UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 0-21321
CYMER, INC.
(Exact name of registrant as specified in its charter)
Nevada 33-0175463
(State or other jurisdiction of incorporation (I.R.S. Employer
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
Former name, former address and former fiscal year, if changed
since last report.
N/A
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of Common Stock, with $0.001 par value,
outstanding on July 30, 1998 was 28,567,319.
CYMER, INC.
FORM 10-Q
For the Quarter Ended June 30, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of 3
December 31, 1997 and June 30, 1998
Consolidated Statements of Income 4
for the three and six months ended June
30, 1997 and 1998
Consolidated Statements of Cash 5
Flows for the six months ended June 30, 1997
and 1998
Notes to Consolidated Financial 7
Statements
ITEM 2. Management's Discussion and Analysis of 11
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Changes in Securities 26
ITEM 3. Defaults upon Senior Securities 26
ITEM 4. Submission of Matters to a Vote of 26
Security Holders
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
SIGNATURE PAGE 27
PART I. FINANCIAL INFORMATION
CYMER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1998
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $51,903 $74,631
Short-term investments 80,387 20,336
Accounts receivable - net 59,140 55,631
Foreign exchange contracts receivable 31,267 19,638
Inventories 47,502 59,318
Deferred income taxes 12,690 12,638
Prepaid expenses and other 2,847 2,994
Total current assets 285,736 245,186
PROPERTY - net 48,031 51,568
LONG-TERM INVESTMENTS 42,667 73,747
OTHER ASSETS 8,446 8,476
TOTAL ASSETS $384,880 $378,977
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loan $9,480
Accounts payable $22,615 13,588
Accrued and other liabilities 26,860 29,369
Foreign exchange contracts payable 27,278 17,389
Income taxes payable 6,444 6,176
Total current liabilities 83,197 76,002
CONVERTIBLE SUBORDINATED NOTES 172,500 172,500
OTHER LIABILITIES 3,566 3,501
MINORITY INTEREST 1,077 1,121
COMMITMENTS AND CONTINGENCIES (Note 7)
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 28,724,000 and
28,659,00 shares 29 29
Paid-in capital 109,367 110,493
Retained earnings 18,637 23,028
Accumulated other comprehensive loss (3,493) (2,421)
Treasury stock at cost (305,000 common
shares) (5,276)
Total stockholders' equity 124,540 125,853
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $384,880 $378,977
</TABLE>
See notes to consolidated financial statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three For the six
months months
ended June 30 ended June 30
1997 1998 1997 1998
<S> <C> <C> <C> <C>
REVENUES:
Product sales $50,030 $52,946 $86,476 $102,574
Other 102 76 627 127
Total revenues 50,132 53,022 87,103 102,701
COSTS AND EXPENSES:
Cost of product sales 31,003 34,154 52,700 64,784
Research and development 6,344 8,292 10,592 16,109
Sales and marketing 2,756 3,980 5,015 7,880
General and administrative 2,059 2,605 3,856 5,083
Total costs and expenses 42,162 49,031 72,163 93,856
OPERATING INCOME 7,970 3,991 14,940 8,845
OTHER INCOME (EXPENSE):
Foreign currency exchange
gain (loss) - net 470 (520) (85) (752)
Interest and other income 507 1,847 1,204 3,855
Interest and other expense (158) (2,802) (275) (5,583)
Total other income
(expense) - net 819 (1,475) 844 (2,480)
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 8,789 2,516 15,784 6,365
PROVISION FOR INCOME TAXES (1,359) (724) (3,946) (1,882)
MINORITY INTEREST (103) (91)
NET INCOME $7,430 $1,689 $11,838 $4,392
EARNINGS PER SHARE:
Basic:
Earnings per share $0.26 $0.06 $0.42 $0.15
Weighted average common
shares outstanding 28,134 28,768 27,960 28,747
Diluted:
Earnings per share $0.24 $0.06 $0.39 $0.14
Weighted average common and
common equivalent shares
outstanding 30,694 30,291 30,558 30,366
</TABLE>
See notes to consolidated financial statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30
1997 1998
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $11,838 $4,392
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation and amortization 2,777 7,148
Minority interest 91
Deferred income taxes (3,162)
Change in assets and liabilities:
