SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the Fiscal Year Ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the transition period from ______________________ to
_______________________
Commission File Number 0-21321
CYMER, INC.
(Exact name of registrant as specified in its charter)
Nevada 33-0175463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16750 Via Del Campo Court, San Diego, CA 92127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (619) 451-7300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each Exchange
Title of each class on which registered
Common Stock, $.001 par value Nasdaq National Market
Preferred Share Purchase Rights Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of $23 5/8 for shares of the
registrant's Common Stock on March 15, 1999 as reported on the Nasdaq
National Market, was approximately $621,659,391. In calculating such
aggregate market value, shares of Common Stock owned of record or beneficially
by officers, directors, and persons known to the registrant to own more than
five percent of the registrant's voting securities (other than such persons
of whom the Company became aware only through the filing of a Schedule 13G
filed with the Securities and Exchange Commission) were excluded because such
persons may be deemed to be affiliates. The registrant disclaims the existence
of control or any admission thereof for any other purpose.
Number of shares of Common Stock outstanding as of March 15, 1999: 27,479,312.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in Parts I, II,
III and IV of this Annual Report on Form 10-K: portions of registrant's
proxy statement for its annual meeting of stockholders to be held on May 20,
1999 (Part III).
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CYMER, INC.
1998 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I 1
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security-Holders 11
PART II 12
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III 31
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management 31
Item 13. Certain Relationships and Related Transactions 31
PART IV 32
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 32
CYMER is a registered trademark of Cymer, Inc.
<PAGE>
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 10-K, INCLUDING "RISK FACTORS"
BEGINNING ON PAGE 20 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.
PART I
Item 1. Business
General
Cymer is the world's leading supplier of excimer laser illumination
sources, the essential light source for deep ultraviolet ("DUV")
photolithography systems used in the manufacture of semiconductors. DUV
lithography is a key enabling technology that has allowed the semiconductor
industry to meet the exacting specifications and manufacturing requirements
for volume production of today's most advanced semiconductor devices. Cymer's
lasers are incorporated into step-and-repeat and step-and-scan photolithography
systems for use in the manufacture of semiconductors with critical feature sizes
below 0.35 microns. Cymer believes that its excimer lasers constitute a
substantial majority of all excimer lasers incorporated in DUV photolithography
tools. Cymer's customers include all five manufacturers of DUV
photolithography systems: ASM Lithography, Canon, Nikon, SVG Lithography and
Ultratech Stepper. Photolithography systems incorporating Cymer's excimer
lasers have been purchased by each of the world's 20 largest semiconductor
manufacturers: AMD, Fujitsu, Hitachi, Hyundai, IBM, Intel, LG Semicon, Lucent,
Micron, Motorola, NEC, Philips, Samsung, SGS-Thomson, Siemens, Texas
Instruments, Toshiba, TSMC, UMC, and Winbond.
Products
Cymer's products consist of photolithography lasers, industrial
high power lasers and replacement parts.
Photolithography Laser Products
Cymer's photolithography lasers produce narrow bandwidth pulses of
short wavelength light. The lasers permit very fine feature resolution and
high throughput. Cymer has designed its lasers to be highly reliable, easy
to install and compatible with existing semiconductor manufacturing processes.
5000 Series - The 5000 Series lasers are 1000Hz solid state pulse power
krypton flouride (KrF) 248nm excimer lasers engineered using modular
construction. Enabling higher device yields by delivering improved energy
stability, they are designed specifically for use in manufacturing
semiconductors with 0.25um and smaller design rule features. This series
includes three models:
ELS-5000 - Providing 10W of output power, this KrF laser is used
with optical designs requiring bandwidths less than 0.8pm, in stepper and
scanner applications.
EX-5000 - With 15W of output power, this model is used for scanner
applications with
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catadioptric lens designs.
ELS-5010 - Designed for the next generation of steppers and scanners
with numerical apertures as high as 0.7. The ELS-5010 provides 10W of
output power, controls bandwidth to -/<2.0pm, 95% energy integral, and
integrated energy stability to <+/-0.6% in a 40 pulse window.
6000 Series - The ELS-6000 is a 2000Hz repetition rate, KrF 248nm excimer
laser enabling 0.18um and below integrated circuit (IC) production. This laser
addresses next-generation lithography applications with 0.7 numerical aperture
lens design. The ELS-6000 provides 20 watts of output power, controls
bandwidth to -/<2.0pm, 95% energy integral, and integrated energy stability to
<+/-0.5% in a 32 pulse window. The higher repetition provides better dose
control in stepper applications, and enables improved exposure uniformity in
scanner applications and significant improvement in wafer throughput for both
stepper and scanner lithography tools.
Cymer's lasers incorporate advanced software control and diagnostic
systems. The control system provides users with on-line monitoring of laser
operating conditions, with approximately 129 diagnostic readings (including
flow rate, temperatures, pressures and light quality), that are automatically
monitored by the photolithography tool's control system. Additionally,
approximately 262 configurable parameters can be adjusted to optimize the
laser's performance for each customer's system. A portable computer attached
to the laser logs this data, automatically providing critical information
about performance and reliability. The lasers are also designed for
easy serviceability, with most major modules and components articulated
for easy swing-out or roll-out motion to facilitate inspection and replacement.
Cymer continues to develop, and offer for sale to its customers,
its next generation argon flouride (ArF) excimer laser. The ArF laser
incorporates the advanced technological features and modular design of the
5000 series lasers providing power output of 5 watts of 193nm wavelength light.
Cymer believes its ArF laser will be capable of producing critical feature sizes
below 0.10 microns.*
Industrial High Power Laser Products
Cymer's HPL-100K/110K series KrF excimer lasers are designed to meet
the rigors of high duty cycle industrial usage, such as microdrilling,
micromachining and annealing applications. The laser operates at a
200 to 250Hz pulse repetition rate and provides average power output of
100 watts for the HPL-100K and 110 watts for the HPL-110K. The pulse
repetition rate and high power makes these lasers well suited for
micro-fabrication processes. Cymer is currently focusing its development
and marketing efforts on its photolithography laser products, and Cymer
expects minimal revenues from industrial laser products in 1999.*
Replacement Parts
Certain components and subassemblies included in Cymer's lasers
require replacement or refurbishment following continued operation. For
example, the discharge chamber of Cymer's lasers has an expected life of
approximately three to five billion pulses, depending on the model. Cymer
estimates that a laser used in a semiconductor production environment will
require one to two replacement chambers per year. Similarly, certain
optical components of the laser deteriorate with continued exposure to
DUV light and require periodic replacement. Cymer provides these and other
spare and replacement parts for its photolithography lasers as needed by its
customers. On a limited basis, Cymer also refurbishes and resells complete
laser systems.
