UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 (I.R.S. Employer
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 November 5, 1998 was 27,124,024.
CYMER, INC.
FORM 10-Q
For the Quarter Ended September 30, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of 3
December 31, 1997 and September 30, 1998
Consolidated Statements of Income for 4
the three and nine months ended
September 30, 1997 and 1998
Consolidated Statements of Cash Flows 5
for the nine months ended September 30,
1997 and 1998
Notes to Consolidated Financial 7
Statements
ITEM 2. Management's Discussion and Analysis 11
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 2. Changes in Securities 27
ITEM 3. Defaults upon Senior Securities 27
ITEM 4. Submission of Matters to a Vote of 27
Security Holders
ITEM 5. Other Information 27
ITEM 6. Exhibits and Reports on Form 8-K 27
SIGNATURE PAGE 28
PART I. FINANCIAL INFORMATION
Item1. Consolidated Financial Statements
CYMER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $51,903 $65,030
Short-term investments 80,387 14,571
Accounts receivable - net 59,140 42,825
Foreign exchange contracts receivable 31,267 18,182
Inventories 47,502 57,252
Deferred income taxes 12,690 12,652
Prepaid expenses and other 2,847 3,864
Total current assets 285,736 214,376
PROPERTY - net 48,031 52,939
LONG-TERM INVESTMENTS 42,667 86,405
OTHER ASSETS 8,446 8,271
TOTAL ASSETS $384,880 $361,991
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving loan $9,637
Accounts payable $22,615 12,701
Accrued and other liabilities 26,860 30,893
Foreign exchange contracts payable 27,278 17,177
Income taxes payable 6,444 5,833
Total current liabilities 83,197 76,241
CONVERTIBLE SUBORDINATED NOTES 172,500 172,500
OTHER LIABILITIES 3,566 3,452
MINORITY INTEREST 1,077 1,139
COMMITMENTS AND CONTINGENCIES (Notes 6 and 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
27,182,000 shares 29 27
Paid-in capital 109,367 110,526
Retained earnings 18,637 24,482
Accumulated other comprehensive loss (3,493) (2,634)
Treasury stock at cost (1,863,000 common
shares) (23,742)
Total stockholders' equity 124,540 108,659
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $384,880 $361,991
See notes to consolidated financial statements.
</TABLE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30 ended September 30
1997 1998 1997 1998
<S> <C> <C> <C> <C>
REVENUES:
Product sales $56,062 $44,368 $142,538 $146,942
Other 1,406 80 2,033 207
Total revenues 57,468 44,448 144,571 147,149
COSTS AND EXPENSES:
Cost of product sales 35,773 28,811 88,473 93,595
Research and development 6,760 7,580 17,352 23,689
Sales and marketing 3,306 3,014 8,321 10,894
General and administrative 2,024 1,953 5,880 7,036
Total costs and expenses 47,863 41,358 120,026 135,214
OPERATING INCOME 9,605 3,090 24,545 11,935
OTHER INCOME (EXPENSE):
Foreign currency exchange
gain (loss) - net (311) 111 (396) (641)
Interest and other income 1,679 1,766 2,883 5,621
Interest and other expense (1,743) (2,856) (2,018) (8,439)
Total other income
(expense) - net (375) (979) 469 (3,459)
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 9,230 2,111 25,014 8,476
PROVISION FOR INCOME TAXES (2,307) (640) (6,253) (2,522)
MINORITY INTEREST 124 (18) 124 (109)
NET INCOME $7,047 $1,453 $18,885 $5,845
EARNINGS PER SHARE:
Basic:
Earnings per share $0.25 $0.05 $0.67 $0.20
Weighted average common
shares outstanding 28,469 28,280 28,111 28,591
Diluted:
Earnings per share $0.23 $0.05 $0.62 $0.19
Weighted average common and
common equivalent shares
outstanding 30,503 29,472 30,329 30,060
See notes to consolidated financial statements.