Accounts receivable (29,261) 1,968
Foreign exchange contracts receivable (15,991) 10,296
Inventories (20,812) (12,078)
Prepaid expenses and other assets (2,617) (448)
Accounts payable 8,638 (6,568)
Accrued and other liabilities 15,269 273
Foreign exchange contracts payable 17,158 (8,711)
Income taxes payable 2,147 (2,200)
Other 232
Net cash used for operating activities (13,784) (5,837)
INVESTING ACTIVITIES:
Acquisition of property (15,391) (10,550)
Purchases of investments (26,278) (45,558)
Proceeds from sold or matured investments 20,867 74,480
Net cash provided by (used for)
investing activities (20,802) 18,372
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
loan and security agreements (500) 10,013
Debt issue costs 395
Proceeds from issuance of common stock 272 1,126
Purchase of treasury stock (5,276)
Payments on capital lease obligations (159) (299)
Net cash provided by (used for)
financing activities (387) 5,959
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (1,472) 4,234
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (36,445) 22,728
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 55,405 51,903
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18,960 $74,631
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $320 $3,305
Income taxes paid $2,963 $2,140
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred for
furniture and equipment $839 $71
</TABLE>
See notes to consolidated financial statements.
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial information has been
prepared by Cymer, Inc., its wholly-owned subsidiaries, Cymer
Japan, Inc., (Cymer Japan), Cymer Singapore, Pte Ltd. (Cymer
Singapore), and Cymer B.V. in the Netherlands (Cymer B.V.) and
its majority-owned subsidiaries, Cymer Korea, Inc. (Cymer Korea)
and Cymer Southeast Asia, Inc. (Cymer SEA) (collectively, the
"Company"), without audit, in accordance with the instructions to
Form 10-Q and therefore does not include all information and
footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in accordance with
generally accepted accounting principles.
Principles of Consolidation - The consolidated financial
statements include the accounts of Cymer, Inc., its wholly-owned
subsidiaries, Cymer Japan, Cymer Singapore and Cymer B.V., 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, Cymer Singapore and Cymer B.V.
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.
Statement of Financial Accounting Standards No. 132 - In
February, 1998 the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits",
effective for fiscal years beginning after December 15, 1997. SFAS No. 132
revises employers' disclosures about pension and other postretirement
benefit plans, but does not change the measurement or recognition of
those plans. The Company adopted SFAS No. 132 for the year ended
December 31, 1998. Management has determined that this pronouncement
does not materially effect the Company's current disclosures of its
retirement plan.
Unaudited Interim Financial Data - In the opinion of
management, the unaudited consolidated financial statements for
the interim periods presented reflect all adjustments, consisting
of only normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations
as of and for such periods indicated. These consolidated
financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K
(including items incorporated by reference therein) for the year
ended December 31, 1997 and the Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 1998. Results for the interim
periods presented herein are not necessarily indicative of
results which may be reported for any other interim period or for
the entire fiscal year.
2. EARNINGS PER SHARE
Earnings Per Share - In February 1997, the FASB 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 Accounting Principles Board ("APB") Opinion No. 15. Basic
EPS excludes dilution from common stock equivalents and is computed
by dividing income available to common stockholders by the weighted-
average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from common stock
equivalents, similar to fully diluted EPS, but uses only the
average stock price during the period as part of the computation.