<PAGE>
Customers and End Users
Cymer sells its photolithography laser products to each of the five
manufacturers of DUV photolithography tools:
ASM Lithography Nikon Ultratech Stepper
Canon SVG Lithography
Cymer believes that maintaining and strengthening customer relationships
will play an important role in maintaining its leading position in the
photolithography market. Cymer works closely with its customers to integrate
Cymer's products into their photolithography tools and is collaborating with
certain of its customers on advanced technology developments under jointly
funded programs. Sales to ASM Lithography, Canon and Nikon accounted
for 37%, 20% and 31%, respectively, of total revenue in 1998.
End users of Cymer's lasers include the world's 20 largest semiconductor
manufacturers. The following semiconductor manufacturers have purchased one
or more DUV photolithography tools incorporating Cymer's lasers:
United States Japan Taiwan/Southeast Asia
Advanced Micro Devices ASET Chartered Semiconductor
Cypress Epson ERSO
Digital Equipment Corporation Fujitsu HNS
Dominion Semiconductor Hitachi Macronix
Hewlett Packard KTI Mosel
IBM Matsushita Nan-Ya
Integrated Device Technology Mitsubishi Electric ProMOS
Intel NEC Tech Semiconductor
LSI NTT TSMC
Lucent/Cirent Oki Electric UMC
Micron Technology Rohm USC
Micrus Sanyo USIC
Motorola Sharp Vanguard International
National Semiconductor Sony Winbond
Rockwell Toshiba WSMC
SEMATECH** Yamaha
Texas Instruments
VLSI
White Oak
Korea Europe
Anam-TI C-NET
ETRI IMEC
Hyundai LETI
LG Semiconductor Philips
Samsung SGS THOMSON
Siemens
** A semiconductor industry consortium.
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Backlog
Cymer schedules production of lasers based upon order backlog and
informal customer forecasts. Cymer includes in backlog only those orders
to which a purchase order number has been assigned by the customer and for
which delivery has been specified within 12 months. Because customers may
cancel or delay orders with little or no penalty, Cymer's backlog as of any
particular date may not be a reliable indicator of actual sales for any
succeeding period. At December 31, 1998, Cymer had a backlog of approximately
$37.3 million, compared with a backlog of $108.7 million at December 31, 1997.
Manufacturing
Cymer's manufacturing activities consist of material management, assembly,
integration and testing. These activities are performed in a 134,000 square
foot facility in San Diego, California that includes approximately 32,000
square feet of class 1000 clean room manufacturing and test space. In order
to focus its own resources, capitalize on the expertise of its key suppliers
and respond more efficiently to customer demand, Cymer has outsourced many
of its subassemblies. Cymer's outsourcing strategy is exemplified by the
modular design of Cymer's 5000 and 6000 series lasers, for which substantially
all of the nonproprietary subassemblies have been outsourced. Cymer
believes that the highly outsourced content and manufacturable design of
the 5000 and 6000 series lasers allows for reduced manufacturing cycle times
and increased output per employee.
To meet current and anticipated demand for its products, Cymer must
continue to increase the rate by which it manufactures and tests modules,
spares and replacement parts for its photolithography laser systems.
In order to accomplish this objective, Cymer intends to continue to
provide additional training to manufacturing personnel, improve its assembly
and test processes in order to reduce cycle time, invest in additional
manufacturing tooling and further develop its supplier management and
engineering capabilities.* Cymer is also increasingly relying on outside
suppliers for the manufacture of various components and subassemblies used in
its products and is dependent upon these suppliers to meet Cymer's
manufacturing schedules. The failure by one or more of these suppliers to
supply Cymer on a timely basis with sufficient quantities of components
or subassemblies that perform to Cymer's specifications could affect Cymer's
ability to deliver completed lasers to its customers on schedule.
In addition to the manufacturing capacity at its facilities in San Diego,
California, Cymer has qualified Seiko of Japan as a contract manufacturer of
its photolithography excimer lasers. In order to ensure uniformity of product
for all customers, Cymer maintains control of all work flow design,
manufacturing process, engineering changes and component sourcing decisions.
Cymer manufactures and seals all core technology modules in San Diego. The
agreement expires in 2001, but will automatically renew every two years
thereafter, unless one year's notice to terminate is given by either party.
Seiko began production of lasers for Cymer in the first quarter of 1997.
Certain of the components and subassemblies included in Cymer'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 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
used in the production of Cymer's laser systems in a timely manner from existing
sources. If in the future Cymer is unable to obtain sufficient quantities of
required materials, components or subassemblies, or if such items do not meet
Cymer's quality standards, delays or reductions in product shipments could
occur which could have a material adverse effect on Cymer's business, financial
condition and results of operations.
<PAGE>
Sales and Marketing
Cymer's sales and marketing efforts have been predominately focused on
DUV photolithography tool manufacturers. Cymer markets and sells its
products through its own worldwide direct sales force. Cymer is in the process
of developing product and applications engineering teams to support the
account managers and Cymer's customers. Cymer believes that to facilitate
the sales process it must work closely with and understand the requirements
of semiconductor manufacturers, the end users of Cymer's products. Cymer
visits major semiconductor manufacturers, and their representatives attend
Company-sponsored seminars on advanced excimer photolithography. In Japan,
Cymer sponsors an annual seminar with Seiko in conjunction with SEMICON Japan.
This seminar has attracted representatives of semiconductor manufacturers from
Japan, Korea, the United States and SEMATECH, as well as photolithography tool
manufacturers and other photolithography process suppliers.