</TABLE>
CYMER, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30
1997 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 18,885 $ 5,845
Adjustments to reconcile net income to net
cash provided by (used for)
operating activities:
Depreciation and amortization 4,866 10,966
Minority interest (124) 109
Deferred income taxes (3,159)
Change in assets and liabilities:
Accounts receivable (37,190) 14,967
Foreign exchange contracts receivable (19,267) 11,868
Inventories (28,147) (9,930)
Prepaid expenses and other assets (4,893) (754)
Accounts payable 14,930 (9,214)
Accrued and other liabilities 21,929 3,124
Foreign exchange contracts payable 19,324 (9,019)
Income taxes payable (583) (556)
Other 255
Net cash provided by (used for)
operating activities (13,174) 17,406
INVESTING ACTIVITIES:
Acquisition of property (30,587) (15,677)
Purchases of investments (78,532) (70,843)
Proceeds from sold or matured investments 26,179 92,872
Net cash provided by (used for)
investing activities (82,940) 6,352
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
loan and security agreements (1,750) 9,782
Proceeds from issuance of convertible
subordinated notes 172,500
Debt issue costs (5,500) 593
Proceeds from issuance of common stock 1,608 1,055
Purchase of treasury stock (23,742)
Payments on capital lease obligations (250) (361)
Net cash provided by (used for)
financing activities 166,608 (12,673)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 84 2,042
NET INCREASE IN CASH AND CASH EQUIVALENTS 70,578 13,127
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 55,405 51,903
CASH AND CASH EQUIVALENTS AT END OF PERIOD $125,983 $65,030
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $617 $ 6,750
Income taxes paid $7,855 $3,112
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred for
furniture and equipment $1,065 $82
See notes to consolidated financial statements.
</TABLE>
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 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 quarters ended March 31 and June 30, 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 Nine months ended
September 30 September 30
1997 1998 1997 1998
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income $7,047 $1,453 $18,885 $5,845
Basic earnings per share $0.25 $0.05 $0.67 $0.20
Basic weighted average
common shares outstanding 28,469 28,280 28,111 28,591
Effect of dilutive
securities:
Warrants 124 114 122 117
Options 1,910 1,078 2,096 1,352
Diluted weighted average
common and common equivalent
shares outstanding 30,503 29,472 30,329 30,060
Diluted earnings per share $0.23 $0.05 $0.62 $0.19
</TABLE>
3. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(in thousands)
<S> <C> <C>
INVENTORIES:
Raw Materials $24,365 $22,944
Work-in-progress 18,394 16,779
Finished goods 4,743 17,529
Total $47,502 $57,252
ACCRUED AND OTHER LIABILITIES:
Warranty and installation reserves $15,730 $18,800
Payroll and payroll related 2,735 3,133
Interest 3,920 5,244
Other 4,475 3,716
Total $26,860 $30,893
</TABLE>
4. STOCKHOLDERS' EQUITY
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
September 30, 1998, the Company had repurchased 1,863,000 shares
at a cost of $23.7 million. Subsequent to September 30, 1998,
the Company has purchased an additional 137,000 shares, bringing
the total shares repurchased to date of 2.0 million shares at a
cost of $24.9 million.
5. 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 Nine months ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income $7,047 $1,453 $18,885 $5,845
Other comprehensive income
(loss), net of tax:
Foreign currency
translation adjustments (83) (252) (285) 471
Total unrealized holding
gains on available
for sale investments 8 104 5 131
Other comprehensive income
(loss), net of tax: (75) (148) (280) 602
Comprehensive income $6,972 $1,305 $18,605 $6,447
</TABLE>
6. CLASS ACTION LAWSUITS
The Company has been named as a defendant in several putative
shareholder class action lawsuits which were filed in September
and October, 1998 in the U.S. District Court for the Southern
District of California. Certain executive officers and directors
of the Company are also named as defendants. The plaintiffs
purport to represent a class of all persons who purchased the
Company's Common Stock between April 24, 1997 and September 26,
1997 (the "Class Period"). The complaints allege claims under
the federal securities laws and California law. The plaintiffs
allege that the Company and the other defendants made various
material misrepresentations and omissions during the Class
Period. The complaints do not specify the amount of damages
sought. The Company believes that it has good defenses to the
claims alleged in the lawsuits and will defend itself vigorously
against these actions. These cases are in the early stages and
no trial date has been set. The defense of these actions may
cause some disruption in the Company's operations and may from
time to time distract management from day-to-day operations. The
ultimate outcome of these actions cannot be presently determined.