The Company adopted the new method of reporting EPS for the year
ended December 31, 1997. Reconciliation of the basic and diluted
EPS is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1997 1998 1997 1998
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income $7,430 $1,689 $11,838 $4,392
Basic earnings per share $0.26 $0.06 $0.42 $0.15
Basic weighted average
common shares outstanding 28,134 28,768 27,960 28,747
Effect of dilutive securities:
Warrants 221 119 221 118
Options 2,339 1,404 2,377 1,501
Diluted weighted average
common and common equivalent
shares outstanding 30,694 30,291 30,558 30,366
Diluted earnings per share $0.24 $0.06 $0.39 $0.14
</TABLE>
3. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(in thousands)
<S> <C> <C>
INVENTORIES:
Raw Materials $24,365 $27,877
Work-in-progress 18,394 18,760
Finished goods 4,743 12,681
Total $47,502 $59,318
ACCRUED AND OTHER LIABILITIES:
Warranty and installation reserves $15,730 $16,400
Payroll and payroll related 2,735 2,431
Interest 3,920 5,757
Other 4,475 4,781
Total $26,860 $29,369
</TABLE>
4. STOCKHOLDERS' EQUITY
Stock Split - On August 7, 1997, the Company declared a 2-
for-1 stock split of its common stock effective August 21, 1997.
All share amounts and earnings per share for all periods
presented have been adjusted to give effect to this stock split.
Treasury Stock - 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 from time to time on the
open market or in privately negotiated transactions. As of June
30, 1998, the Company had repurchased 305,000 shares at a cost of
$5.3 million. Subsequent to June 30, 1998, the Company has
purchased an additional 100,000 shares, bringing the total shares
repurchased to date of 405,000 shares at a cost of $6.9 million.
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 were distributed as a
dividend at a rate of one preferred share purchase right on each
outstanding share of the Company's common stock held by
stockholders of record as of close of business on March 2, 1998.
The dividend distribution was made on or about April 20, 1998
with rights expiring on February 13, 2008. The rights are
designed 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.
1996 Stock Option Plan (the "1996 Stock Plan") - At the
Company's Annual Meeting of Stockholders on May 15, 1998,
stockholders of the Company approved a 1,250,000 share increase
in shares issuable under the 1996 Stock Plan. These additional
shares bring the total shares issuable under the plan to
4,250,000. 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.
5. REVOLVING LOAN FACILITY
The Company has a Loan Agreement (the "Agreement") with two
financial institutions which provide for two revolving loan facilities
with combined borrowings of up to a maximum of $15.0 million. The
Agreement provides for the following: (i) an unsecured $5.0
million revolving bank line of credit for domestic borrowing at
an interest rate of prime or LIBOR plus 140 basis points and (ii)
an unsecured $10.0 million United States dollar equivalent
revolving line of credit in Optional Currency at an interest rate
of TIBOR plus 140 basis points. As of June 30, 1998 there was 1.3
billion yen (approximately $9.5 million) outstanding on the Optional
Currency line of credit in Japan.
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 June 30, 1998, the Company was in compliance
with all such covenants.
6. REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 requires reporting and
displaying comprehensive income and its components, which, for
the Company, include 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 adoption of SFAS No. 130
had no impact on the Company's results of operations or financial
position. In accordance with SFAS No. 130, the accumulated
balance of other comprehensive income (loss) is disclosed as a
separate component of stockholders' equity. Prior year financial
statements have been reclassified to conform to the requirements
of SFAS No. 130.
Comprehensive income consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income $7,430 $1,689 $11,838 $4,392
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments (26) 35 (180) 733
Total unrealized holding gains
(losses) on available for
sale investments 36 (26) 11 20
Other comprehensive income
(loss), net of tax: 10 9 (169) 753
Comprehensive income $7,440 $1,698 $11,669 $5,145
</TABLE>
7. CONTINGENCIES
The Company's Japanese manufacturing partner has been
notified that its manufacture of the Company's laser systems in
Japan may infringe a Japanese patent held by another Japanese
company. The Company has agreed to indemnify its Japanese
manufacturing partner against patent infringement claims under
certain circumstances. The Company believes, based upon the
advice of counsel, that the Company's products do not infringe
any valid claim of the asserted patent.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 10Q, INCLUDING "RISK
FACTORS" BEGINNING ON PAGE 17 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.