Service and Support
Cymer believes its success in the semiconductor photolithography market is
highly dependent upon after-sales support of both the customer and the end
user. Cymer supports its customers with field service, technical service
engineers and training programs, and in some cases provides ongoing on-site
technical support at the customer's manufacturing facility. Prior to
shipment, Cymer's support personnel typically assist the customer in site
preparation and inspection and provide customers with training at Cymer's
facilities or at the customer's location. Customers and end users are
also provided with a comprehensive set of manuals, including operations,
maintenance, service, diagnostic and safety manuals.
Cymer's field engineers and technical support specialists are based at
its San Diego headquarters, and at its field service offices in Santa Clara,
Austin, and near Boston. Support in Europe, Japan, Korea, Singapore and
Southeast Asia are provided by Cymer's subsidiaries located within those
regions. As part of its customer service, Cymer maintains an inventory of spare
parts at each of its service facilities. As Cymer's installed base grows so
does the demand for replacement parts to satisfy worldwide support
requirements for direct customers' support organizations, as well as Cymer's
own logistics organization. In order to meet this demand, Cymer must continue
to expand its production of component modules which are required for
new systems as well as for support and warranty requirements.
Cymer believes that the need to provide fast and responsive service to
the semiconductor manufacturers using its lasers is critical and that it
will not be able to depend solely on its customers to provide this specialized
service. Therefore, Cymer believes it is essential to establish, through
trained third party sources or through its own personnel, a rapid response
capability to service its customers throughout the world. Accordingly,
Cymer intends to continue its expansion of the direct support infrastructure
in Japan, Korea, Taiwan and Southeast Asia, Singapore and Europe.* The
establishment of these activities will entail recruiting and training qualified
personnel or identifying qualified independent firms and building effective
and highly trained organizations that can provide service to customers
in various countries in their assigned regions. There can be no assurance
that Cymer will be able to attract qualified personnel to establish these
operations successfully or that the costs of such operations will not be
excessive. A failure to implement this plan effectively could have a
material adverse effect on Cymer's business, financial condition and results
of operations.
Cymer generally warrants its products against defects in design,
materials and workmanship for the earlier to occur of between 17 and 24
months from the date of shipment or 12 months after acceptance by the end user.
<PAGE>
Research and Development
The semiconductor industry is subject to rapid technological change and
new product introductions and enhancements. Cymer believes that continued and
timely development and introduction of new and enhanced laser products are
essential for Cymer to maintain its competitive position. Cymer intends to
continue to develop its technology and innovative products to meet customer
demands.* Current projects include enhancements to Cymer's KrF and ArF
lasers and the development of the next generation of photolithography lasers.
Other research and development efforts are currently focused on reducing
manufacturing costs, lowering the cost of laser operation, enhancing laser
performance and developing new features for existing lasers.
Cymer has historically devoted a significant portion of its financial
resources to research and development programs and expects to continue to
allocate significant resources to these efforts.* Research and development
expenses for 1996, 1997 and 1998 were approximately $11.7 million, $25.0
million and $30.2 million, respectively.
In addition to funding its own research and development projects,
Cymer has pursued a strategy of securing research and development contracts
from customers, government agencies and SEMATECH in order to develop advanced
technology for current and future laser systems based on Cymer's core
technology. Revenues generated from research and development contracts
amounted to approximately $2.5 million, $2.5 million, and $313,000 during
1996, 1997, and 1998, respectively.
Intellectual Property Rights
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 and as of
December 31, 1998, Cymer owned 36 United States patents covering certain aspects
of technology associated with excimer lasers which expire from January 2008 to
December 2018 and had applied for 56 additional patents in the United States,
4 of which had been allowed. As of December 31, 1998, Cymer also owned 9
foreign patents and had filed 147 patent applications in various foreign
countries. There can be no assurance that Cymer's pending patent
applications or any future applications will be approved, that any issued
patents will provide it with competitive advantages or will not be challenged
by third parties, or that the patents of others will not have an adverse effect
on 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 patents and patent applications
until 1993 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 Cymer will adequately protect Cymer's proprietary information.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate Cymer's products or, if patents are issued
to Cymer, design around the patents issued to Cymer.
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 that could
result in substantial cost to Cymer. No assurance can be given that any
such patent application will not have priority over patent applications
filed by Cymer.
Cymer 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
<PAGE>
substantially equivalent proprietary information and techniques or otherwise
gain access to Cymer's trade secrets or disclose such technology or that
Cymer can meaningfully protect its trade secrets.
Cymer 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 in connection with the
design and development of specific products. 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, there can be no assurance that disputes over
the ownership or rights to use or market such intellectual property will not
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.
Cymer has in the past been, and may in the future be, notified
that it may be infringing intellectual property rights possessed by third
parties. Cymer's Japanese manufacturing partner, Seiko, was in 1996
notified by Komatsu Ltd., ("Komatsu"), one of Cymer's competitors, that
certain aspects of Cymer's lasers might infringe three patents (the
"Komatsu Patents") that had been issued to Komatsu in Japan, and that
Komatsu intended to enforce its rights under the Komatsu Patents against
Seiko if Seiko continued to engage in manufacturing activities for
Cymer. In connection with its manufacturing agreement with Seiko, Cymer
has agreed to indemnify Seiko against such claims under certain circumstances.
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 pending applications and additional patents. Cymer, in consultation with
Japanese patent counsel, has initiated oppositions to the Komatsu Patents
and the applications in the Japanese Patent Office. Cymer has been advised
by its patent counsel in this matter, which is relying in part on the opinion
of Cymer's Japanese patent counsel, that in the opinion of such firm Cymer's
products do not infringe any valid claims of the Komatsu Patents. However,
there can be no assurance that litigation will not ensue with respect to
these claims, that Cymer 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 Cymer's management and technical personnel which
could have a material adverse effect on Cymer'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 Cymer'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 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. There can be no assurance, however,
that a license will be available on reasonable terms, if 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.
Cymer has registered the trademark CYMER in the United States and
certain other countries and is seeking additional registrations in certain
countries. In Japan, Cymer'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. Cymer is seeking a
partial nullification of that registration with respect to laser devices and
related components and does not believe that the holder of that trademark
is engaged in any business similar to that of Cymer. For this reason, Cymer
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 that company's trademark.* There can be no assurance
that Cymer 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,
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would require Cymer to cease use of the mark and, potentially, pay damages.