Accordingly, no provision for any liability or loss that may
result from adjudication or settlement thereof has been made in
the accompanying consolidated financial statements.
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 18 HEREOF. THE COMPANY MAY FROM TIME
TO TIME MAKE ADDITIONAL WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS, INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND IN ITS
REPORTS TO STOCKHOLDERS. THE COMPANY DOES NOT UNDERTAKE TO
UPDATE ANY FORWARD-LOOKING STATEMENT THAT MAY BE MADE FROM TIME
TO TIME BY OR ON BEHALF OF THE COMPANY.
Results of Operations
The following table sets forth certain items in the Company's
statements of income as a percentage of total revenues for the
periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues:
Product sales 97.6% 99.8% 98.6% 99.9%
Other 2.4 0.2 1.4 .1
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of product sales 62.2 64.8 61.2 63.6
Research and development 11.8 17.1 12.0 16.1
Sales and marketing 5.8 6.8 5.7 7.4
General and administrative 3.5 4.4 4.1 4.8
Total costs 83.3 93.1 83.0 91.9
Operating income 16.7 6.9 17.0 8.1
Other income (expense) - net (0.6) (2.2) .3 (2.3)
Income before provision
for income taxes and
minority interest 16.1 4.7 17.3 5.8
Provision for income taxes (4.0) (1.4) (4.3) (1.7)
Minority interest .2 .1 (0.1)
Net income 12.3% 3.3% 13.1% 4.0%
Gross margin on product
sales 36.2% 35.1% 37.9% 36.3%
</TABLE>
Three Months Ended September 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 decreased 21% from $56.1 million in the three
months ended September 30, 1997 to $44.4 million in the three
months ended September 30, 1998, primarily due to a decrease in
laser system sales offset by higher average sales prices and an
increase in spare parts sales 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 $1.4 million
for the three months ended September 30, 1997 to $80,000 in the
three months ended September 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 nine 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 46% of revenues from 1996, 1997 and the first nine 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 declined 19% from $35.8 million for
the three months ended September 30, 1997 to $28.8 million for
the three months ended September 30, 1998 due to lower sales
volumes. The gross margin on these sales decreased from 36.2% for
the three months ended September 30, 1997 to 35.1% for the same
three month period in 1998. This reduction was primarily due to
lower cost absorption of fixed production and field costs
associated with the decline in revenues, 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
nine 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 a net loss on such contracts of $52,000
for the three months ended September 30, 1997 as compared to a
net gain of $2.0 million for the three months ended September 30,
1998.
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 12% from $6.8 million in the three months
ended September 30, 1997 to $7.6 million in the three months
ended September 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 6000 (formerly
known as the Orion Project) 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 11.8% to 17.1% 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
decreased 9% from $3.3 million for the three months ended
September 30, 1997 to $3.0 million in the three months ended
September 30, 1998, due primarily to a decline in travel,
advertising and in-house training. As a percentage of total
revenues, such expense increased from 5.8% to 6.8% 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 remained
relatively flat at $2.0 million in the three months ended
September 30, 1997 and 1998. As a percentage of total revenues,
such expenses increased from 3.5% to 4.4% from 1997 to 1998 due
to lower sales volumes.
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 expense increased from $375,000 for the
three months ended September 30, 1997 to $979,000 for the three
months ended September 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 three month period in 1997 versus a gain
for the same period in 1998. Foreign currency exchange loss
totaled $311,000, interest income totaled $1.7 million and
interest expense totaled $1.7 million for the three months ended
September 30, 1997, compared to an exchange gain of $111,000,
interest income of $1.8 million and $2.9 million in interest
expense for the three months ended September 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 $2.3 million for the three months ended September 30, 1997
reflects an annual effective tax rate of 25%. The provision for
income taxes for the three months ended September 30, 1998 of
$640,000 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.
