UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 (858) 385-7300
Former name, former address and former fiscal year, if
changed since last report.
N/A
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock, with $0.001 par value,
outstanding on July 22, 1999 was 27,986,892.
<PAGE>
CYMER, INC.
FORM 10-Q
For the Quarter Ended June 30, 1999
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of 3
December 31, 1998 and June 30, 1999
Consolidated Statements of Operations for 4
the three and six months ended
June 30, 1998 and 1999
Consolidated Statements of Cash Flows for 5
the three and six months ended June 30,
1998 and 1999
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About 27
Market Risk
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 28
ITEM 5. Other Information 28
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURE PAGE 29
<PAGE>
PART I. FINANCIAL INFORMATION
CYMER, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $53,130 $75,562
Short-term investments 85,558 71,008
Accounts receivable - net 50,909 54,809
Foreign exchange contracts receivable 22,145 16,279
Inventories 50,786 52,901
Deferred income taxes 12,824 12,812
Prepaid expenses and other 3,706 4,057
Total current assets 279,058 287,428
PROPERTY - net 51,937 52,975
LONG-TERM INVESTMENTS 23,480 18,251
DEFERRED TAXES - NON-CURRENT 2,533 3,041
OTHER ASSETS 7,310 6,929
TOTAL ASSETS $364,318 $368,624
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $8,581 $13,301
Accrued and other liabilities 33,204 38,852
Foreign exchange contracts payable 24,873 16,296
Income taxes payable 2,146 2,399
Revolving loan 11,609 15,495
Total current liabilities 80,413 86,343
LONG-TERM LIABILITIES:
Convertible subordinated notes 172,500 172,500
Other liabilities 3,424 3,026
MINORITY INTEREST 1,450 1,723
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 27,174,000 and 27,951,000 shares 27 28
Paid-in capital 111,842 114,869
Treasury stock at cost (2,000,000
common shares) (24,871) (24,871)
Accumulated other comprehensive loss (1,627) (2,367)
Retained earnings 21,160 17,373
Total stockholders' equity 106,531 105,032
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $364,318 $368,624
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
REVENUES:
Product sales $52,946 $43,378 $102,574 $83,202
Other 76 31 127 299
Total revenues 53,022 43,409 102,701 83,501
COSTS AND EXPENSES:
Cost of product sales 34,154 28,395 64,784 56,511
Research and development 8,292 7,863 16,109 15,315
Sales and marketing 3,980 3,465 7,880 6,996
General and administrative 2,605 3,172 5,083 5,966
Total costs and expenses 49,031 42,895 93,856 84,788
OPERATING INCOME (LOSS) 3,991 514 8,845 (1,287)
OTHER INCOME (EXPENSE):
Foreign currency exchange
gain (loss) - net (520) 161 (752) (74)
Interest and other income 1,847 1,653 3,855 3,417
Interest and other expense (2,802) (2,807) (5,583) (5,570)
Total other income
(expense) - net (1,475) (993) (2,480) (2,227)
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES AND MINORITY
INTEREST 2,516 (479) 6,365 (3,514)
PROVISION FOR INCOME TAXES (724) (758) (1,882) -
MINORITY INTEREST (103) (252) (91) (273)
NET INCOME (LOSS) $1,689 ($1,489) $4,392 ($3,787)
EARNINGS (LOSS) PER SHARE:
Basic:
Earnings (loss) per share $0.06 ($0.05) $0.15 ($0.14)
Weighted average common
shares outstanding 28,768 27,795 28,747 27,592
Diluted:
Earnings (loss) per share $0.06 ($0.05) $0.14 ($0.14)
Weighted average common and
potential common shares
outstanding 30,291 27,795 30,366 27,592
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1998 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $4,392 ($3,787)
Adjustments to reconcile net income
(loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 7,148 8,515
Minority interest 91 273
Deferred income taxes (514)
Gain on disposal of property (45)
Change in assets and liabilities:
Accounts receivable 1,968 (5,813)
Foreign exchange contracts receivable 10,296 4,536
Inventories (12,078) (2,491)
Prepaid expenses and other assets (53) (990)
Accounts payable (6,568) 4,765
Accrued and other liabilities 273 6,692
Foreign exchange contracts payable (8,711) (7,124)
Income taxes payable (2,200) 275
Net cash provided by (used for)
operating activities (5,442) 4,292
INVESTING ACTIVITIES:
Acquisition of property (10,550) (9,888)
Purchases of investments (45,558) (62,354)
Proceeds from sold or matured investments 74,480 81,785
Net cash provided by investing activities 18,372 9,543
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
loan and security agreements 10,013 4,726
Proceeds from issuance of common stock 1,126 3,018
Purchase of treasury stock (5,276)
Payments on capital lease obligations (299) (284)
Net cash provided by financing activities 5,564 7,460
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 4,234 1,137
NET INCREASE IN CASH AND CASH EQUIVALENTS 22,728 22,432
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 51,903 53,130
CASH AND CASH EQUIVALENTS AT END OF PERIOD $74,631 $75,562
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $3,305 $3,337
Income taxes paid $2,140 $1,101
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial information has
been prepared by Cymer, Inc., its wholly-owned and majority-
owned subsidiaries, (collectively, "Cymer"), 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, 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). Cymer, Inc. owns 70% of
Cymer Korea and 75% of Cymer SEA. Cymer sells its laser
systems 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 Cymer's Annual
Report on Form 10-K (including items incorporated by
reference therein) for the year ended December 31, 1998 and
the Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1999. 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 ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings
Per Share ("EPS"), 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 and is computed
by dividing net income or loss attributable to common
stockholders by the weighted-average of common shares
outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred
stock, warrants to purchase common stock and common
<PAGE>
stock options using the treasury stock method) were exercised or
converted into common stock. Potential common shares in the
diluted EPS computation are excluded in net loss periods as
their effect would be antidilutive. EPS for all periods
have been computed in accordance with SFAS No. 128. Cymer
adopted the new method of reporting EPS for the year ended
December 31, 1997. Reconciliation of the basic and diluted
EPS is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss) $1,689 ($1,489) $4,392 ($3,787)
Basic earnings (loss) per share $0.06 ($0.05) $0.15 ($0.14)
Basic weighted average common
shares outstanding 28,768 27,795 28,747 27,592
Effect of dilutive securities:
Warrants 119 118
Options 1,404 1,501
Diluted weighted average common
and potential common shares
outstanding 30,291 27,795 30,366 27,592
Diluted earnings (loss) per share $0.06 ($0.05) $0.14 ($0.14)
</TABLE>
3. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
(in thousands)
<S> <C> <C>
INVENTORIES:
Raw Materials $29,324 $13,221
Work-in-progress 12,946 17,493
Finished goods 8,516 22,187
Total $50,786 $52,901
ACCRUED AND OTHER LIABILITIES:
Warranty and installation reserves $19,000 $20,600
Payroll and payroll related 3,622 3,303
Interest 7,651 9,471
Other 2,931 5,478
Total $33,204 $38,852
</TABLE>
4. REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, Cymer adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 requires
reporting and displaying comprehensive income and its
components, which, for Cymer, include foreign currency
translation adjustments and unrealized holding gains and
losses on available-for-sale securities that are currently
being presented by Cymer as a
<PAGE>
separate component of stockholders' equity. The adoption of
SFAS No. 130 had no impact on Cymer'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.