Effective August 1, 1989 and lasting until the expiration of the licensed
patents, Cymer entered into an agreement for a nonexclusive worldwide license
to use or sell certain patented laser technology with Patlex Corp., a patent
holding company ("Patlex"). Under the terms of the agreement, Cymer is required
to pay royalties ranging from 0.25% to 5.0% of gross sales and leases of
its lasers. Beginning in 1997, the royalties are subject to an annual cap
of $100,000 per year. During 1996, 1997 and 1998, royalty fees totaled
$226,000, $49,000, and $100,000, respectively.
Cymer has granted to Seiko the exclusive right in Japan and the non-
exclusive right outside of Japan to manufacture and sell Cymer's industrial
high power laser and subsequent enhancements thereto. Cymer has also granted
Seiko a right of first refusal to fund Cymer's development of, and receive a
license to, new industrial laser technologies not developed with funding
from other parties. In exchange for these rights, Cymer received up-front
license fees of $3.0 million. Cymer is also entitled to royalties of 5% on
related product sales through September 1999, after which the royalty rate is
subject to renegotiation. The license agreement also provides that product
sales between Cymer and Seiko will be at a 15% discount from the
respective companies' list prices. The agreement terminates in August 2012.
Competition
Cymer believes that the principal elements of competition in Cymer's
markets are the technical performance characteristics of the excimer laser
products; the cost of ownership of the system, which is based on price,
operating cost and productivity; customer service and support; and product
availability. Cymer believes that it competes favorably with respect to
these factors.
Cymer currently has three competitors in the market for excimer laser
systems for photolithography applications, Lambda-Physik ("Lambda-Physik"),
a German-based subsidiary of Coherent, Inc., Komatsu, Ltd. ("Komatsu") and
Ushio, both located in Japan. All of these companies are larger than Cymer,
have access to greater financial, technical and other resources and are
located in closer proximity to Cymer's customers. Although Cymer believes
that these competitors are not yet supplying excimer lasers in volume for
photolithography application, Cymer believes that Lambda-Physik and Komatsu
are aggressively seeking to gain larger positions in the 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. If competitors successfully qualify their lasers for use with
chipmakers, Cymer could lose market share and its growth could slow or
even decline. In the future, Cymer will likely experience competition
from post-optical technologies, such as EUV, and scalpel processes.
To remain competitive, Cymer believes that it will be required to manufacture
and deliver products to customers on a timely basis and without significant
defects and that it will also be required to maintain a high level of
investment in research and development and sales and marketing. There can
be no assurance that Cymer 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 Cymer
will remain competitive.
A failure to remain competitive would have a material adverse effect on
Cymer's business, financial condition and results of operations. See "Risk
Factors-Competition."
Employees
On December 31, 1998, there were 703 persons employed by Cymer,
including 63 in Japan. No employees are currently covered by collective
bargaining agreements or are members of any labor
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organization as far as Cymer is aware. Cymer has not experienced any work
stoppages and believes that its employee relations are good.
Executive Officers
Set forth below is certain information regarding the executive officers
of Cymer and their ages as of December 31, 1998.
Name Age Position
Robert P. Akins 47 Chairman of the Board, Chief Executive
Officer and President
William A. Angus, III 52 Senior Vice President, Chief Financial
Officer and Secretary
Pascal Didier 40 Senior Vice President, Worldwide
Customer Operations
Edward "Ted" Holtaway 43 Senior Vice President, Process Quality
G. Scott Scholler 48 Senior Vice President, Operations
Robert P. Akins, a co-founder of Cymer, has served as its President,
Chief Executive Officer and Chairman of the Board since its inception in
January 1986. From 1980 to 1985, Mr. Akins was a Senior Program Manager
for HLX, Inc., a manufacturer of laser and defense systems, where he was
responsible for managing the development of compact excimer lasers for
military communications applications and an excimer laser trigger for the
particle beam fusion accelerator at Sandia National Laboratories. Mr. Akins
received a B.S. in Physics and a B.A. in Literature in 1974, and a Ph.D. in
Applied Physics in 1983, from the University of California, San Diego.
William A. Angus, III has served as Senior Vice President and Chief
Financial Officer since February 1996 and Secretary of Cymer since July 1990.
From July 1990 to February 1996, Mr. Angus served as Vice President of
Finance and Administration. From April 1988 to June 1990, Mr. Angus was
Executive Vice President and Chief Operating Officer, and from May 1985 to
April 1988, Chief Financial Officer, of Avant-Garde Computing Inc., a
manufacturer of data communications network management systems. Mr. Angus
graduated from the Wharton School of the University of Pennsylvania with a
B.S. in Economics in 1968.
Pascal Didier has served as Senior Vice President, Worldwide Customer
Operations since October 1997. From July 1997 to October 1997, he served
as Vice President, Marketing and Sales. From June 1996 to July 1997, Mr.
Didier was Vice President of Worldwide Sales & Field Operations, and from
June 1995 to June 1996, Vice President of Asia/Pacific of GaSonics
International, a supplier of capital equipment for photoresist removal
and isotropic etching for the semiconductor industry. From 1983 to 1995,
Mr. Didier served in various marketing and management positions at
Megatest Corporation, a supplier of test equipment for the semiconductor
industry. From June 1993 to June 1995, he was Megatest's Vice President of
International Operations, from June 1990 to June 1993, Director of International
Operations, from July 1989 to June 1990, a Software Marketing Manager and
from 1983 to 1989, European Technical Manager. Mr. Didier received a
Bacalaureate in Business and Administration in 1978 from College de Paris
and a Bacalaureate Superieur in 1979 from Electronique Institut Universitaire
de Lyon.
Edward "Ted" Holtaway has served as Senior Vice President, Process
Quality since July 1998. He joined Cymer in April 1998 as Vice President
of Process Quality. Prior to that, Mr. Holtaway spent 13 years with San
Diego-based Brooktree Corp., a fabless semiconductor company acquired by
Rockwell Semiconductor Systems in September of 1996. During his tenure at
Brooktree, Mr. Holtaway's executive posts included: Vice President of
Corporate Quality from 1989 to 1995; Vice President and Managing Director of
Brooktree's Singapore operations from 1995 to 1996; and most recently,
Director of Rockwell's San Diego operations from 1997 to 1998. Mr. Holtaway
received a B.S. in Electrical Engineering from the New Jersey Institute of
Technology, an M.S. in Electrical Engineering from the
<PAGE>
Polytechnic Institute of New York, and an M.B.A. from San Diego State
University.