Nine Months Ended September 30, 1997 and 1998
Revenues. Product sales increased 3% from $142.5 million in
the nine months ended September 30, 1997 to $146.9 million in the
nine months ended September 30, 1998, primarily due to increased
sales of laser system 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 $2.0 million for the nine
months ended September 30, 1997 to $207,000 in the nine months
ended September 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 6% from
$88.5 million for the nine months ended September 30, 1997 to
$93.6 million for the nine months ended September 30, 1998 due to
the increase in spares sales volume and additional inventory
reserves of approximately $4.4 million. The gross margin on
these sales decreased from 37.9% for the nine months ended
September 30, 1997 to 36.3% for the same nine month period in
1998. In addition to the inventory reserves, this reduction in gross
margin 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 nine 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
$3.3 million and $5.2 million for the nine months ended September
30, 1997 and 1998, respectively.
Research and Development. Research and development
expenses increased 37% from $17.4 million in the nine months
ended September 30, 1997 to $23.7 million in the nine months
ended September 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 6000 (formerly
known as the Orion Project) 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 12.0% to 16.1% 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 31% from $8.3 million for the nine months ended
September 30, 1997 to $10.9 million in the nine months ended
September 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 5.7% to 7.4% 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 20% from $5.9 million in the nine months ended
September 30, 1997 to $7.0 million for the nine months ended
September 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 increased from 4.1% in 1997 to 4.8% in 1998.
Other Income (Expense) - net. Net other income decreased
from $469,000 for the nine months ended September 30, 1997 to
$3.5 million of net other expense for the nine months ended
September 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 larger foreign currency
exchange loss for the first nine months of 1998. Foreign
currency exchange losses totaled $396,000, interest income
totaled $2.9 million and interest expense totaled $2.0 million
for the nine months ended September 30, 1997, compared to an
exchange loss of $641,000, interest income of $5.6 million and
$8.4 million in interest expense for the nine months ended
September 30, 1998.
Provision for Income Taxes. The provision for income taxes
of $6.3 million for the nine months ended September 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 nine
months ended September 30, 1998 of $2.5 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 $167.0 million
in a convertible subordinated note offering on August 6, 1997.
As of September 30, 1998, the Company had approximately $65.0
million in cash and cash equivalents, $14.6 million in short-term
investments, $86.4 million in long-term investments, $138.1
million in working capital and $9.6 million in bank debt.
Net cash used for operating activities was approximately
$13.2 million for the nine months ended September 30, 1997
compared to cash provided by operating activities of $17.4
million for the nine months ended September 30, 1998. The
increase in cash from operations for the nine months ended
September 30, 1998 as compared to 1997 was primarily attributable
to an increase in depreciation, smaller increase in inventory
from period to period, and a decrease in accounts receivable
during the period.
Net cash used for investing activities was approximately
$82.9 million for the nine months ended September 30, 1997 as
compared to net cash provided by investing activities of $6.4
million for the nine months ended September 30, 1998. The cash
used for investing activities during 1997 primarily reflects the
investment activity of funds received through the Company's
convertible subordinated note offering in August, 1997 and the
purchase of computer equipment, test equipment, research and
development tools, manufacturing process machinery and tenant
improvements to the manufacturing facility in order to
accommodate the business expansion for the period. The net cash
provided by investing activities during the first nine 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 provided by financing activities was approximately
$166.6 million for the nine months ended September 30, 1997, as
compared to net cash used for financing activities of $12.7
million for the nine months ended September 30, 1998. During the
nine months ended September 30, 1997, the Company decreased it's
bank borrowings by $1.8 million, and received net proceeds of
approximately $167.0 million on the subordinated convertible note
offering and $1.6 million from the issuance of common stock. For
the nine months ended September 30, 1998, the Company received a
net $1.1 million through the issuance of common stock, and $9.8
million in bank borrowings offset by treasury stock repurchases
of $23.7 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 Year 2000 Issue ("Y2K") is primarily the result of
computer systems using a two-digit format rather than four-digits
to indicate the year. Such computer systems will be unable to
differentiate between the year 1900 and the year 2000, causing
errors and system failures which may disrupt the operations of
such systems. The Company has been addressing this issue and has
been focusing its efforts through a five step approach: (1)
identification of the systems which may be vulnerable to Y2K problems;
(2) assessment on the impact of the systems identified; (3)
remediation of non-compliant systems and components and
determination of solutions for non-compliant suppliers; (4)
testing of systems and components following remediation; and (5)
documentation.