The following table summarizes the change in each
component of accumulated other comprehensive income (loss)
for the periods ended December 31, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
Total unrealized
gains (losses) on Accumulated
Translation available-for-sale other
adjustment, investments, comprehensive
net of tax net of tax income(loss)
<S> <S> <C> <C> <C>
January 1,1998 Balance ($2,303) $49 ($2,254)
Period net
change 441 186 627
December 31,1998 Balance (1,862) 235 (1,627)
Period net
change (535) (205) (740)
June 30, 1999 Balance ($2,397) $30 ($2,367)
</TABLE>
5. CLASS ACTION LAWSUITS
Cymer 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 Cymer are also named as
defendants. The plaintiffs purport to represent a class of
all persons who purchased Cymer's Common Stock between April
24, 1997 and September 26, 1997 (the "Class Period"). The
complaints allege claims under the federal securities laws.
The plaintiffs allege that Cymer 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 complaints have been
consolidated into a single action and a class representative
has been appointed by the court. A consolidated amended
complaint is due to be filed in early August, 1999.
Discovery has not yet commenced. Cymer believes that it has
good defenses to the claims alleged in the lawsuits and will
defend itself vigorously against these actions. The defense
of these actions may cause some disruption in Cymer'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.
6. CONTINGENCIES
Cymer's Japanese manufacturing partner has been
notified that its manufacture of Cymer's laser systems in
Japan may infringe certain Japanese patents held by Komatsu,
Ltd., one of Cymer's competitors. Cymer has agreed to
indemnify its Japanese manufacturing partner against patent
infringement claims under certain circumstances. Cymer has
engaged in discussions with Komatsu to attempt to resolve
these patent issues. In the course of those discussions,
Komatsu has identified additional patents that Komatsu
asserts may be infringed by Cymer and Seiko. Cymer
believes, based upon the advice of counsel, that Cymer's
products do not infringe any valid claim of the asserted
patents.
<PAGE>
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 MATERIALLY FROM
THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND
STOCKHOLDERS OF CYMER, INC. (TOGETHER WITH ITS WHOLLY-OWNED
AND MAJORITY-OWNED SUBSIDIARIES, COLLECTIVELY, "CYMER")
SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET FORTH
IN THIS FORM 10Q, INCLUDING "RISK FACTORS" BEGINNING ON PAGE
17 HEREOF. CYMER MAY FROM TIME TO TIME MAKE ADDITIONAL
WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS, INCLUDING
STATEMENTS CONTAINED IN CYMER'S FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION AND IN ITS REPORTS TO STOCKHOLDERS.
CYMER DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF
OF CYMER.
RESULTS OF OPERATIONS
The following table sets forth certain items in Cymer's
statements of operations as a percentage of total revenues
for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Revenues:
Product sales 99.8% 99.9% 99.9% 99.6%
Other .2 .1 .1 .4
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of product sales 64.4 65.4 63.1 67.7
Research and development 15.6 18.1 15.7 18.3
Sales and marketing 7.5 8.0 7.7 8.4
General and administrative 4.9 7.3 4.9 7.1
Total costs and expenses 92.4 98.8 91.4 101.5
Operating income (loss) 7.6 1.2 8.6 (1.5)
Other income (expense) - net (2.8) (2.3) (2.4) (2.7)
Income (loss) before provision
for income taxes and
minority interest 4.8 (1.1) 6.2 (4.2)
Provision for income taxes (1.4) (1.7) (1.8) -
Minority interest (.2) (.6) (.1) (.3)
Net income (loss) 3.2% (3.4%) 4.3% (4.5%)
Gross margin on product sales 35.6% 34.6% 36.8% 32.1%
</TABLE>
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1999
Revenues. Cymer's total revenues consist of product
sales, which include sales of laser systems, spare parts,
service and training, and other revenues, which primarily
include revenues from funded development activities
performed 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 18% from $52.9 million for the
three months ended June 30, 1998 to $43.4 million for the
three months ended June 30, 1999, primarily due to decreased
sales of DUV photolithography laser systems. The decrease
in laser system sales was partially offset by an increase in
the average selling price from period to period. The
average selling price of a lithography laser system was
$425,000 for the three month period ended June 30, 1998 as
compared to $469,000 for the three month period ended June
30, 1999. Due to the increase in Cymer's installed base of
lasers, Cymer's revenues from spares, system upgrades,
replacement parts and services has increased and is a larger
component of product sales. Funded development revenues
decreased from $76,000 for the three months ended June 30,
1998 to $31,000 in the three months ended June 30, 1999.
Cymer's sales are generated primarily by shipments to
customers in Japan, the Netherlands, and the United States.
Approximately 89%, 88% and 85% of Cymer's sales in 1997,
1998 and the first six months of 1999, respectively, were
derived from customers outside the United States. Cymer
maintains a wholly-owned Japanese subsidiary which sells to
Cymer's Japanese customers. Revenues from Japanese
customers, generated primarily by this subsidiary, accounted
for 65%, 48% and 32% of revenues for 1997, 1998 and the
first six months of 1999, respectively. The activities of
Cymer'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
Cymer's products, including costs of shipment to Japan, are
recorded as costs of the parent company. Cymer 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 Cymer's products by the
Japanese subsidiary for resale under firm third-party sales
commitments.
Cost of product sales declined 17% from $34.2 million
for the three months ended June 30, 1998 to $28.4 million
for the three months ended June 30, 1999 due to the decrease
in sales volume. The gross margin on these sales decreased
from 35.5% for the three months ended June 30, 1998 to 34.5%
for the same three month period in 1999. This reduction was
primarily due to lower product sales on higher relative
fixed manufacturing facility costs as well as the continued
development of worldwide field support infrastructure.
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. Cymer recognized net gains on such
contracts of $861,000 and $122,000 for the three months
ended June 30, 1998 and 1999, respectively.