G. Scott Scholler has served as Senior Vice President, Operations
of Cymer since March 1996. From June 1995 to February 1996, Mr. Scholler
served as a consultant in product development and program management for
Electro Scientific Industries, a manufacturer of semiconductor capital
equipment. From March 1994 until October 1995, Mr. Scholler was a co-founder
and President of Black Rose Ltd., a developer of computer telephone software
for automated commerce applications. From August 1992 to September 1994,
he was Senior Vice President of Operations for Whittaker Communications,
Inc., a wholly-owned subsidiary of Whittaker Corporation and a
manufacturer of high-performance multimedia servers. From October 1988
to August 1992, Mr. Scholler served as Vice President of Operations for Etec
Systems, Inc., a manufacturer of semiconductor capital equipment and as
General Manager of its Laser Lithography subsidiary. From 1986 to 1988,
Mr. Scholler was Director of Engineering, and from 1983 to 1986, Director of
Manufacturing, of the Etch Products Division of Applied Materials Inc., a
supplier of equipment to the semiconductor industry. Mr. Scholler received
a B.S. in Nuclear Engineering from the United States Military Academy at West
Point in 1972 and an M.S. in Research and Development Management in 1978
from the University of Southern California.
Executive officers serve at the discretion of the Board of Directors.
There are no family relationships between any of the directors and executive
officers of Cymer.
Item 2. Properties
Cymer's corporate headquarters, manufacturing, engineering and R&D
facilities are located in San Diego, California housed in multiple buildings
totaling approximately 253,000 square feet. All building facilities are
leased by Cymer under leases expiring between August 2002 and January 2010.
In February 1999, Cymer purchased 2 lots of land, adjacent to their current
facilities, which total approximately 5.98 acres. For use as field service
offices, Cymer also leases a 400 square foot facility near Boston,
Massachusetts under a lease expiring August 1998, a 1,857 square foot facility
in Santa Clara, California under a lease expiring September 2000, and a 1,627
square foot facility in Austin, Texas under a lease expiring September 2000.
For use as field service and sales offices, Cymer leases 13,831 square feet
of facilities in Ichikawa, Japan under a renewable two year lease expiring in
June 2000, 6,390 square feet in Osaka Japan under a lease expiring in
December 1999, 4,184 square feet in Pundang, Korea under a lease expiring
August 1999, 1,754 square feet in Hsin Chu, Taiwan under a lease expiring
June 1999 and 1,866 square feet in United Square, Singapore under a lease
expiring in May 2000. Cymer intends to add additional field service offices
as necessary to service and support its customers.
Item 3. Legal Proceedings
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
representations 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. No lead plaintiff has yet been appointed and a
consolidated complaint has not yet been filed. 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 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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the security holders of Cymer
during the fourth quarter of the fiscal year ended December 31, 1998.
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Cymer's Common Stock has been publicly traded on the Nasdaq National
Market under the symbol "CYMI" since September 19, 1996. Cymer's initial
public offering price was $4.75 per share. The following table sets forth,
for the periods indicated, the high and low closing sales prices of Cymer's
Common Stock as reported by the Nasdaq National Market. All per share prices
reflect a 2-for-1 stock split effected in August 1997.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year ended December 31, 1996
Third quarter (beginning Sept. 19, 1996) $8 7/8 $6 13/16
Fourth quarter $24 1/16 $7 7/8
Year ended December 31, 1997
First quarter $27 3/16 $15 1/2
Second quarter $29 $17 11/16
Third quarter $48 3/4 $24 3/8
Fourth quarter $30 7/8 $14 15/16
Year ended December 31, 1998
First quarter $22 9/16 $14 7/8
Second quarter $27 1/2 $14 7/8
Third quarter $18 5/8 $8 1/2
Fourth quarter $19 1/4 $6 1/2
The closing sales price of Cymer's Common Stock on the Nasdaq National
Market was $23 5/8 on March 15, 1999 and there were 469 registered holders of
record as of that date.
Cymer has never declared or paid cash dividends on its Common Stock and
currently does not anticipate paying cash dividends in the forseeable future.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with Cymer's consolidated financial statements and notes thereto
and with Management's Discussion and Analysis of Financial Condition and
Results of Operations, which are included elsewhere in this Annual Report on
Form 10-K. The consolidated statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and the consolidated balance sheet data
at December 31, 1997 and 1998 are derived from, and are qualified by
reference to, the consolidated financial statements included elsewhere in
Annual Reports on Form 10-K and 10-K/A, which have been audited by Deloitte
& Touche LLP. The consolidated statement of operations data for the years
ended December 31, 1994 and 1995, and the consolidated balance sheet data
at December 31, 1994, 1995, and 1996, are derived from consolidated
financial statements not included in this Annual Report on Form 10-K,
which have also been audited by Deloitte & Touche LLP. These historical
results are not necessarily indicative of the results to be expected in the
future.
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996 1997 1998
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Product sales $7,705 $15,576 $62,510 $201,191 $184,828
Other 1,216 3,244 2,485 2,456 313
Total revenues 8,921 18,820 64,995 203,647 185,141
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996 1997 1998
(in thousands, except per share data)
Costs and expenses:
<S> <C> <C> <C> <C> <C>
Cost of product sales 4,797 8,786 35,583 123,654 125,713
Research and development 3,283 6,154 11,742 24,971 30,152
Sales and marketing 1,780 2,353 5,516 11,992 14,528
General and administrative 849 1,181 4,270 8,586 9,487
Total costs and expenses 10,709 18,474 57,111 169,203 179,880
Operating income (loss) (1,788) 346 7,884 34,444 5,261
Other income (expense) - net (199) (241) (183) 112 (3,568)
Income (loss) before income tax
(provision) benefit and
minority interest (1,987) 105 7,701 34,556 1,693
Income tax (provision) benefit (58) (36) (1,191) (8,639) 1,250
Minority interest 141 (420)
Net income (loss) ($2,045) $69 $6,510 $26,058 $2,523
Basic earnings per share (1) $0.33 $0.92 $0.09
Weighted average common shares 19,868 28,212 28,226
Diluted earnings per share (1) $0.29 $0.86 $0.09
Weighted average common and
potential shares outstanding (1) 22,420 30,267 29,566
</TABLE>
<TABLE>
<CAPTION>
December 31,
1994 1995 1996 1997 1998
(in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $2,326 $2,015 $55,405 $51,903 $53,130
Working capital (1,557) 3,845 84,743 202,539 198,645
Total assets 9,172 15,619 129,467 386,119 364,318
Total debt (2) 6,879 4,164 2,217 176,066 175,924
Redeemable convertible
preferred stock 19,290 28,409 - - -
Treasury stock - - - - (24,871)
Stockholders' equity (deficit) (19,752) (21,830) 98,820 125,779 106,531
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing earnings
per share.
