nonqualified stock options to employees, directors and consultants of the
Company. Incentive stock options may be granted only to employees. The 1996
Stock Plan is administered by the Board of Directors or by a committee appointed
by the Board of Directors, which determines the terms of options granted,
including the exercise price and the number of shares subject to the option.
The exercise price of incentive stock options granted under the 1996 Stock
Plan must be at least equal to the fair market value of the Company's
common stock on the date of grant and the exercise price of nonqualified
stock options must be at least equal to 85% of the fair market value of the
Company's common stock on the date of grant. Options issued under the 1996
Plan expire five to ten years after the options are granted and generally
become exercisable ratably over a four-year period following the date of
grant.
(iii) 1996 Employee Stock Purchase Plan (the "Purchase Plan") - The
Purchase Plan is intended to qualify under Section 423 of the Code. Under
the Purchase Plan, an eligible employee may purchase shares of common stock
from the Company through payroll deductions of up to 10% of his or her base
compensation (excluding bonuses, overtime and sales commissions), at a price
per share equal to 85% of the lower of (i) the fair market value of the
Company's common stock as of the first day of each offering period under the
Purchase Plan or (ii) the fair market value of the common stock at the end
of the offering period.
In 1996 the Company had adopted a 1996 Director Option Plan (the "Director
Option Plan") whereby 200,000 shares were reserved for the Board of Director
option grants. There was 80,000 options issued under the Plan in 1997. The
plan was dissolved in October 1997 by the Board of Directors.
Stock option transactions are summarized as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
<S> <C> <C>
Outstanding, January 1, 1995 848 $ 0.38
Granted 1,958 $ 0.31
Exercised (118) $ 0.35
Terminated (766) $ 0.34
Outstanding, December 31, 1995 1,922 $ 0.33
Granted 1,444 $ 7.16
Exercised (254) $ 0.37
Terminated (78) $ 1.16
Outstanding, December 31, 1996 3,034 $ 3.48
Granted 1,838 $ 27.20
Exercised (608) $ 0.78
Terminated (217) $ 8.93
Outstanding, December 31, 1997 4,047 $ 14.39
Exercisable, December 31, 1995 400 $ 0.27
Exercisable, December 31, 1996 586 $ 0.31
Exercisable, December 31, 1997 846 $ 3.73
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its employee stock options plans. Accordingly, no compensation expense
has been recognized for its stock-based compensation plan, as the options are
granted at the fair market value of the Company's common stock. Had
compensation cost been determined based upon the fair value at the grant date
for awards under the plan consistent with the methodology prescribed under
SFAS No. 123, the Company's net income for the year ended December 31, 1995
would have been reduced by approximately $19,000; the Company's net income
for the year ended December 31, 1996 would have been reduced by approximately
$218,000 ($0.01 per share, basic and diluted), and the Company's net income
for the year ended December 31, 1997 would have been reduced by approximately
$7.6 million ($0.27 and $0.25 per share, basic and diluted, respectively).
Using the Black-Scholes option-pricing model, the estimated weighted average
fair value of the options granted during 1995 was $0.07 per option on the date
of grant with the following weighted average assumptions: no dividend yield or
volatility rate, risk free interest rates of 5.57% to 7.54%, assumed
forfeiture rate of 3% and an expected life of five years. The estimated
weighted average fair value of the options granted during 1996 was $1.75 per
option on the date of grant with the following weighted average assumptions:
no dividend yield, volatility rate of 107%, risk free interest rates of
5.33% to 6.68%, assumed forfeiture rate of 3% and an expected life of five
years. The estimated weighted average fair value of the options granted
during 1997 was $17.36 per option on the date of grant with the following
weighted average assumptions: no dividend yield, volatility rate of 88%, risk
free interest rates of 5.37% to 6.83%, assumed forfeiture rate of 5% and an
expected life of five years.
The following table summarizes information as of December 31, 1997 concerning
currently outstanding and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding
Weighted Ave. Weighted Weighted
Range of Number Remaining Average Number Average
Exercises Out- Contractual Exercise Exercisable Exercise
Prices standing Life Price Price
<S> <C> <C> <C> <C> <C>
$ 0.25-$ 4.75 1,896 2.85 $ 1.85 734 $ 1.55
$11.38-$17.31 287 6.45 $15.03 33 $11.38
$20.50-$24.25 801 4.68 $21.15 79 $20.59
$27.38 375 5.36 $27.38
$33.75 688 4.56 $33.75
4,047 846
</TABLE>
Common Shares Reserved - As of December 31, 1997, the Company had reserved the
following number of shares of common stock for issuance (in thousands):
Issuance under stock option and purchase plans 933
Exercise of common stock purchase warrants 130
Total 1,063
8. INCOME TAXES
Income taxes in the statement of operations for the year ended December 31,
1995 primarily represent taxes paid in Japan for research and development
revenues generated from agreements with Japanese companies, see Note 10.