Research and Development. Research and development
expenses include costs of internally-funded and externally-
funded projects as well as continuing research support
expenses which primarily include employee and material
costs, depreciation of equipment and other
<PAGE>
engineering related costs. Research and development expenses
decreased 5% from $8.3 million in the three months ended June 30,
1998 to $7.9 million for the three months ended June 30, 1999,
due primarily to timing of various research programs
initiation, development and milestone completions.
Development expenses during 1998 consisted of the completion
of major milestones on Cymer's ELS-5010 laser system, and
development efforts on Cymer's next generation Orion or ELS-
6000 laser system. The expenses associated with these
programs declined in 1999 as milestones were met and as new
programs were at their initial stages. As a percentage of
total revenues, such expenses increased from 15.6% to 18.1%
in the respective periods due to lower revenues.
Sales and Marketing. Sales and marketing expenses
include the expenses of the sales, marketing and customer
support staffs and other marketing expenses. Sales and
marketing expenses decreased 13% from $4.0 million for the
three months ended June 30, 1998 to $3.5 million for the
three months ended June 30, 1999 due primarily to initial
start up costs associated with developing Cymer's foreign
field service locations in Europe, Singapore, Korea and
Taiwan, which were incurred in 1998. As a percentage of
total revenues, such expenses increased from 7.5% to 8.0% in
the respective periods due to lower sales volumes.
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 23% from $2.6 million for the three months ended
June 30, 1998 to $3.2 million for the three months ended
June 30, 1999, due to continuing business process quality
development efforts and other required general and
administrative support activities. As a percentage of total
revenues, such expenses increased from 4.9% to 7.3% 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 fluctuations in the value of the Japanese yen against
the United States dollar. Net other expense decreased from
$1.5 million for the three months ended June 30, 1998 to
$1.0 million for the three months ended June 30, 1999,
primarily due to a foreign exchange loss in 1998 versus a
gain for the same period in 1999. Foreign currency exchange
losses totaled $520,000, interest income totaled $1.8
million and interest expense totaled $2.8 million for the
three months ended June 30, 1998, compared to an exchange
gain of $161,000, interest income of $1.7 million and $2.8
million in interest expense for the three months ended June
30, 1999.
Cymer's results of operations are subject to
fluctuations in the value of the Japanese yen against the
United States dollar. Sales by Cymer to its Japanese
subsidiary are denominated in dollars, and sales by the
subsidiary to customers in Japan are denominated in yen.
Cymer's Japanese subsidiary manages its exposure to such
fluctuations by entering into foreign currency exchange
contracts to hedge its purchase commitments to Cymer. 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.
Income Tax Provision. The provision for income taxes
for the three months ended June 30, 1998 of $724,000
reflects an annual effective tax rate of 30% as Cymer had no
additional loss or valuation allowance carryovers from
previous periods to be applied in 1998. The tax provision
of $758,000 for the three months ended June 30, 1999 is
reflective of a change in Cymer's effective tax rate from
25% for the three month period ended March 31, 1999, to an
annual effective rate of 0% at June 30, 1999. This decrease
in the annual rate is primarily the result of improved
visibility regarding certain expected tax benefits for 1999.
Specifically, the lower rate
<PAGE>
reflects an increase in the expected tax benefit from
foreign sales and a more favorable expected mix of 1999 taxable
earnings between the U.S. and foreign jurisdictions.
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Revenues. Product sales decreased 19% from $102.6
million for the six months ended June 30, 1998 to $83.2
million for the six months ended June 30, 1999, primarily
due to decreased sales of DUV photolithography laser
systems. The decrease in laser system sales was partially
offset by an increase in the average selling price from
period to period. The average selling price of a
lithography laser system for the six month periods ended
June 30, 1998 and 1999 were $408,000 and $472,000,
respectively. Due to the increase in Cymer's installed
base of lasers, Cymer's revenues from spares, system
upgrades, replacement parts and services has increased and
is a larger component of product sales. Funded development
revenues increased from $127,000 for the six months ended
June 30, 1998 to $299,000 in the six months ended June 30,
1999, primarily due to the addition of various laser
research projects sponsored by customers and SEMATECH in
1999 compared to the completion of various projects in 1998.
Cost of Product Sales. Cost of product sales declined
13% from $64.8 million for the six months ended June 30,
1998 to $56.5 million for the six months ended June 30, 1999
due to the decrease in sales volume. The gross margin on
these sales decreased from 36.8% for the six months ended
June 30, 1998 to 32.1% for the same six month period in
1999. This reduction was primarily due to lower product
sales on higher relative fixed manufacturing facility costs
as well as the continued development of worldwide field
support infrastructure.
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. Cymer recognized net gains on such
contracts of $3.2 million for the six months ended June 30,
1998 and a $829,000 net loss for the six months ended June
30, 1999.
Research and Development. Research and development
expenses decreased 5% from $16.1 million for the six months
ended June 30, 1998 to $15.3 million for the six months
ended June 30, 1999, due primarily to the timing of various
research programs initiation, development and milestone
completions. Development expenses during 1998 consisted of
the completion of major milestones on Cymer's ELS-5010 laser
system, and development efforts on Cymer's next generation
Orion or ELS-6000 laser system. The expenses associated with
these programs declined in 1999 as milestones were met and
as new programs were at their initial stages. As a
percentage of total revenues, such expenses increased from
15.7% to 18.3% in the respective periods due to lower
revenues.
Sales and Marketing. Sales and marketing expenses
decreased 11% from $7.9 million for the six months ended
June 30, 1998 to $7.0 million for the six months ended June
30, 1999 due primarily to the initial start up costs
associated with developing Cymer's foreign field service
locations in Europe, Singapore, Korea and Taiwan, which were
incurred in 1998. As a percentage of total revenues, such
expenses increased from 7.7% to 8.4% in the respective
periods due to lower sales volumes.
General and Administrative. General and
administrative expenses increased 18% from $5.1 million for
the six months ended June 30, 1998 to $6.0 million for the
six months ended June 30, 1999, due to the continuing
business process quality development efforts and other
required general and administrative support activities. As
a percentage of total revenues, such expenses increased from
4.9% to 7.1% from period to period.
Other Income (Expense) - net. Net other expense
decreased from $2.5 million for the six months ended June
30, 1998 to $2.2 million for the six months ended June 30,
1999, primarily due to larger foreign exchange losses in
1998 versus 1999, offset by a decrease in interest income
associated with lower market yields in 1999 on the
investment of excess cash. Foreign currency exchange losses
totaled $752,000, interest income totaled $3.9 million and interest
<PAGE>
expense totaled $5.6 million for the six months ended
June 30, 1998, compared to an exchange loss of
$74,000, interest income of $3.4 million and $5.6 million in
interest expense for the six months ended June 30, 1999.