(2) Total debt includes indebtedness for convertible subordinated notes,
and capital lease obligations.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth certain items in Cymer's statements of
operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
1996 1997 1998
Revenues:
<S> <C> <C> <C>
Product sales 96.2 % 98.8 % 99.8 %
Other 3.8 1.2 .2
Total revenues 100.0 100.0 100.0
Cost and expenses:
Cost of product sales 54.7 60.7 67.9
Research and development 18.1 12.3 16.3
Sales and marketing 8.5 5.9 7.9
General and administrative 6.6 4.2 5.1
Total costs and expenses 87.9 83.1 97.2
Operating income 12.1 16.9 2.8
Other income (expense) - net (0.3) .1 (1.9)
Income before income tax
(provision) benefit and
minority interest 11.8 17.0 0.9
Income tax (provision) benefit (1.8) (4.3) 0.7
Minority interest - .1 (0.2)
Net income 10.0 % 12.8 % 1.4 %
Gross margin on product sales 43.1 % 38.5 % 32.0 %
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenues. Cymer's total revenues consist of product sales, which include
sales of laser systems and spare parts and service and training, and other
revenues, which primarily include revenue from funded development activities
performed for customers and for SEMATECH. Revenue from product sales is
generally recognized at the time of shipment, unless customer agreements
contain inspection or other conditions, in which case revenue is recognized
at the time such conditions are satisfied. Funded development contracts are
accounted for on the percentage-of-completion method based on the relationship
of costs incurred to total estimated costs, after giving effect to estimates
for costs to complete the development project.
Product sales decreased 8% from $201.2 million in 1997 to $184.8 million
in 1998, primarily due to lower sales of DUV photolithography laser systems.
A total of 460 laser systems were sold in 1997 compared to 341 laser
systems in 1998. The decrease was primarily attributable to the overall market
decline in the semiconductor industry during 1998. Cymer's installed base of
lasers continued to rise in 1998 supporting Cymer's belief that revenues
from spares, replacement parts and services will become
<PAGE>
an increasingly larger component of product sales.* Funded development
revenues declined from $2.5 million for 1997 to $313,000 for 1998, primarily
due to completion of larger laser research projects sponsored by SEMATECH.
Cymer expects that funded development revenues will continue to decrease
as a percentage of total revenues as Cymer focuses on product sales.*
Cymer's sales are generated primarily by shipments to customers in
Japan, the Netherlands, and the United States. Approximately 81%, 89%, and
88% of the Company's sales in 1996, 1997, and 1998, 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 61%,
65%, and 48% of revenues in 1996, 1997, and 1998, 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 on the books 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 rose 2% from $123.7 million in 1997 to $125.7 million
in 1998 primarily due to additional inventory obsolescence reserves recognized
during the fourth quarter of 1998 offset by lower sales volume in 1998.
The gross margin on these sales decreased from 38.5% in 1997 to 32.0%
in 1998 primarily due to a $5.8 million obsolete inventory reserve
associated with the accelerated customer acceptance of the 5010 series
lasers over the 5000 series lasers, and an increase in foreign field support
overhead costs as Cymer continued to build its worldwide field support
infrastructure in Japan, Singapore, Europe, Korea and Southeast Asia 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 income as the
related sales are recognized. Cymer recognized net gains on such contracts of
$5.8 million and $4.5 million for the years ended December 31, 1997
and 1998, 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 engineering related costs. Research and
development expenses increased 21% from $25.0 million in 1997 to $30.2
million in 1998, due primarily to increased product support efforts associated
with the release of Cymer's 5010 series lasers, the ongoing development of
the 6000 series laser, and the continued development of new laser products. As
a percentage of total revenues, such expenses rose from 12.3% to 16.3% in
the respective periods due to the decline in Cymer's revenues as well as the
increase in development expenditures throughout 1998. Cymer expects that
research and development expenses will increase in absolute dollars and as
a percentage of revenues in 1999 as Cymer continues to invest in the
development of new products and product enhancements.*
Sales and Marketing. Sales and marketing expenses include the expenses of
the sales, marketing and customer support staffs and other marketing expenses.
Sales and marketing expenses increased 21% from $12.0 million in 1997 to $14.5
million in 1998, due primarily to increased product management and sales
support efforts and marketing infrastructure activities developed over the
period. As a percentage of total revenues, such expenses rose from 5.9%
to 7.9% in the respective periods due to a
<PAGE>
decrease in overall revenues from period to period as well as an increased
focus on building a worldwide sales and marketing team in 1998 and beyond.
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 10% from $8.6 million in 1997 to $9.5
million in 1998, due to ongoing process quality development costs and an
increase in general and administrative support as Cymer's overall level of
business activity increased. As a percentage of total revenues, such expenses
increased from 4.2% to 5.1% in the respective periods.
Other Income (Expense)-net. Net other income (expense) consists primarily
of interest income and expense and foreign currency exchange gains and
losses associated with the fluctuations in the value of the Japanese yen
against the United States dollar. Net other income (expense) decreased
from $112,000 of net other income for 1997 to $3.6 million of net other
expense for 1998, primarily due to the increase in interest income associated
with the investment of excess cash and a foreign exchange gain in 1998
versus a net loss in 1997, offset by a full year of interest expense associated
with the convertible subordinated notes in 1998. Foreign currency
exchange loss totaled $359,000, interest income totaled $5.3 million,
and interest expense totaled $4.8 million for 1997, compared to a foreign
exchange gain of $692,000, interest income of $7.4 million and interest expense
of $11.6 million for 1998.
