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 March 31, 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 April 27, 1998 was 28,850,174.
CYMER, INC.
FORM 10-Q
For the Quarter Ended March 31, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as 3
of December 31,
1997 and March 31, 1998
Consolidated Statements of 4
Income for the
three months ended March 31,
1997 and 1998
Consolidated Statements of Cash 5
Flows for the
three months ended March 31,
1997 and 1998
Notes to Consolidated Financial 7
Statements
ITEM 2. Management's Discussion and 10
Analysis of Financial
Condition and Results of
Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities 24
ITEM 3. Defaults upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote 24
of Security Holders
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURE PAGE 25
PART I. FINANCIAL INFORMATION
CYMER, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1997 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $51,903 $68,705
Short-term investments 80,387 29,351
Accounts receivable - net 59,140 50,917
Foreign exchange contracts receivable 31,267 22,388
Inventories 47,502 56,098
Deferred income taxes 12,690 12,673
Prepaid expenses and other 2,847 2,948
Total current assets 285,736 243,080
PROPERTY - net 48,031 50,463
LONG-TERM INVESTMENTS 42,667 68,866
OTHER ASSETS 8,446 8,370
TOTAL ASSETS $384,880 $370,779
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $22,615 $18,055
Accrued and other liabilities 26,860 23,893
Foreign exchange contracts payable 27,278 19,421
Income taxes payable 6,444 5,802
Total current liabilities 83,197 67,171
CONVERTIBLE SUBORDINATED NOTES 172,500 172,500
OTHER LIABILITIES 3,566 3,555
MINORITY INTEREST 1,077 1,017
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred Stock - authorized 5,000,000
shares; $.001 par value,
no shares issued or outstanding
Common stock - authorized 50,000,000
shares; $.001 par value,
issued and outstanding 28,724,000 and 29 29
28,842,000 shares
Paid-in capital 109,367 109,688
Retained earnings 18,637 21,340
Accumulated other comprehensive loss (3,493) (2,430)
Treasury stock at cost (100,000 common
shares) (2,091)
Total stockholders' equity 124,540 126,536
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $384,880 $370,779
See notes to consolidated financial statements.
</TABLE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1997 1998
<S> <C> <C>
REVENUES:
Product sales $36,446 $49,628
Other 525 51
Total revenues 36,971 49,679
COSTS AND EXPENSES:
Cost of product sales 21,697 30,630
Research and development 4,248 7,817
Sales and marketing 2,259 3,900
General and administrative 1,797 2,478
Total costs and expenses 30,001 44,825
OPERATING INCOME 6,970 4,854
OTHER INCOME (EXPENSE):
Foreign currency exchange loss - net (555) (232)
Interest and other income 697 2,008
Interest and other expense (117) (2,781)
Total other income (expense) - net 25 (1,005)
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST 6,995 3,849
PROVISION FOR INCOME TAXES (2,587) (1,158)
MINORITY INTEREST 12
NET INCOME $4,408 $2,703
EARNINGS PER SHARE:
Basic:
Earnings per share $0.16 $0.09
Weighted average common shares
outstanding 27,674 28,775
Diluted:
Earnings per share $0.14 $0.09
Weighted average common and common
equivalent shares outstanding 30,426 30,496
</TABLE>
See notes to consolidated financial statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the three months ended
March 31
1997 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $4,408 $2,703
Adjustments to reconcile net income to net
cash used for operating activities:
Depreciation and amortization 1,163 3,413
Minority interest (12)
Change in assets and liabilities:
Accounts receivable (11,537) 7,997
Foreign exchange contracts receivable (6,762) 8,616
Inventories (10,491) (8,564)
Prepaid expenses and other assets (658) (457)
Accounts payable 7,666 (3,319)
Accrued and other liabilities 7,147 (3,920)
Foreign exchange contracts payable 6,085 (7,633)
Income taxes payable 463 (561)
Other 465
Net cash used for operating activities (2,051) (1,737)
INVESTING ACTIVITIES:
Acquisition of property (6,430) (5,719)
Purchases (costs) of investments (20,375) (26,199)
Proceeds from sold or matured investments 5,950 51,102
Net cash provided by (used for)
investing activities (20,855) 19,184
FINANCING ACTIVITIES:
Net payments under revolving loan and
security agreements (250)
Debt issue costs 197
Proceeds (costs) from issuance of common
stock (93) 321
Purchase of treasury stock (2,091)
Payments on capital lease obligations (94) (158)
Net cash used for financing activities (437) (1,731)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 774 1,086
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (22,569) 16,802
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 55,405 51,903
CASH AND CASH EQUIVALENTS AT END OF PERIOD $32,836 $68,705
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $143 $3,395
Income taxes paid $1,938 $1,814
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred for
furniture and equipment $619 $71
</TABLE>
See notes to consolidated financial statements.