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997
(in thousands)
<S> <C> <C>
Current income taxes
Federal $1,605 $16,174
State 1,127
Foreign 1,004 2,700
Total 2,609 20,001
Deferred income taxes:
Federal (131) (5,103)
State (12) (360)
Foreign (352) (611)
Total (495) (6,074)
Reduction in valuation allowance (923) (5,288)
Provision for income taxes $1,191 $8,639
</TABLE>
The provision for income taxes is different from that which would be obtained
by applying the statutory Federal income tax rate (35%) to income before
provision for income taxes. The items causing this difference for the
period are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997
<S> <C> <C>
Provision at statutory rate 34.0% 35.0%
Foreign provision in excess of Federal
statutory rate 7.3 4.8
State income taxes, net of Federal benefit (1.6) 1.4
Foreign sales corporation taxes, net of
Federal benefit (4.4) (1.3)
Federal tax credits (2.5) (1.7)
Japanese imported product credits (1.8)
Miscellaneous/other items 3.2 2.8
Reduction in valuation allowance (20.5) (14.2)
Provision at effective rate 15.5% 25.0%
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax assets are as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1997
(in thousands)
<S> <C> <C>
Reserves and accruals not currently deductible $3,290 $11,780
Differences between book and tax basis of
inventory and fixed assets 594 355
Accrued Japanese enterprise tax 246 739
State taxes (65) (563)
Tax credit carryforwards 2,126
Capitalized research and development costs 243
Other 286 379
Net deferred tax assets before valuation
allowance 6,720 12,690
Valuation allowance (5,288)
Total $1,432 $12,690
</TABLE>
The Company recorded a valuation alloance equal to the total net deferred
tax asset balance at December 31, 1995. The Company reduced its valuation
allowance in 1996 by $923,000. The Company eliminated its remaining
valuation allowance in 1997 due to management's belief that current year
activity made realization of such benefit more likely than not.
9. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases its primary facilities under non-cancelable
operating leases. The lease terms are through January 1, 2010 and provide
for certain rent abatements and minimum annual increases and options to
extend the term. The Company also leases certain other facilities and
equipment under capital and short-term operating lease agreements. The
capital leases expire on various dates through 2002.
Under the terms of an operating lease for an office building entered into
in December 1996, the Company has deposited approximately $2,224,000 in an
escrow account in lieu of a security deposit for the premises. The majority
of this amount is included with prepaid expenses and other assets on
the consolidated balance sheet.
Rent expense under operating leases is recognized on a straight-line basis
over the life of the related leases and totaled approximately $736,000,
$1,052,000, $2,863,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
The net book value of assets under capital leases at December 31, 1996 and
1997 was approximately $528,000 and $2,101,000, net of accumulated
amortization of approximately $145,000 and $523,000, respectively.
Total future minimum lease commitments under operating and capital leases
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31, Operating Capital
<S> <C> <C>
1998 $2,852 $727
1999 2,901 716
2000 2,918 663
2001 2,936 429
2002 2,885 32
Thereafter 20,757
Total $35,249 2,567
Less amount representing interest 563
Present value of minimum lease payments 2,004
Less current portion 570
Long term obligations under capital leases $1,434
</TABLE>
Patent License Agreement - The Company has a patent license agreement for
a non-exclusive worldwide license to certain patented laser technology.
Under the terms of the agreement, the Company is required to pay royalties
ranging from 0.25% to 5.0% of gross sales and leases as defined depending
on the total amounts attained. Royalty fees totaled $64,000, $226,000 and
$49,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Employee Savings Plan - The Company has a 401(k) plan that allows
participating employees to contribute a percentage of their salary,
subject to annual limits. The Plan is available to substantially all
full-time United States employees. Effective January 1, 1997, the Company
matched 100% of each eligible employee's contributions, up to $500 per
year. The Company contributed $187,000 to the plan for the year ended
December 31, 1997. There were no matching contributions for 1996.