Income Tax Provision. The provision for income taxes
for the six months ended June 30, 1998 of $1.8 million
reflects an annual effective tax rate of 30% as Cymer had no
additional loss or valuation allowance carryovers from
previous periods to be applied in 1998. There is no tax
provision estimated for 1999 primarily due to tax benefits
expected from foreign sales.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Cymer 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 Cymer of approximately
$29.7 million, the public offering on December 12, 1996,
which resulted in net proceeds of approximately $50.0
million, and raising a net $167.3 million in a convertible
subordinated note offering on August 6, 1997. As of June
30, 1999, Cymer had approximately $75.6 million in cash and
cash equivalents, $71.0 million in short-term investments,
$18.3 million in long-term investments, $201.1 million in
working capital and $15.5 million in bank debt.
Net cash used for operating activities was
approximately $5.4 million for the six months ended June 30,
1998 and net cash provided by operating activities was $4.3
million for the six months ended June 30, 1999. The change
from cash used for to cash provided by operating activities
for the six months ended June 30, 1998 and 1999 was
primarily attributable to a significantly smaller increase
in inventory from period to period, an increase in accounts
payable and other accrued liabilities, offset by an increase
in accounts receivable from 1998 to 1999.
Net cash provided by investing activities was
approximately $18.4 million for the six months ended June
30, 1998 as compared to $9.5 million for the six months
ended June 30, 1999. The net cash provided by investing
activities during the first six months of 1998 and 1999
primarily reflects continued property acquisitions to
accommodate the business development and focus, offset by
the timing of short and long term investments maturing and
being reinvested during the period.
Net cash provided by financing activities was
approximately $5.6 million for the six months ended June 30,
1998, and $7.5 million for the six months ended June 30,
1999. For the six months ended June 30, 1998, Cymer
borrowed $10.0 on its line of credit in Japan, received a
net $1.1 million through the issuance of common stock,
offset by a treasury stock repurchase of $5.3 million. The
net cash provided by financing activities for the six months
ended June 30, 1999 was primarily attributable to $4.7
million in bank borrowings in Japan and the receipt of $3.0
million upon the issuance of common stock due to the
exercising of stock options by Cymer employees.
Cymer requires substantial working capital to fund its
business, particularly to finance inventories and accounts
receivable and for capital expenditures. Cymer's future
capital requirements will depend on many factors, including
the rate of Cymer'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 overall industry
conditions. Cymer believes that it has sufficient working
capital and available bank credit to sustain operations and
provide for the future expansion of its business during
1999.
<PAGE>
Recent Accounting Pronouncements
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 Cymer for the year ending
December 31, 2000. Interim reporting for this standard will
be required. Cymer has not yet assessed the effect of this
standard on Cymer's current reporting and disclosures.
Impact of Year 2000 Issue
The Year 2000 issue 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. Cymer 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 Year 2000 issues; (2) assessment of the impact
on 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.
Cymer is 100% complete with the identification of
systems which may be vulnerable to the Year 2000 issues, and is
100% 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 Cymer. In addition, all suppliers have been
contacted for their Year 2000 issues and plans, and all new
software licenses include Year 2000 statements. Remediation
is 100% complete. The testing of systems and components was
100% complete as of March 31, 1999.
Cymer has completed the initial phase of working with
suppliers and customers to verify their Year 2000 readiness as of
June 30, 1999, including obtaining their then-current Year 2000
related public statements on Year 2000 compliance. Cymer is
evaluating any issues raised in this process in terms of any
special actions Cymer 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 Cymer's Year 2000 ongoing action plan.
Cymer's Year 2000 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.
Cymer's current laser systems are not Year 2000 compliant per
accepted industry standards. The laser systems currently require
manual intervention to reset the internal clock to account
for leap year in the year 2000. Cymer'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. Cymer has demonstrated and tested the
software fix to bring the lasers to fully accepted industry
standards for Year 2000 compliance. These tests have been
completed and Cymer is currently making the upgrade available
to customers.
Based on the assessment efforts to date, Cymer does not
believe that the year 2000 will have a material adverse
effect on Cymer's consolidated financial condition and
results of operations.* The cost of Year 2000 compliance is
estimated at approximately $250,000 of which
<PAGE>
approximately $150,000 has been incurred.* However, Cymer's beliefs
and expectations are based on certain assumptions that
ultimately may prove to be inaccurate. Aside from global
infrastructure Year 2000 requirements, Cymer'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 Year 2000 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 Cymer's consolidated
financial condition and results of operations.
<PAGE>
RISK FACTORS
Likely Fluctuations in Operating Results
Certain Factors Causing Fluctuations
Cymer's operating results have in the past fluctuated
and are likely in the future to fluctuate significantly.
These fluctuations depend on a variety of factors which 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 Cymer's customers;
* cyclicality in the market for semiconductor
manufacturing equipment;
* the timing and size of orders from Cymer's small base
of customers;
* the ability of Cymer to manufacture, test and deliver
laser systems in a timely and cost effective manner;
* the mix of laser models, replacement parts and service
revenues;
* the ability of Cymer's competitors to obtain orders
from Cymer's customers;
* the entry of new competitors into the market for DUV
photolithography illumination sources;
* the ability of Cymer to manage its costs as it supplies
its products in higher volumes; and
* Cymer's ability to effectively manage its exposure to
foreign currency exchange rate fluctuations, principally
with respect to the Japanese yen (in which sales by Cymer's
Japanese subsidiary are denominated).
In addition, as customers become more efficient at
integrating Cymer's lasers into their photolithography
tools, reductions in customer laser inventories may affect
Cymer's operating results.
Timing of Revenue Recognition
Cymer 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 Cymer's total revenues and operating results for a
particular period. If customers cancel or reschedule orders
for a small number of systems or if Cymer cannot fill orders
in time to recognize revenue during a particular period,
this could adversely affect Cymer's operating results for
that period. For example, unanticipated manufacturing,
testing, shipping or product acceptance delays could cause
such cancellations, rescheduling or inability to fill orders
promptly.
Fixed Expenses
Cymer's expense levels are based, in large part, on
Cymer's expectations as to future revenues. Therefore,
Cymer's expenses are relatively fixed in the short term. If
revenue levels fall below expectations, this would
disproportionately and adversely affect net income. Cymer
cannot forecast the impact of these and other factors on its
revenues and operating results in any future period with any
degree of certainty.