Results of Operations
The following table sets forth certain items in the Company's
statements of income as a percentage of total revenues for the
periods indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1998 1997 1998
Revenues:
<S> <C> <C> <C> <C>
Product sales 99.8% 99.8% 99.3% 99.9%
Other 0.2 0.2 0.7 .1
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of product sales 61.8 64.4 60.5 63.1
Research and development 12.7 15.6 12.2 15.7
Sales and marketing 5.5 7.5 5.8 7.7
General and administrative 4.1 4.9 4.4 4.9
Total costs and expenses 84.1 92.4 82.9 91.4
Operating income 15.9 7.6 17.1 8.6
Other income (expense) - net 1.6 (2.8) 1.0 (2.4)
Income before provision for
income taxes and minority
interest 17.5 4.8 18.1 6.2
Provision for income taxes (2.7) (1.4) (4.5) (1.8)
Minority interst (0.2) (0.1)
Net income 14.8% 3.2% 13.6% 4.3%
Gross margin on product sales 38.0% 35.6% 39.1% 36.8%
</TABLE>
Three Months Ended June 30, 1997 and 1998
Revenues. The Company's total revenues consist of product
sales, which include sales of laser systems and spare parts and
service and training, and other revenues, which primarily include
revenues from funded development activities performed for
customers and for SEMATECH. Revenue from product sales is
generally recognized at the time of shipment, unless customer
agreements contain inspection or other conditions, in which case
revenue is recognized at the time such conditions are satisfied.
Funded development contracts are accounted for on the percentage-
of-completion method based on the relationship of costs incurred
to total estimated costs, after giving effect to estimates of
costs to complete the development project.
Product sales increased 6% from $50.0 million in the three
months ended June 30, 1997 to $52.9 million in the three months
ended June 30, 1998, primarily due to increased sales of DUV
photolithography spare parts and higher average sales prices on
laser systems in 1998. 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 decreased from $102,000 for the three months
ended June 30, 1997 to $76,000 in the three months ended June 30,
1998, primarily due to substantial completion of various laser
research projects sponsored by customers and 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 81%, 89% and 89% of the Company's sales in 1996,
1997 and the first six months of 1998, 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 61%, 65% and 48% of
revenues from 1996, 1997 and the first six months of 1998,
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 10% from $31.0 million for the
three months ended June 30, 1997 to $34.2 million for the three
months ended June 30, 1998 due to the increase in spare parts
sales volume and an additional $2.5 million inventory reserve in
1998. The additional inventory reserve accounts for the
sunsetting of some of the Company's older products as well as reserving
for lower revision levels of current products. The gross margin
on these sales decreased from 38.0% for the three months ended
June 30, 1997 to 35.6% for the same three month period in 1998.
This reduction was primarily due to the additional inventory
costs, additional costs of the Company's new manufacturing
facility, which was completed in late 1997, the related reduced
capacity utilization of the manufacturing facility in the first six
months of 1998, as well as 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.
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 $1.4
million and $861,000 for the three months ended June 30, 1997 and
1998, 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 31% from $6.3 million in the three months
ended June 30, 1997 to $8.3 million in the three months ended
June 30, 1998, due primarily to the development and introduction
of the Company's new ELS-5010 laser system, development efforts
on the Company's next generation Orion laser system, product
support efforts associated with 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 increased from 12.7% to 15.6% in the
respective periods 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 44% from $2.8 million for the three months ended June
30, 1997 to $4.0 million in the three months ended June 30, 1998,
due primarily to increased product management and sales support
efforts and marketing activities as more lasers were placed in
the field. As a percentage of total revenues, such expense
increased from 5.5% to 7.5% in the respective periods due to the
new product introduction of the ELS-5010 and the continuing
infrastructure development in order to support system integrators
as well as chip manufacturers.