Retirement Plan - During the year ended December 31, 1996, Cymer Japan
adopted a retirement benefit plan for all Cymer Japan employees and
Japanese directors. The plan consists of a multi-employer retirement
plan covering all employees and life insurance policies covering all
employees and Japanese directors. The multi-employer retirement plan was
established under the Small and Medium-Size Enterprise Retirement Benefits
Cooperative Law. Expense under the plan totaled $37,000 and $172,000 for
the years ended December 31, 1996 and 1997, respectively.
Contingency - On November 1, 1996, the Company entered into a settlement
agreement for the dismissal of a patent infringement complaint filed
against the Company in September, 1996. Under the terms of the settlement,
the plaintiffs agreed to (i) release the Company from any claims they may
have with respect to the disputed patent and (ii) dismiss the patent
infringement action with prejudice. In return, the Company agreed to make
annual payments to the plaintiffs over a 13-year period. Such annual
payments and the related expense are not material to the Company's financial
position, results of operations or cash flows.
In addition, 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
advise of counsel, that the Company's products do not infringe any valid
claim of the asserted patent.
10.RELATED PARTY TRANSACTIONS
Collaborative Arrangement - The Company has a collaborative arrangement
with a Japanese company that is also a stockholder of the Company. The
arrangement, entered into in August, 1992, includes a (i) stock purchase
agreement, (ii) research and development agreement (iii) product license
agreement, and (iv) contract manufacturing agreement. The general provisions
of these agreements are as follows:
Stock Purchase Agreement - The stockholder purchased 470,590 shares of the
Company's Series D Redeemable Convertible Preferred Stock at $4.25 per share
with net proceeds to the Company of $1,909,000. Such stock was converted
to common stock in 1996 (see Note 6).
Research and Development Agreement - The stockholder agreed to reimburse
the Company 50% of the Company's total research and development expenses
under annual sub-agreements, as defined, to a maximum of $500,000 per year.
Reimbursements of $250,000 were received under the agreement for the year
ended December 31, 1995. The agreement expired in June 1995.
Product License Agreement - The Company granted to the stockholder the
exclusive right in Japan and the non-exclusive right outside Japan to
manufacture and sell one of the Company's products and subsequent
enhancements thereto. The Company also granted the stockholder the
right of first refusal to license and fund the development of new
technologies not developed with funding from other parties. In
exchange for these rights, the Company received up-front license fees
and is also entitled to royalties of 5% on related product sales
through September 1999, after which the royalty rate is subject to
renegotiation. The license agreement also provides that product sales
between the Company and the stockholder will be at a 15% discount from the
respective companies' list price. The agreement terminates in August 2012.
There was no activity under this agreement in 1995, 1996 and 1997.
Contract Manufacturing Agreement - The stockholder has agreed to manufacture
for the Company another of its products. The Company will be required
to purchase a specified percentage of its total annual product, as defined.
The agreement expires in August 2001, and will automatically renew for
two-year terms unless one year's notice is given by either party. The
Company made $477,000 and $14.1 million in purchases under this agreement
in 1996 and 1997, respectively. No purchases were made in 1995.
Design and Development Agreements - During 1995, the Company entered into
design and development agreements with certain of its major customers who
are also stockholders. Such agreements generally provide, among other
things, discounts to these customers on future sales of the related lasers.
Revenues from such agreements are not a material component of 1995, 1996
or 1997 revenues.
Service Agreement - The Company has a service agreement with another
Japanese company who is also a stockholder of the Company. The general
provisions of the service agreement are as follows:
Sales and Marketing - The Japanese company is to assist the Company in
establishing sales, marketing, manufacturing, and maintenance capabilities
in exchange for consideration equal to a percentage of net sales of certain
products in Japan. The agreement initially expired in March 1996 and
automatically extends until the total consideration paid under the
agreement aggregates $2,000,000. Under certain conditions, if the
agreement is terminated, the Company may be required to pay liquidated
damages equal to $2,000,000 less the aggregate of previous consideration
plus other eligible consideration paid to the Japanese company as defined
in the agreement. Consideration expensed under the agreement for the
years ended December 31, 1995, 1996 and 1997 totaled $211,000, $1,284,000
and $150,000, respectively. The aggregate $2,000,000 consideration was
met in January, 1997.
Business Strategy - In addition, the Japanese company has agreed to assist
the Company in establishing a business strategy for the Japanese market,
evaluating third party contractors, preparing and negotiating the terms
and conditions of a license proposal with third party contractors, and
finding new investors. In exchange for such assistance, the Company agreed
to pay the Japanese company a percentage of any (i) up-front license fees,
(ii) royalties received on certain sales, and (iii) funding received from
new investors. No payments were made under the agreement in 1995, 1996 and
1997.