Semiconductor Manufacturer Demand
Cymer believes that semiconductor manufacturers are currently
developing capability for production and pilot production of 0.25um,
0.18um and below devices. Cymer also believes that
<PAGE>
the efforts to develop such capability are driving present demand
for its laser systems for DUV photolithography tools. Once
semiconductor manufacturers have acquired such capability, their demand
for Cymer's DUV photolithography tools will depend on whether they want
to expand their capacity to manufacture such devices. This will
in turn depend on whether their sales forecasts and manufacturing
process yields justify such an investment. Cymer currently expects
that demand for its DUV laser systems will depend on such demand and
process development constraints of the semiconductor manufacturers.
Industry Conditions
Recently, Cymer has increased some aspects of its
operations in response to anticipated improvement in
industry conditions. Should these improvements not
materialize, the planned increases in spending may delay the
return to profitable operations.
Due to the foregoing, as well as other unanticipated
factors, Cymer's operating results will likely fall below
the expectations of public market analysts or investors in
some future quarter or quarters. Such failure to meet
operating result expectations would materially adversely
affect the price of Cymer's Common Stock.
Dependence on Semiconductor Industry
Cymer derives substantially all of its revenues from
photolithography tool manufacturers. Photolithography tool
manufacturers depend in turn on the demand for their
products from semiconductor manufacturers. Semiconductor
manufacturers 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.
These downturns have often had a severe effect on the demand
for semiconductor manufacturing equipment, including
photolithography tools. Cymer believes that downturns in
the semiconductor manufacturing industry will periodically
occur, resulting in periodic decreases in demand for
semiconductor manufacturing equipment. In addition, Cymer
believes that in a future downturn Cymer's need to continue
investment in research and development, and to maintain
extensive ongoing customer service and support capability
will constrain its ability to reduce expenses. Accordingly,
downturns in the semiconductor industry could have a
material adverse effect on Cymer's business, financial
condition and results of operations.
Dependence on Small Number of Customers
A small number of manufacturers of DUV photolithography
tools constitute Cymer's primary customer base. Four large
firms, ASM Lithography, Canon, Nikon and SVG Lithography (a
subsidiary of Silicon Valley Group, Inc.), dominate the
photolithography tool business. Collectively, they accounted
for approximately 94%, 94% and 82% of Cymer's total revenues
in 1997, 1998, and the six months ended June 30, 1999,
respectively. Individually, sales to ASM Lithography, Canon,
Nikon and SVG Lithography accounted for approximately 37%,
20%, 31% and 6%, respectively, of total revenues in 1998 and
41%, 19%, 16%, 6%, respectively, of total revenues for the
six months ended June 30, 1999. Cymer 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 Cymer's customers are obligated to purchase a
minimum number of Cymer'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, would have a material adverse effect on Cymer's
business, financial condition and results of operations.
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, could all cause such a
loss of business or reduction in orders.
<PAGE>
Need to Manage a Changing Business
Cymer has recently dramatically expanded and contracted
the scope of its operations and the number of employees in
most of its functional areas. For example, Cymer 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
then decreased that number to 703 at December 31, 1998. As
of June 30, 1999, Cymer had 727 employees. Cymer has
installed new management information systems and has also
substantially expanded its facilities and manufacturing
capacity. For example, since December 31, 1996 Cymer has
occupied three additional buildings covering approximately
187,000 square feet. In a cyclical environment of dramatic
growth or contraction, Cymer will need:
* to continue close management of these areas, and
* to improve its management, operational and financial
systems, including
* accounting and other internal management systems,
* quality control,
* delivery and
* field service and customer support capabilities.
Cymer must also effectively manage its inventory levels,
including assessing and managing excess and obsolete
inventories associated with the changing environment and new
product introductions. Cymer will need to attract, train,
retain and manage key technical personnel in order to
support Cymer's growth and/or contraction. Cymer will also
need to manage effectively its international operations,
including:
* the operations of its subsidiaries in Japan, Korea,
Taiwan, Singapore and the Netherlands,
* its field service and support presence in Asia and
Europe and
* its relationship with Seiko as a manufacturer of its
photolithography lasers.
Cymer must also effect timely deliveries of its products and
maintain the product quality and reliability required by its
customers. Any failure to effectively manage Cymer's growth
or contraction would materially adversely affect Cymer's
financial condition and results of operations.
Dependence on Single Product Line
Cymer's only product line is excimer lasers ("KrF, ArF
and F2 laser systems"). The primary market for excimer
lasers is for use in DUV photolithography equipment for
manufacturing deep-submicron semiconductor devices. Demand
for Cymer'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:
* instability of photoresists used in advanced DUV
photolithography and
* potential shortages of specialized materials used in
DUV optics.
There can be no assurance that such impediments can or will
be overcome. In any event, such impediments may materially
reduce the demand for Cymer's products. Further, if Cymer's
customers experience reduced demand for DUV photolithography
tools, or if Cymer's competitors are successful in obtaining
significant orders from such customers, Cymer's financial
condition and results of operations would be materially
adversely affected.
<PAGE>
Competition
Lambda-Physik, Komatsu and Ushio
Cymer 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 Cymer,
* have access to greater financial, technical and other
resources than does Cymer, and
* are located in closer proximity to Cymer's customers
than is Cymer.
Cymer believes that Lambda-Physik and Komatsu are
aggressively seeking to gain larger positions in this
market. Cymer 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. Cymer believes that Komatsu in particular has been
qualified for production use by chipmakers in Japan and
elsewhere. Cymer could lose market share and its growth
could slow or even decline as competitors gain market
acceptances.
Other Technologies
In the future, Cymer will likely experience competition
from other technologies, such as EUV and scalpel processes.
To remain competitive, Cymer believes that it will need to:
* manufacture and deliver products to customers on a
timely basis and without significant defects, and
* maintain a high level of investment in research and
development and in sales and marketing.
Cymer might not have sufficient resources to continue to
make the investments necessary to maintain its competitive
position.
Small and Immature Market for Excimer Lasers
In addition, the market for excimer lasers is still
small and immature. Larger competitors with substantially
greater financial resources, including other manufacturers
of industrial lasers, might attempt to enter the market.
Cymer might not remain competitive. A failure to
remain competitive would have a material adverse effect on
Cymer's business, financial condition and results of
operations.
Risk of Excessive Inventory Buildups by Photolithography
Tool Manufacturers
Photolithography tool manufacturers constitute
substantially all of Cymer's customers. Photolithography tool
manufacturers sell their systems in turn to semiconductor
manufacturers. Market conditions in the industry can cause
Cymer'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. Cymer is working
with its customers to better understand end user demand for DUV photo-
lithography tools. However, there can be no assurance that Cymer will be
<PAGE>
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 Cymer's revenues and operating results in
future periods as such inventories are brought into balance.