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.
Provision for Income Taxes. The tax provision of $8.6 million in 1997 was
primarily attributable to the substantial growth in Cymer's pretax income
partially offset by the reduction of the deferred tax asset valuation
allowance carried over from 1996. The tax benefit of $1.3 million reported
in 1998 was primarily attributed to tax credits and permanent differences
between taxable income and book income which resulted in a negative effective
tax rate for the year.
YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenues. Product sales increased 222% from $62.5 million in 1996 to
$201.2 million in 1997, primarily due to increased sales of DUV photolithography
laser systems. A total of 460 laser systems were sold in 1997 compared to
145 laser systems in 1996. Funded development revenues remained constant at
$2.5 million for 1996 and 1997, primarily due to the laser research project
sponsored by SEMATECH.
Cost of Product Sales. Cost of product sales rose 248% from $35.6
million in 1996 to $123.7 million in 1997 due to the increase in sales
volume. The gross margin on these sales decreased from 43.1% in 1996 to
38.5% in 1997 primarily due to the increase in additional specific warranty
reserves of $6.4 million, an increase in field support overhead costs as
Cymer continued to build its worldwide field support infrastructure in order
to provide fast and responsive service to the semiconductor manufacturers,
and one time charges associated with bringing Cymer's new manufacturing
facility more fully on line.
Warranty reserve expenses are included in cost of product sales as the
related sales are reported. For 1997, an additional specific warranty reserve
was expensed to certain lasers previously shipped.
<PAGE>
This additional warranty expense was to incorporate changes in these
lasers to ensure that they meet the current product configuration and
specifications. Cymer took a proactive approach to make the necessary hardware
and software changes to the laser systems as a preventative maintenance
measure to meet performance levels warranted by Cymer. These scheduled
changes were completed in early 1998. The gross margin on product sales prior
to this specific reserve was 41.7% for the period ended December 31, 1997.
Cymer recognized net gains on foreign currency exchange contracts of
$1.9 million and $5.8 million for the years ended December 31, 1996 and 1997,
respectively.
Research and Development. Research and development expenses increased 113%
from $11.7 million in 1996 to $25.0 million in 1997, due primarily to
increased product support efforts associated with the release of Cymer's
5000 series lasers, the hiring of additional technical personnel and
the continued development of new laser products. As a percentage of total
revenues, such expenses declined from 18.1% to 12.3% in the respective
periods due to the growth in Cymer's revenues.
Sales and Marketing. Sales and marketing expenses increased 117% from
$5.5 million in 1996 to $12.0 million in 1997, due primarily to increased
product management and sales support efforts and marketing activities as
more lasers were placed in the field over the period. As a percentage of
total revenues, such expense declined from 8.5% to 5.9% in the respective
periods due to the growth in Cymer's revenues.
General and Administrative. General and administrative expenses increased
101% from $4.3 million in 1996 to $8.6 million in 1997, due to an increase in
general and administrative support as Cymer's sales volume, manufacturing
capacity, employee recruiting requirements and overall level of business
activity increased. As a percentage of total revenues, such expenses
decreased from 6.6% to 4.2% in the respective periods.
Other Income (Expense)-net. Net other income (expense) increased from
$183,000 of net other expense for 1996 to $112,000 of net other income for
1997, primarily due to the increase in interest income associated with the
investment of excess cash, offset by interest expense associated with the
convertible subordinated notes issued in 1997 and a foreign currency exchange
loss for 1997. Foreign currency exchange gains totaled $161,000, interest
income totaled $347,000, and interest expense totaled $691,000 for 1996,
compared to a foreign exchange loss of $359,000, interest income of $5.3
million and interest expense of $4.8 million for 1997.
Provision for Income Taxes. The income tax provision in 1996 was primarily
attributable to the growth in Cymer's pre tax income offset by net operating
loss carryforwards from prior years. The tax provision of $8.6 million in
1997 was primarily attributable to the substantial growth in Cymer's pretax
income partially offset by the reduction of the deferred tax asset valuation
allowance carried over from 1996.
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 December 31, 1998, Cymer had approximately $53.1
million in cash and cash equivalents, $85.6 million in short-term
investments, $23.5 million in long-term investments, $198.6 million in
working capital and $11.6 million in bank debt.
<PAGE>
Net cash used for operating activities was approximately $8.0 million, and
$17.3 million for 1996 and 1997, respectively, whereas net cash was provided
by operating activities of $23.2 million for 1998. The increases in cash used
in operations for the periods ended December 31, 1996 and 1997 were primarily
attributable to increases in accounts receivable and inventory as the working
capital requirements of Cymer continued to increase due to the expansion of
the business during these periods. The net cash provided by operating
activities in 1998 was primarily due to increases in depreciation associated
with the prior year expansion efforts, offset by decreases in accounts
receivable.
Net cash used for investing activities was approximately $22.9 million,
$153.6 million and $5.7 million in 1996, 1997 and 1998. The increase in
cash used for investing activities during the periods ended December 31, 1996,
1997 and 1998 primarily reflects the investment activity of funds received
through Cymer's public offerings in 1996, and through the convertible
subordinated notes offering in 1997 as well as the purchase of computer
equipment, test equipment, research and development tools, manufacturing
process machinery and tenant improvements to the field support organizations
and manufacturing facility in order to accommodate business expansion throughout
the periods.
Cymer's financing activities provided net cash of approximately $83.6
million, and $167.3 million for 1996 and 1997, respectively. In 1996, Cymer
received net proceeds of approximately $79.7 million from its two public
offerings, received net proceeds of approximately $6.1 million from the sale
of Redeemable Convertible Preferred Stock and decreased bank borrowings by
$1.0 million. During the same period, Cymer reduced discounting of commercial
drafts in Japan by approximately $1.2 million. In 1997, Cymer issued $172.5
million in convertible subordinated notes with net costs of $5.2 million
and, in addition, received $2.1 million in net proceeds for the issuance of
common stock and reduced bank debt by $1.8 million. In 1998, Cymer's financing
activities used net cash of approximately $13.5 million primarily due to the
$24.9 million repurchase of treasury stock offset by $10.1 million in bank loans
for the period.