The Company is approximately 95% complete with the
identification of systems which may be vulnerable to the Y2K issue,
and is approximately 90% complete with the assessment of the
impact on these systems. The assessment includes factory
systems, desktop PC's, fax machines, printers, and common
software packages in use at the Company. In addition, all
suppliers have been contacted for their Y2K plans and all new
software licenses include Y2K statements. Remediation is
approximately 85% complete and is currently targeted for
completion by the end of November, 1998.* The testing of systems
and components is approximately 50% complete and is expected to
be complete by the end of December, 1998.*
The Company's ongoing plan is to continue the process of
working with suppliers and customers to verify their Y2K readiness
by June 30, 1999, as well as to obtain their then-current Y2K
related public statements of Y2K compliance.* The Company plans
to evaluate any issues raised in this process in terms of any special
actions the Company should consider taking to reduce related risks,
including further follow up with suppliers and customers as the year
2000 approaches.* These and other issues will be included in the
Company's Y2K ongoing action plan.*
The Company's Y2K contingency plan consists of the
following: (1) offsite backup of all critical data and software;
(2) multiple redundant suppliers for all critical data communication
and telecommunications services; (3) readiness planning for support
personnel; (4) outside consultants identified for rapid
availability; and (5) ongoing evaluation and planning for
contingencies.*
The Company's current laser systems are not Y2K compliant
per SEMATECH standards. The laser systems currently require
manual intervention to reset the internal clock to account for
leap year in the year 2000. The Company's customers have been
informed of the non-compliance and have been provided with
instructions for the manual correction of the date between
January 1 and February 28, 2000. Not resetting the internal
clock would have no material impact on the operation of the laser
system.* The Company has demonstrated and is currently testing a
software fix to bring the lasers to full SEMATECH Y2K compliance.
These tests are currently not complete and no date has been
determined for full deployment of the software upgrade out to the
field, but the Company currently has no reason to believe the
software upgrade will not be implemented prior to the year 2000.*
Based on the assessment efforts to date, the Company does
not believe that the Y2K issue will have a material adverse
effect on the Company's consolidated financial condition and
results of operations.* The cost of the Y2K process is estimated
at approximately $250,000.* However, the Company's beliefs and
expectations are based on certain assumptions that ultimately may
prove to be inaccurate. Aside from global infrastructure Y2K
requirements, the Company's worst case scenario may include:
supplier and customer purchase, delivery and payment delays; server
and desktop computer failures; one or more critical software systems
failures, including embedded control systems; and failure of one or
more internal and external communications systems such as telephones,
networks, voice mail and paging systems.* Additional, potential
sources of risk include (a) the inability of key suppliers and
customers to be Y2K compliant, (b) the disruption of global transportation
channels as a result of general system failures, and (c) an overall
failure of necessary infrastructure such as electricity and
telecommunications. If any of these were to occur, there could be
a material adverse effect on the Company's consolidated financial
condition and results of operations.*
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 production and pilot
production of 0.25um and below 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 these devices only to the degree to
which their sales forecasts and 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 decreased some aspects of its
operations in response to unfavorable industry conditions. Those
reductions may not be sufficient to sustain profitable operations
should revenue declines experienced recently continue.
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 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.
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 nine months of 1998, respectively. Sales to ASM
Lithography, Canon, Nikon and SVG Lithography accounted for
approximately 40%, 21%, 28% and 6%, respectively, of total
revenues for the first nine 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.