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
27% from $2.1 million in the three months ended June 30, 1997 to
$2.6 million for the three months ended June 30, 1998, due to an
increase in general and administrative support as the Company's
sales volume, manufacturing capacity, employee headcount, and
overall level of business activity increased. As a percentage of
total revenues, such expenses remained relatively flat from
period to period.
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 decreased from $819,000 for the
three months ended June 30, 1997 to $1.5 million of net other
expense for the three months ended June 30, 1998, 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 August 1997, and a
foreign currency exchange loss for the first six months of 1998.
Foreign currency exchange gain totaled $470,000, interest income
totaled $507,000 and interest expense totaled $158,000 for the
three months ended June 30, 1997, compared to an exchange loss of
$520,000, interest income of $1.8 million and $2.8 million in
interest expense for the three months ended June 30, 1998.
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
of $1.4 million for the three months ended June 30, 1997 reflects
a current period 15% tax rate. The 1997 annual effective tax rate
was reduced from a 37% annual effective tax rate for the three
month period ended March 31, 1997 to an annual effective tax rate
of 25% due to a partial reduction of a deferred tax asset
valuation allowance carried over from 1996. Had this rate been
applied during the full six month period ended June 30, 1997, the
tax provision for the three months ended June 30, 1997 would have
been increased to $2.2 million. The provision for income taxes
for the three months ended June 30, 1998 of $724,000 reflects an
annual effective tax rate of 30% as the Company had no additional
loss or valuation allowance carryovers from previous periods to
be applied in 1998.
Six Months Ended June 30, 1997 and 1998
Revenues. Product sales increased 19% from $86.5 million in
the six months ended June 30, 1997 to $102.6 million in the six
months ended June 30, 1998, primarily due to increased sales of
DUV photolithography laser systems and spare parts and a rise in
average sale price of laser systems in 1998. 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 decreased from $627,000 for
the six months ended June 30, 1997 to $127,000 in the six months
ended June 30, 1998, primarily due to substantial completion of
various laser research projects sponsored by customers and
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.*
Cost of Product Sales. Cost of product sales rose 23% from
$52.7 million for the six months ended June 30, 1997 to $64.8
million for the six months ended June 30, 1998 due to the
increase in sales volume and additional inventory reserves. The
gross margin on these sales decreased from 39.1% for the six
months ended June 30, 1997 to 36.8% for the same six month period
in 1998. This reduction was primarily due to the additional
costs of the Company's new manufacturing facility, which was
completed in late 1997, the related reduced capacity
utilization of the manufacturing facility in the first six months of
1998, as well as 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.
The Company recognized net gains on foreign currency
exchange contracts associated with the sale of laser systems of
$3.4 million and $3.2 million for the six months ended June 30,
1997 and 1998, respectively.
Research and Development. Research and development
expenses increased 52% from $10.6 million in the six months ended
June 30, 1997 to $16.1 million in the six months ended June 30,
1998, due primarily to the development and introduction of the
Company's new ELS-5010 laser system, development efforts on the
Company's next generation Orion laser system, product support
efforts associated with 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 increased from 12.2% to 15.7% in the
respective periods as the Company continues to invest in the
development of new products and product enhancements.*
Sales and Marketing. Sales and marketing expenses
increased 57% from $5.0 million for the six months ended June 30,
1997 to $7.9 million in the six months ended June 30, 1998 due
primarily to increased product management and sales support
efforts and marketing activities as more lasers were placed in
the field. As a percentage of total revenues, such expenses
increased from 5.8% to 7.7% in the respective periods due to the
new product introduction of the ELS-5010 and the continuing
infrastructure development in order to support system integrators
as well as chip manufacturers.
General and Administrative. General and administrative
expenses increased 32% from $3.9 million in the six months ended
June 30, 1997 to $5.1 million for the six months ended June 30,
1998, due to an increase in general and administrative support as
the Company's sales volume, manufacturing capacity, employee
headcount, and overall level of business activity increased. As
a percentage of total revenues, such expenses remained relatively
flat from period to period.