Dependence on Key Suppliers
Cymer obtains certain of the components and
subassemblies included in its products from a single
supplier or a limited group of suppliers. In particular,
there are no alternative sources for certain of such
components and subassemblies, including certain optical
components used in Cymer's lasers. In addition, Cymer is
increasingly outsourcing the manufacture of various
subassemblies. To date Cymer has been able to obtain
adequate supplies of the components and subassemblies in a
timely manner from existing sources. However, due to the
nature of Cymer's product development requirements, key
suppliers often need to rapidly advance their own
technologies in order to support Cymer's new product
introduction schedule. These suppliers may or may not be
able to satisfy Cymer's schedule requirements in providing
new modules and subassemblies to Cymer. If Cymer cannot
obtain sufficient quantities of such materials, components
or subassemblies, or if such items do not meet Cymer's
quality standards, delays or reductions in product shipments
could have a material adverse effect on Cymer's business,
financial condition and results of operations.
Limited Production Use of Excimer Lasers
The semiconductor industry is at the early stages of
adopting the excimer laser technology into photolithography
applications. Cymer's products might not meet production
specifications or cost of operation requirements over time
when subjected to prolonged and intense use in volume
production in semiconductor manufacturing processes. If any
semiconductor manufacturer cannot successfully achieve or
sustain volume production using Cymer's lasers, Cymer's
reputation with semiconductor manufacturers or the limited
number of photolithography tool manufacturers could be
damaged. This would have a material adverse effect on
Cymer's business, financial condition and results of
operations.
Development of Field Service and Support Organization
Cymer believes that the need to provide fast and
responsive service to the semiconductor manufacturers using
its lasers is critical. Cymer cannot depend solely on its
direct customers to provide this specialized service.
Therefore, Cymer 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, Cymer has an ongoing
effort to develop its direct support infrastructure in the
United States, Japan, Europe, Korea, Singapore, Taiwan and
Southeast Asia. This development 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. Cymer has historically experienced difficulties in
effectively training field service personnel. Cymer might
not be able to attract and train qualified personnel to
establish these operations successfully. Further, the costs
of such operations might be excessive. A failure to
implement this plan effectively could have a material
adverse effect on Cymer'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. Cymer 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
* develop and manufacture new products with improved
capabilities.
<PAGE>
In order to enhance and improve its products and develop new
products, among other things, Cymer must work closely with
its customers, particularly in the product development
stage, to integrate its lasers with its customers'
photolithography tools. Future technologies, such as EUV
and scalpel processes, might render Cymer's excimer laser
products obsolete. Further, Cymer might not 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 Cymer's
business, financial condition and results of operations.
Dependence on Key Personnel
Cymer 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. There is intense competition for
such personnel, as well as for the highly-skilled hardware
and software engineers Cymer requires. Cymer has in the
past experienced, and continues to experience, difficulty in
hiring personnel, including experts in excimer laser
technology. Cymer 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
* its ability to attract, train and retain highly skilled
personnel in each of these areas.
Cymer does not have employment agreements with most of its
employees, and Cymer might not be able to retain its key
employees. The failure of Cymer to hire, train and retain
such personnel could have a material adverse effect on
Cymer's business, financial condition and results of
operations.
Uncertainty Regarding Patents and Protection of Proprietary Technology
Cymer Patents
Cymer 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 Cymer may depend in part on
patents. As of June 30, 1999, Cymer owned 46 United States
patents covering certain aspects of technology associated
with excimer lasers. Such patents will expire at various
times during the period from January 2008 to September
2017. As of June 30, 1999, Cymer had also applied for 65
additional patents in the United States, 10 of which have
been allowed. As of June 30, 1999, Cymer owned 15 foreign
patents and had filed 177 patent applications in various
foreign countries.
Cymer's pending patent applications and any future
applications might not be approved. Cymer's patents might
not provide Cymer with competitive advantages. Third
parties might challenge Cymer's patents. In addition, third
parties' patents might have an adverse effect on Cymer's ability
to do business. In this regard, due to cost constraints, Cymer
did not begin filing for patents in Japan or other countries
with respect to inventions covered by its United States
<PAGE>
patents and patent applications until 1993. Therefore, Cymer
has 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, any such patents issued
to Cymer might not adequately protect Cymer's technology. Furthermore,
third parties might independently develop similar products, duplicate
Cymer's products or, to the extent patents are issued to Cymer, design
around the patents issued to Cymer.
Competitive Patents
Others may have filed and in the future may file patent
applications that are similar or identical to those of
Cymer. To determine the priority of inventions, Cymer may
have to participate in interference proceedings declared by
the United States Patent and Trademark Office. Such
interference proceedings could result in substantial cost to
Cymer. Such third party patent applications might have
priority over patent applications filed by Cymer.
Other Forms of Protection
Cymer also relies upon:
* trade secret protection,
* employee nondisclosure agreements,
* third-party nondisclosure agreements, and
* other intellectual property protection methods
to protect its confidential and proprietary information. Despite these
efforts, third parties might:
* independently develop substantially equivalent
proprietary information and techniques,
* otherwise gain access to Cymer's trade secrets, or
* disclose such technology.
Cymer might not be able to meaningfully protect its trade secrets.
Possible Claims to Ownership of Cymer's Intellectual Property
Cymer has in the past funded a significant portion of
its research and development expenses from outside research
and development revenues. Cymer has received such revenues
from photolithography tool manufacturers and from SEMATECH,
a semiconductor industry consortium, in connection with the
design and development of specific products. Cymer currently
funds a small portion of its development expenses through
SEMATECH. Although Cymer'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 Cymer,
disputes over the ownership or rights to use or market such
intellectual property might arise between Cymer and such
parties. Any such dispute could result in restrictions on
Cymer's ability to market its products and could have a
material adverse effect on Cymer's business, financial
condition and results of operations.
Patent Infringement
Third parties have in the past notified, and may in the
future notify, Cymer that it may be infringing their
intellectual property rights. Komatsu, one of Cymer's
competitors, has notified Cymer's Japanese manufacturing
partner, Seiko Instruments, Inc. ("Seiko"), that certain
aspects of Cymer's lasers might infringe certain patents
that have been issued to Komatsu in Japan. Komatsu has
notified Seiko that Komatsu intends to enforce its rights
under the Komatsu patents against Seiko if Seiko engages in
manufacturing activities for Cymer. In connection with its
manufacturing agreement with Seiko, Cymer has agreed to
indemnify Seiko against such claims
<PAGE>
under certain circumstances. Attorneys representing Komatsu are
currently challenging one of Cymer's U.S. patents in the U.S. Patent
Office. In addition, Cymer has engaged in discussions with
Komatsu with respect to the Komatsu patents, in the course
of which Komatsu has also identified to Cymer a number of
additional patents that Komatsu asserts may be infringed by
Cymer and Seiko. Cymer, in consultation with Japanese
patent counsel, has initiated oppositions to certain Komatsu
patents and the applications in the Japanese Patent Office.