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 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.
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. 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 Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share,"
effective for financial statements issued after December 15,
1997. SFAS No. 128 requires dual presentation of "Basic" and
"Diluted" EPS by entities with complex capital structures,
replacing "Primary" and "Fully Diluted" EPS under Accounting
Principals 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 March 31,
1997 1998
(In thousands, except
per share amounts)
<S> <C> <C>
Net income $4,408 $2,703
Basic earnings per share $0.16 $0.09
Basic weighted average common
shares outstanding 27,674 28,775
Effect of dilutive securities:
Warrants 367 118
Options 2,385 1,603
Diluted weighted average common
and common equivalent shares
outstanding 30,426 30,496
Diluted earnings per share $0.14 $0.09
</TABLE>
<TABLE>
<CAPTION>
1. BALANCE SHEET DETAILS
December 31, March 31,
1997 1998
(in thousands)
<S> <C> <C>
INVENTORIES:
Raw Materials $24,365 $25,952
Work-in-progress 18,394 20,088
Finished goods 4,743 10,058
Total $47,502 $56,098
ACCRUED AND OTHER LIABILITIES:
Warranty and installation
reserves $15,730 $14,347
Payroll and payroll related 2,735 3,288
Interest 3,920 3,301
Other 4,475 2,957
Total $26,860 $23,893
</TABLE>
1. 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 March 31,
1998, the Company had repurchased 100,000 shares at a cost of $2.1 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.
5. REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS 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
March 31,
1997 1998
<S> <C> <C>
Net income $4,408 $2,703
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments (154) 698
Total unrealized holding gains
(losses) on available for sale
investments (25) 46
Other comprehensive income (loss),
net of tax: (179) 744
Comprehensive income $4,229 $3,447
</TABLE>
6. CONTINGENCIES
The Company's Japanese manufacturing partner has been
notified that its manufacture of the Company's laser systems in
Japan may infringe a Japanese patent held by another Japanese
company. The Company has indemnified its Japanese manufacturing
partner against patent infringement claims under certain
circumstances. The Company believes, based upon the advice of
counsel, that the Company's products do not infringe any valid
claim of the asserted patent.
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 14 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
March 31,
1997 1998
<S> <C> <C>
Revenues:
Product sales 98.6% 99.9%
Other 1.4 .1
Total revenues 100.0% 100.0%
Cost and expenses:
Cost of product 58.7 61.7
Research and development 11.5 15.7
Sales and marketing 6.1 7.8
General and administrative 4.9 5.0
Total costs and expenses 81.2 90.2
Operating income 18.8 9.8
Other income (expense) - net 0.1 (2.0)
Income before provision
for income taxes and
minority interest 18.9 7.8
Provision for income taxes (7.0) (2.3)
Minority interest (.1)
Net income 11.9% 5.4%
Gross margin on product sales 40.5% 38.3%
</TABLE>
Three Months Ended March 31, 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 36% from $36.4 million in the three
months ended March 31, 1997 to $49.6 million in the three months
ended March 31, 1998, primarily due to increased sales of DUV
photolithography laser systems and spare parts. 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 $525,000 for
the three months ended March 31, 1997 to $51,000 in the three
months ended March 31, 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 90% of the Company's sales in 1996,
1997 and the first three 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 55% of revenues from 1996, 1997 and the first three 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 41% from $21.7 million for the
three months ended March 31, 1997 to $30.6 million for the three
months ended March 31, 1998 due to the increase in sales volume.