Other Income (Expense) - net. Net other income decreased
from $844,000 for the six months ended June 30, 1997 to $2.5
million of net other expense for the six months ended June 30,
1998, 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
August 1997, and a foreign currency exchange loss for the first
six months of 1998. Foreign currency exchange losses totaled
$85,000, interest income totaled $1.2 million and interest
expense totaled $275,000 for the six months ended June 30, 1997,
compared to an exchange loss of $752,000, interest income of $3.9
million and $5.6 million in interest expense for the six months
ended June 30, 1998.
Provision for Income Taxes. The provision for income taxes
of $3.9 million for the six months ended June 30, 1997 reflects a 25%
annual effective tax rate due to a partial reduction of a
deferred tax asset valuation allowance carried over from 1996.
The provision for income taxes for the six months ended June 30,
1998 of $1.9 million reflects an annual effective tax rate of 30%
as the Company had no additional loss or valuation allowance
carryovers from previous periods to be applied in 1998.
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 financings, bank borrowings, the 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 net proceeds of $167.3 million in
a convertible subordinated note offering on August 6, 1997. As of
June 30, 1998, the Company had approximately $74.6 million in
cash and cash equivalents, $20.3 million in short-term
investments, $73.7 million in long-term investments, $169.2
million in working capital and $9.5 million in bank debt.
Net cash used for operating activities was approximately
$13.8 million for the six months ended June 30, 1997 and $5.8
million for the six months ended June 30, 1998. The decrease in
cash used in operations for the six months ended June 30, 1997 as
compared to 1998 was primarily attributable to a decrease in
accounts receivable offset by lower increases in inventory and a
decrease in accounts payable during the period.
Net cash used for investing activities was approximately
$20.8 million for the six months ended June 30, 1997 as compared
to net cash provided by investing activities of $18.4 million for
the six months ended June 30, 1998. The cash used for investing
activities during 1997 primarily reflects the investment activity
of funds received through the Company's public offerings in
September and December, 1996 and the purchase of computer
equipment, test equipment, research and development tools,
manufacturing process machinery and tenant improvements to the
manufacturing facility in order to accommodate the business
expansion for the period. The net cash provided by investing
activities during the first six months of 1998 primarily reflects
continued property acquisitions to accommodate the business
expansion and focus, offset by the timing of short and long term
investments maturing and being reinvested during the period and
an increase in long term investments.
Net cash used for financing activities was approximately
$387,000 for the six months ended June 30, 1997, as compared to
net cash provided by financing activities of $6.0 million for the
six months ended June 30, 1998. During the six months ended June
30, 1997, the Company decreased it bank borrowings by $500,000.
For the six months ended June 30, 1998, the Company received a
net $1.1 million through the issuance of common stock, and $10.0
million in bank borrowings offset by treasury stock repurchases
of $5.3 million.
The Company requires substantial working capital to fund its
business, particularly to finance inventories and accounts
receivable and for capital expenditures. The Company's future
capital requirements will depend on many factors, including the
rate of the Company's manufacturing expansion, the timing and
extent of spending to support product development efforts and
expansion of sales and marketing and field service and support,
the timing of introductions of new products and enhancements to
existing products, and market acceptance of the Company's
products.* The Company believes that it has sufficient working
capital and available bank credit to sustain operations and
provide for the future expansion of its business for at least the
next 12 months.*
Recent Accounting Pronouncements
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. Interim reporting of this
standard is not required. The Company does not expect this
pronouncement to materially change the Company's current
reporting and disclosures.*
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. The new standard will
become effective for the Company for the year ending December 31,
2000. Interim reporting of this standard will be required. The
Company has not yet assessed the effect of this standard on the
Company's current reporting and disclosures.
Impact of Year 2000 Issue
The Company is reviewing its data processing systems as
well as computer applications and to date 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.