Litigation might ensue with respect to Komatsu's patents.
Cymer and Seiko might not ultimately prevail in any such
litigation. Komatsu might assert infringement claims under
additional patents.
Any patent litigation would, at a minimum, be costly.
Litigation could also divert the efforts and attention of
Cymer's management and technical personnel. Both could have
a material adverse effect on Cymer's business, financial
condition and results of operations. Furthermore, in the
future third parties might assert other infringement claims,
and customers and end users of Cymer's products might assert
other claims for indemnification resulting from infringement
claims. Such assertions, if proven to be true, might
materially adversely affect Cymer's business, financial
condition and results of operations. If any such claims are
asserted against Cymer, Cymer may seek to obtain a license
under the third party's intellectual property rights.
However, such a license might not be available on reasonable
terms or at all. Cymer 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 Cymer's
management and technical personnel, which would materially
adversely affect Cymer's business, financial condition and
results of operations.
Trademark
Cymer has registered the trademark CYMER in the United
States and certain other countries and is seeking additional
registrations in certain countries. Although Cymer has
recently received a positive "Decision for Registration" on
its CYMER trademark in Japan, Cymer might be subjected to an
action for trademark infringement in other countries, which
could be costly to defend. If successful, such an action
would require Cymer to cease use of the mark and,
potentially, to pay damages.
Risks Associated with Manufacturing in Japan
Cymer has qualified Seiko of Japan as a contract
manufacturer of its photolithography lasers. Komatsu, a
competitor of Cymer, has advised Seiko that certain aspects
of Cymer's lasers might infringe certain patents that have
been issued to Komatsu in Japan. Komatsu has advised Seiko
it intends to enforce its rights under such patents against
Seiko if Seiko engages in manufacturing activities for
Cymer. In the event that, notwithstanding its manufacturing
agreement with Cymer, Seiko should determine not to continue
manufacturing Cymer's products until resolution of the
matter with Komatsu, Cymer'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
Significant International Trade
Cymer derived approximately 89%, 88% and 85% of its
revenues in 1997, 1998 and the six months ended June 30,
1999, respectively, from customers located outside the
United States. Because a significant majority of Cymer's
principal customers are located in other countries,
particularly Asia, Cymer anticipates that international
sales will continue to account for a significant portion of
its revenues.* In order to support its overseas customers,
Cymer:
<PAGE>
* maintains subsidiaries in Japan, Korea, Taiwan,
Singapore and the Netherlands,
* is further developing its field service and support
operations worldwide, and
* will continue to work with Seiko as a manufacturer of
its products in Japan.*
Cymer might not be able to manage these operations
effectively. Cymer's investment in these activities might
not enable it to compete successfully in international
markets or to meet the service and support needs of its
customers. Additionally, a significant portion of Cymer'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 Cymer's principal customers, as well as many
of the end-users of Cymer's laser systems, are located in
Asia, the recent economic problems and currency fluctuations
affecting that region could intensify Cymer's international
risk. Further, while Cymer 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 Cymer to export its products to various
countries. These factors could have a material adverse
effect on Cymer's business, financial condition and results
of operations.
Currency Fluctuations
Sales by Cymer to its Japanese subsidiary are
denominated in dollars, while sales by the subsidiary to
customers in Japan are denominated in yen. This means that
Cymer's results of operations show some fluctuation based on
the value of the Japanese yen against the U.S. dollar.
Cymer's Japanese subsidiary manages its exposure to such
fluctuations by entering into foreign currency exchange
contracts to hedge its purchase commitments. Management
will continue to monitor Cymer's exposure to currency
fluctuations, and, when appropriate, use financial hedging
techniques to minimize the effect of these fluctuations.
However, exchange rate fluctuations might have a material
adverse effect on Cymer's results of operations or financial
condition. In the future, Cymer might need to sell its
products in other currencies, which would make the
management of currency fluctuations more difficult and
expose Cymer to greater risks in this regard.*
Foreign Regulations
Numerous foreign government standards and regulations
apply to Cymer's products. These standards and regulations
are continually being amended. Although Cymer endeavors to
meet foreign technical and regulatory standards, Cymer's
products might not continue to comply with foreign
government standards and regulations, or changes thereto. It
might not be cost effective for Cymer to redesign its
products to comply with such standards and regulations. The
inability of Cymer to design or redesign products to comply
with foreign standards could have a material adverse effect
on Cymer'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 Cymer's manufacturing process and on the
facility leased by Cymer. Cymer believes that its activities
conform to present governmental regulations applicable to
its operations and its current facilities. These
regulations include those related to environmental, land use,
public utility utilization and fire code matters. Such governmental
<PAGE>
regulations might in the future impose the need for additional
capital equipment or other process requirements upon Cymer.
They might also restrict Cymer's ability to expand its operations.
The (1) adoption of such measures, or (2) failure by Cymer to
comply with applicable environmental and land use regulations or to
restrict the discharge of hazardous substances, could subject Cymer to
future liability or could cause its manufacturing operations
to be curtailed or suspended.
Risks of Product Liability Claims
Cymer 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. Cymer might experience
material product liability losses in the future. Cymer
maintains insurance against product liability claims.
However, such coverage might not continue to be available on
terms acceptable to Cymer. Such coverage also might not be
adequate for liabilities actually incurred. Further, in the
event that any of Cymer's products prove to be defective,
Cymer may need to recall or redesign such products. A
successful claim brought against Cymer in excess of
available insurance coverage, or any claim or product recall
that results in significant adverse publicity against Cymer,
could have a material adverse effect on Cymer's business,
financial condition and results of operations.
Possible Price Volatility of Common Stock
The following factors may significantly affect the
market price of Cymer's Common Stock:
* actual or anticipated fluctuations in Cymer's operating
results,
* announcements of technological innovations,
* new products or new contracts by Cymer 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. Such
fluctuations have in some cases been unrelated to the
operating performance of these companies. Severe price
fluctuations in a company's stock have frequently been
followed by securities litigation. Cymer is currently in
the process of defending such an action (see - Legal
Matters). Such litigation can result in substantial costs
and a diversion of management's attention and resources.