The gross margin on these sales decreased from 40.5% for the
three months ended March 31, 1997 to 38.3% for the same three
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 and the related reduced capacity
utilization of the facility in the first three 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 $2.0
million and $2.3 million for the three months ended March 31,
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 84% from $4.2 million in the three months
ended March 31, 1997 to $7.8 million in the three months ended
March 31, 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 11.5% 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 include
the expenses of the sales, marketing and customer support staffs
and other marketing expenses. Sales and marketing expenses
increased 73% from $2.3 million for the three months ended March
31, 1997 to $3.9 million in the three months ended March 31, 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 6.1% to 7.8% 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
38% from $1.8 million in the three months ended March 31, 1997 to
$2.5 million for the three months ended March 31, 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 $25,000 for the
three months ended March 31, 1997 to $1.0 million of net other
expense for the three months ended March 31, 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 three months of
1998. Foreign currency exchange losses totaled $555,000,
interest income totaled $697,000 and interest expense totaled
$117,000 for the three months ended March 31, 1997, compared to
an exchange loss of $232,000, interest income of $2.0 million and
$2.8 million in interest expense for the three months ended March
31, 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 tax provision of $2.6
million for the three months ended March 31, 1997 reflects a 37%
annual effective tax rate. This 1997 annual rate was reduced in
the three month period ended June 30, 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 three months ended March 31, 1997, the
tax provision would have been reduced to $1.7 million. The
provision for income taxes for the three months ended March 31,
1998 of $1.2 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 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 March 31, 1998, the Company had
approximately $68.7 million in cash and cash equivalents, $29.4
million in short-term investments, $68.9 million in long-term
investments, $175.9 million in working capital and no bank debt.
Net cash used for operating activities was approximately
$2.1 million for the three months ended March 31, 1997 and $1.7
million for the three months ended March 31, 1998. The decrease
in cash used in operations for the three months ended March 31,
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
$20.9 million for the three months ended March 31, 1997 as
compared to net cash provided by investing activities of $19.2
million for the three months ended March 31, 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 three 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.
Net cash used for financing activities was approximately
$437,000 for the three months ended March 31, 1997, and $1.7
million for the three months ended March 31, 1998. During the
three months ended March 31, 1997, the Company decreased it bank
borrowings by $250,000. For the three months ended March 31,
1998, the Company received a net $321,000 through the issuance of
common stock, offset by a treasury stock repurchase of $2.1
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 during the 1998
fiscal year.*
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes requirements for
disclosure of comprehensive income and became 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
adopted this standard as of March 31, 1998 and the December 31,
1997 financial statements have been restated to reflect the
change.
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.*
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 eight 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 90%,
94%, and 97% of the Company's total revenues in 1996, 1997, and
the first three months of 1998, respectively. Sales to ASM
Lithography, Canon, Nikon and SVG Lithography accounted for
approximately 34%, 27%, 28% and 8%, respectively, of total
revenues for the first three 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. 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, to 809 at
December 31, 1997 and to 828 at March 31, 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. 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,
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, 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 March 31, 1998, the Company owned 24
United States patents covering certain aspects of technology
associated with excimer lasers which expire from January 2008 to
March 2016 and had applied for 37 additional patents in the
United States, three of which have been allowed. As of March 31,
1998, the Company owned one foreign patent and had filed 95
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 90% of the Company's revenues in 1996, 1997 and the
three months ended March 31, 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
None.
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.
1. Current Report on Form 8-K filed on January 30, 1998,
reporting the information set forth in the Company's press
releases dated January 29, 1998, which announced the Company's
results of operations and stock repurchase program.
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: May 8, 1998 By: ___/s/________________________
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
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