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.
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 90%,
94%, and 95% of the Company's total revenues in 1996, 1997, and
the first six months of 1998, respectively. Sales to ASM
Lithography, Canon, Nikon and SVG Lithography accounted for
approximately 42%, 21%, 27% and 6%, respectively, of total
revenues for the first six months of 1998 and 24%, 25%, 39% and
6%, respectively, of total revenues in 1997. 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. The 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.
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. Current market
conditions in the industry are causing the Company's customers to
reduce their orders for new laser systems as they try to manage
their inventories to appropriate levels which better reflect
their expected sales forecasts. 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 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.
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.
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, to 809 at
December 31, 1997 and to 816 at June 30, 1998. 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. In a cyclical environment of dramatic growth or
contraction, the Company will be required to continue close
management of these areas, to improve 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 also be
required to attract, train and retain key technical personnel,
including both hardware and software engineers, in order to
support the Company's growth and/or contraction.* The Company
will be required to manage effectively its international
operations, including the operations of its Japan, Korea, Taiwan,
Singapore and Netherlands 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 or
contraction would materially adversely effect the Company's
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 the United States, 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.
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 continue to occur, 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, downturns 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.
Risks Associated with Japan Manufacturing. The Company has
qualified Seiko Instruments, Inc. ("Seiko") of Japan as a
contract manufacturer of its photolithography lasers. 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."
Uncertainty Regarding Patents and Protection of Proprietary
Technology. The Company believes that the success of its
business depends more on such factors as the technical expertise
of its employees, as well as their innovative skills and
marketing and customer relations ability, than on patents,
copyrights, trade secrets and other intellectual property
rights.* Nevertheless, the success of the Company may depend in
part on patents, and as of June 30, 1998, the Company owned 29
United States patents covering certain aspects of technology
associated with excimer lasers which expire from January 2008 to
May 2017 and had applied for 40 additional patents in the United
States, two of which have been allowed. One of Cymer's U.S.
patents is currently being challenged in the U.S. Patent Office
by attorneys representing Komatsu. As of June 30, 1998, the
Company owned four foreign patents and had filed 112 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
81%, 89% and 89% of the Company's revenues in 1996, 1997 and the
six months ended June 30, 1998, 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, Singapore and the Netherlands, 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
Japanese 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.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on
May 15, 1998. Out of 28,805,945 shares of common stock
entitled to vote at such meeting, there were present or
by proxy 22,807,599 shares. At the Annual Meeting, the
stockholders of the Company approved the following
matters:
(a) The election of Robert P. Akins, Richard P. Abraham, Kenneth
M. Deemer, Peter J. Simone and F. Duwaine Townsen as directors of
the Company for the ensuing year and until their successors are
elected. The vote for the nominated directors was as follows:
Robert P. Akins, 22,685,573 votes cast for and
122,026 votes withheld;
Richard P. Abraham, 22,682,887 votes cast for and
124,712 votes withheld;
Kenneth M. Deemer, 22,669,918 votes cast for and
137,681 votes withheld;
Peter J. Simone, 22,659,568 votes cast for and
148,031 votes withheld;
F. Duwaine Townsen, 22,688,562 votes cast for and
119,037 votes withheld;
(b) Approval of a 1,250,000 share increase in shares issuable
under the 1996 Stock Option Plan. 18,684,831 votes were cast for
approval; 3,276,407 votes were cast against, 146,917 votes
abstained and 699,444 Broker Non-Votes.
(c) Ratification of the appointment of Deloitte &
Touche LLP as the independent auditors of the
Company for the year ending December 31, 1998.
22,657,030 votes were cast for approval; 80,473
votes were cast against and 70,096 votes abstained.
ITEM 5. Other Information
None.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
Financial Data Schedules (submitted for SEC use only)
(b) Reports on Forms 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CYMER, INC.
(Registrant)
Date: July 31, 1998 By: /s/ WILLIAM A.ANGUS, III
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
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