Legal Matters
Cymer 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 Cymer are also named as
defendants. The plaintiffs purport to represent a class of
all persons who purchased Cymer's Common Stock between April
24, 1997 and September 26, 1997 (the "Class Period"). The
complaints allege claims under the federal securities laws.
The plaintiffs allege that Cymer 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 complaints have been
consolidated into a single action and a class representative
has been appointed by the court. A consolidated amended
complaint is due to be filed in early August, 1999.
Discovery has not yet commenced. Cymer believes that it has
good defenses to the claims alleged in the lawsuits and will
defend itself vigorously against these actions. The defense
of these actions may cause some disruption in Cymer's
operations and may from time to time distract management
from day-to-day operations. The ultimate outcome of these
actions cannot be presently
<PAGE>
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 Cymer'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 Cymer'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. Such shares of Preferred Stock may have 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 Board of Directors could use
the issuance of Preferred Stock or of rights to purchase
Preferred Stock to discourage an unsolicited acquisition
proposal.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Foreign Currency Risk
Cymer conducts business in several international
currencies through its worldwide operations. Due to the
large volume of business Cymer manages in Japan, the
Japanese operation poses the greatest foreign currency risk.
Cymer uses financial instruments, principally forward
exchange contracts, in Japan to manage its foreign currency
exposures. Cymer does not enter into forward exchange
contracts for trading purposes.
Cymer enters into foreign currency exchange contracts
in order to reduce the impact of currency fluctuations
related to purchases of Cymer's inventories by Cymer Japan
for resale under firm third-party sales commitments. Net
gains or losses are recorded on the date the inventories are
received by Cymer Japan (the transaction date) and are
included in cost of product sales in the consolidated
statements of income as the related sale is consummated.
Amounts due from/to the bank on contracts not settled as of
the transaction date are recorded as foreign exchange
contracts receivable/payable in the consolidated balance
sheets.
At June 30, 1999, Cymer had outstanding forward foreign
exchange contracts to buy US$33.6 million for 4.0 billion
yen under foreign currency exchange facilities with contract
rates ranging from 114.95 yen to 144.05 yen per US$ and
various expiration dates through April, 2000.
Investment and Debt Risk
Cymer maintains an investment portfolio consisting
primarily of government and corporate fixed income
securities, certificates of deposit and commercial paper.
While it is Cymer's general intent to hold such securities
until maturity, management will occasionally sell particular
securities for cash flow purposes. Therefore, Cymer's
investments are classified as available-for-sale and are
carried on the balance sheet at fair value. Due to the
conservative nature of the investment portfolio, a sudden
change in interest rates would not have a material effect on
the value of the portfolio.
In August 1997, Cymer issued $172.5 million aggregate
principal amount of Step-Up Convertible Subordinated Notes
due August 6, 2004, with interest payable semi-annually
February 6 and August 6, commencing February 6, 1998.
Interest on the notes is stated at 3 1/2% per annum from
August 6, 1997 through August 5, 2000 and at 7 1/4% per annum
from August 6, 2000 to maturity or earlier redemption,
representing a yield to maturity accrued at approximately
5.47%. The Notes are convertible at the option of the
holder into shares of Common Stock of
<PAGE>
Cymer at any time on or after November 5, 1997 and prior
to redemption or maturity, at a conversion rate of 21.2766 shares
per $1,000 principal amount of Notes, subject to adjustment under
certain conditions. Cymer cannot redeem the Notes prior to August 9,
2000. Thereafter, Cymer can redeem the Notes from time to time, in
whole or in part, at specified redemption prices. The Notes are
unsecured and subordinated to all existing and future senior
indebtedness of Cymer. The indenture governing the Notes does
not restrict the incurrence of senior indebtedness or other indebtedness
by Cymer. These Notes are recorded at face value on the
balance sheets. The fair value of such debt, based on
quoted market prices at June 30, 1999 was $157.8 million.
As of December 31, 1998 and June 30, 1999, $172.5 million in
Convertible Subordinated Notes was outstanding.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
Cymer held its Annual Meeting of Stockholders on
May 20, 1999. Out of 27,633,628 shares of common
stock entitled to vote at such meeting, there were
present in person or by proxy 21,417,009 shares.
At the Annual Meeting, the stockholders of Cymer
approved the following matters:
(a) The election of Robert P. Akins, Richard P. Abraham,
Kenneth M. Deemer, Peter J. Simone, Gerald F. Taylor and Jon
D. Tompkins as directors of Cymer for the ensuing year and
until their successors are elected. The vote for the
nominated directors was as follows:
Robert P. Akins, 21,168,058 votes cast for and
248,951 votes withheld; Richard P. Abraham,
21,186,013 votes cast for and 230,996 votes
withheld; Kenneth M. Deemer, 21,163,741 votes
cast for and 253,268 votes withheld; Peter J.
Simone, 21,166,376 votes cast for and 250,633
votes withheld; Gerald F. Taylor, 20,787,973
votes cast for and 629,036 votes withheld; Jon
D. Tompkins, 21,194,958 votes cast for and
222,051 votes withheld;
(b) Approval of a 1,250,000 share increase in shares
issuable under the 1996 Stock Option Plan. 13,409,090 votes
were cast for approval; 7,856,829 votes were cast against,
and 151,090 votes abstained, and 6,216,619 Broker Non-Votes.
(c) Ratification of the appointment of Deloitte & Touche
LLP as the independent auditors of Cymer for the year ending
December 31, 1999. 21,335,705 votes were cast for approval;
45,179 votes were cast against and 36,125 votes abstained.
ITEM 5. Other Information
On July 23, 1999, Gerald F. Taylor resigned from
Cymer's Board of Directors. Mr. Taylor's
resignation was mutually agreed upon by Mr. Taylor
and Cymer to avoid any potential future conflicts
in the area of post-optical lithography as Mr.
Taylor is continuing his senior advisor
affiliation with Applied Materials.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
21.1 Subsidiaries of Registrant
27.1 Financial Data Schedule (submitted for SEC use only)
(b) Reports on Forms 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
CYMER, INC.
(Registrant)
Date: July 30, 1999 By: /s/ WILLIAM A. ANGUS, III
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE>
Subsidiaries of Registrant Jurisdiction of Incorporation
Cymer B.V. Netherlands
Cymer International, Ltd. Barbados
Cymer Japan, Inc. Japan
Cymer Korea, Inc. Korea
Cymer Services, Inc. Nevada
Cymer Singapore Pte Ltd. Singapore
Cymer Southeast Asia, Ltd. Taiwan
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