Royalties - The Company has also agreed to pay the Japanese company
additional royalties on net sales of certain products manufactured by
the third party contractor as well as a fee for each laser chamber
refurbished by the third party contractor. Such royalties are applicable
only for the period subsequent to the expiration of the original agreement.
Consideration expensed under the agreement for the year ended December 31,
1997 was $252,000. There was no consideration under the agreement in
1995 and 1996.
11.GEOGRAPHIC INFORMATION
Presented below is information regarding sales, income from operations, and
identifiable assets, classified by operations located in the United States,
Japan, and Korea, Taiwan and Singapore. The Company sells its excimer
lasers in Japan through Cymer Japan. Intercompany sales to Cymer Japan,
Cymer Korea, Cymer SEA and Cymer Singapore are primarily at 85% of the price
of products sold to outside customers. All significant intercompany balances
are eliminated in consolidation. The majority of consolidated costs and
expenses are incurred in the United States and are reflected in the operating
income (loss) from the United States Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Sales:
United States $11,303 $26,918 $75,432
Japan 7,517 38,077 128,075
Korea, Taiwan and Singapore 140
Total $18,820 $64,995 $203,647
Operating Income:
United States $(3,425) $(13,974) $(30,186)
Japan 3,771 21,858 65,786
Kora, Taiwan and Singapore (1,156)
Total $346 $7,884 $34,444
</TABLE>
<TABLE>
<CAPTION>
Decemeber 31,
1995 1996 1997
<S> <C> <C> <C>
Identifiable assets:
United States $10,876 $105,902 $308,780
Japan 4,743 23,565 72,427
Korea, Taiwan and Singapore 3,673
Total $15,619 $129,467 $384,880
</TABLE>
12.SUBSEQUENT EVENTS
Repurchase - On January 28, 1998, the Company's Board of Directors authorized
the Company to repurchase up to $50.0 million of the Company's common stock.
The purchases will be made from time to time on the open market or in
privately negotiated transactions.
Option Repricing - On January 28, 1998, the Company's Board of Directors
authorized an incentive stock option repricing effective March 2, 1998 at
a new option price of $22.56 per share. The repricing took effect on
839,020 options with original prices ranging from $21.03 to $33.75 per
share granted from December 1996 through October 1997. The four year
vesting period of the repriced options also began on March 2, 1998 and the
term of such options was set at ten years.
Stockholder Rights Plan - On February 13, 1998, the Company's Board of
Directors adopted a Stockholder Rights Plan. Under the terms of the plan,
rights will be distributed as a dividend at a rate of one preferred share
purchase right on each outstanding share of the Company's commmon stock held
by shareholders of record as of close of business on March 2, 1998. The
dividend distribution will be made on or about April 20, 1998 with rights
expiring on February 13, 2008. The rights are designated to assure that
all Company stockholders receive fair and equal treatment in the event of
any proposed takeover of the Company and to guard against partial tender
offers and other abusive tactics to gain control of the Company without
paying all stockholders the fair value of their shares, including a control
premium.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement No. 333-16559 on Form S-8 of our report dated February
17, 1998, appearing in this Annual Report on Form 10-K of Cymer,
Inc. for the year ended December 31, 1997 and to the reference
to us under the heading "Selected Financial Data" in such Form
10-K.
DELOITTE & TOUCHE, LLP
San Diego, California
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 51,903
<SECURITIES> 80,387
<RECEIVABLES> 59,886
<ALLOWANCES> 746
<INVENTORY> 47,502
<CURRENT-ASSETS> 285,736
<PP&E> 60,883
<DEPRECIATION> 12,852
<TOTAL-ASSETS> 384,880
<CURRENT-LIABILITIES> 83,197
<BONDS> 172,500
0
0
<COMMON> 29
<OTHER-SE> 109,367
<TOTAL-LIABILITY-AND-EQUITY> 384,880
<SALES> 201,191
<TOTAL-REVENUES> 203,647
<CGS> 123,654
<TOTAL-COSTS> 123,654
<OTHER-EXPENSES> 45,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,847
<INCOME-PRETAX> 34,556
<INCOME-TAX> 8,639
<INCOME-CONTINUING> 26,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,058
<EPS-PRIMARY> .92
<EPS-DILUTED> .86
</TABLE>