Need to Manage a Changing Business. The Company recently
has dramatically expanded and contracted 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 decreased to 709 at
September 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 must also
effectively manage its inventory levels, including assessing and
managing excess and obsolete inventories associated with the
changing environment and new product introductions. The Company
will be required to attract, train, retain and manage key
technical personnel in order to support the Company's growth
and/or contraction.* The Company will also 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
effectively manage the Company's growth or contraction would
materially adversely affect the Company's 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.
Competition. The Company currently has three significant
competitors in the market for excimer laser systems for
photolithography applications, Lambda-Physik, Komatsu, Ltd ("Komatsu")
and Ushio. All 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 Lambda-Physik and Komatsu 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 chipmakers, 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 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,
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 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.
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.
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 most 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.
Uncertainty Regarding Patents and Protection of Proprietary
Technology. The Company believes that the success of its
business depends more on such factors as the technical expertise
of its employees, as well as their innovative skills and
marketing and customer relations ability, than on patents,
copyrights, trade secrets and other intellectual property
rights.* Nevertheless, the success of the Company may depend in
part on patents, and as of September 30, 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 49 additional patents in the United
States, eight 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 September 30, 1998, the
Company owned six foreign patents and had filed 138 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. The Company currently funds a small portion of
its development expenses through SEMATECH. 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 Instruments, Inc. ("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.
Risks Associated with Japan Manufacturing. The Company has
qualified Seiko of Japan as a contract manufacturer of its
photolithography lasers. Seiko has been advised by 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
any heavy demand for its products could be materially adversely
affected. See - "Uncertainty Regarding Patents and Protection
of Proprietary Technology."
Risks of International Sales and Operations. Approximately
81%, 89% and 89% of the Company's revenues in 1996, 1997 and the
nine months ended September 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 $5 7/8 on October 8, 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 can result in substantial costs and a diversion of
management's attention and resources.
Legal Matters. The Company has been named as a defendant in
several putative shareholder class action lawsuits which were
filed in September and October, 1998 in the U.S. District Court
for the Southern District of California. Certain executive
officers and directors of the Company are also named as
defendants. The plaintiffs purport to represent a class of all
persons who purchased the Company's Common Stock between April
24, 1997 and September 26, 1997 (the "Class Period"). The
complaints allege claims under the federal securities laws and
California law. The plaintiffs allege that the Company and the
other defendants made various material misrepresentations and
omissions during the Class Period. The complaints do not specify
the amount of damages sought. The Company believes that it has
good defenses to the claims alleged in the lawsuits and will
defend itself vigorously against these actions. These cases are
in the early stages and no trial date has been set. The defense
of these actions may cause some disruption in the Company's
operations and may from time to time distract management from day-
to-day operations. The ultimate outcome of these actions cannot
be presently determined. Accordingly, no provision for any
liability or loss that may result from adjudication or settlement
thereof has been made in the accompanying consolidated financial
statements.
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
The Company has been named as a defendant in
several putative shareholder class action lawsuits
which were filed in September and October, 1998 in the
U.S. District Court for the Southern District of
California. Certain executive officers and directors of
the Company are also named as defendants. The
plaintiffs purport to represent a class of all persons
who purchased the Company's Common Stock between April
24, 1997 and September 26, 1997 (the "Class Period").
The complaints allege claims under the federal
securities laws and California law. The plaintiffs
allege that the Company and the other defendants made
various material misrepresentations and omissions
during the Class Period. The complaints do not specify
the amount of damages sought. The Company believes
that it has good defenses to the claims alleged in the
lawsuits and will defend itself vigorously against
these actions. These cases are in the early stages and
no trial date has been set. The ultimate outcome of
these actions cannot be presently determined.
Accordingly, no provision for any liability or loss
that may result from adjudication or settlement thereof
has been made in the accompanying consolidated
financial statements.
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 September
18, 1998, reporting the information set forth
in the Company's press releases dated September
4, 1998 regarding a shareholder lawsuit, and
September 11, 1998 regarding a workforce
reduction.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CYMER, INC.
(Registrant)
Date: November 10, 1998 By: /s/ WILLIAM A. ANGUS, III
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
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