Cymer has available credit arrangements with a bank permitting borrowings of
up to $15.0 million. These borrowings are unsecured and provide for a $15.0
million optional currency revolving line of credit. Cymer has two foreign
currency exchange facilities. Cymer had forward foreign exchange contracts at
December 31, 1998 to buy $33.2 million for 4.2 billion yen. The total
unrecorded deferred loss and discount on these contracts as of December 31,
1998 was approximately $720,000 and $662,000, respectively.
On January 29, 1998, Cymer announced a program to repurchase up to $50.0
million of Cymer's common stock. As of December 31, 1998 Cymer had purchased
2 million shares at a total cost of $24.9 million.
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 the market
acceptance of Cymer's products. 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.*
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
<PAGE>
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 ("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. 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 Y2K problems; (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 Y2K issue, and is approximately 95% 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
Y2K plans and all new software licenses include Y2K statements. Remediation
is 100% complete. The testing of systems and components is approximately
95% complete and is expected to be complete by the end of March, 1999.*
Cymer'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 on Y2K compliance.*
Cymer plans to evaluate 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 Y2K ongoing
action plan.*
Cymer'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.*
Cymer'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. 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 full SEMATECH Y2K
compliance. These tests have been completed; however, no date has been
determined for full deployment of the software upgrade out to the field. Cymer
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, Cymer does not believe that
the Y2K issue will have a material adverse effect on Cymer's consolidated
financial condition and results of operations.* The cost of the
Y2K process is estimated at approximately $250,000 of which approximately
$125,000 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 Y2K 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 Y2K
compliant, (b) the disruption of global transportation channels as
<PAGE>
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.*
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.
<PAGE>
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 the efforts to develop such capability are driving
present demand for its excimer lasers 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 excimer lasers 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 Single Product Line
Cymer's only product line is excimer lasers. 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:
* a shortage of engineers with experience implementing,
utilizing and maintaining DUV photolithography systems that
incorporate excimer laser illumination sources,
* 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.
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
<PAGE>
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 90%, 94%, and 94% of the Cymer's total revenues in
1996, 1997, and 1998, respectively. Individually, sales to ASM
Lithography, Canon, Nikon and SVG Lithography accounted for
approximately 24%, 25%, 39% and 6%, respectively, of total
revenues for 1997, and 37%, 20%, 31% and 6%, respectively, of
total revenues in 1998. 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.
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. Cymer 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.
<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. 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
Pholithography tool manufacturers constitute substantially
all of Cymer's customers. Photolithography tool manufacturers
sell their systems in turn to semiconductor manufacturers.
Current market conditions in the industry could 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
<PAGE>
photolithography tools. However, there can be no assurance that
Cymer 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 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.
Need to Expand 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 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. 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 December 31, 1998,
Cymer owned 36 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
December 2018. As of December 31, 1998, Cymer had also applied
for 56 additional patents in the United States, 4 of which have
been allowed. As of December 31, 1998, Cymer owned 9 foreign
patents and had filed 147 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. And 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 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
<PAGE>
available under United States patent law, any such patents issued
to Cymer might not adequately protect Cymer's proprietary information.
Furthermore, third parties might independently develop similar products,
duplicate Cymer's products or, if 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 three 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 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 pending
applications
<PAGE>
and additional patents. Cymer, in consultation with Japanese
patent counsel, has initiated oppositions to the Komatsu Patents
and the applications in the Japanese Patent Office. However,
litigation might ensue with respect to these claims. 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. In Japan, Cymer'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. Cymer is seeking a
partial nullification of that registration with respect to laser
devices and related components and does not believe that the
holder of that trademark is engaged in any business similar to
that of Cymer. For this reason, Cymer (1) is continuing to use
the trademark CYMER in Japan, (2) believes that it will
ultimately be permitted to register such mark for use with its
products, and (3) believes it is not infringing that company's
trademark.* Cymer might not ultimately succeed in its efforts to
register its trademark in Japan. Cymer might be subjected to an
action for trademark infringement, 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 81%, 89% and 88% of its
revenues in 1996, 1997 and 1998, 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 expanding 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 regulations might in the future impose
the need for additional capital equipment or other process
requirements upon Cymer. They might also
<PAGE>
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
often been unrelated to the operating performance of these
companies. The market price of Cymer's Common Stock has
fluctuated substantially in recent periods, rising from $4 3/4 at
Cymer's initial public offering on September 18, 1996, to $48 3/4
on August 22, 1997, and then declining to $5 7/8 on October 8,
1998, (these prices reflect Cymer's 2-for-1 stock split effective
as of August 21, 1997). 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
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. No lead plaintiff has yet been appointed
and a consolidated amended complaint has not yet been filed.
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
<PAGE>
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.
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 7A. 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 December 31, 1998, Cymer had outstanding forward foreign
exchange contracts to buy US$ 33.2 million for 4.2 billion yen
under foreign currency exchange facilities with contract rates
ranging from 114.95 yen to 144.84 yen per US$ and various
expiration dates through September, 1999 (see Notes 1 and 4 to
Consolidated Financial Statements). The total unrecorded
deferred loss and discount on these contracts at December 31,
1998 was US$ 720,000 and $662,000, respectively.
Investment and Debt Risk
Cymer maintains an investment portfolio consisting primarily
of government and corporate fixed income securities, certificates
of deposit and commercial paper (see Note 3 to Consolidated
Financial Statements). 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,
<PAGE>
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
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 December 31, 1998 was $134.9 million. As of December
31, 1997 and 1998, $172.5 million in Convertible Subordinated
Notes was outstanding.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included in Part IV
Item 14(a)(1) and (2).
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There have been no disagreements with accountants on any
matter of accounting principles and practices or financial
disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding the identification and business
experience of Cymer's directors under the caption "Nominees"
under the main caption "Proposal One - Election of Directors" in
Cymer's definitive Proxy Statement for the annual meeting of
stockholders to be held, as filed with the Securities and
Exchange Commission within 120 days after the end of Cymer's
fiscal year ended December 31, 1998, is incorporated herein by
this reference. For information regarding the identification and
business experience of Cymer's executive officers, see "Executive
Officers" at the end of Item 1 in Part I of this Annual Report on
Form 10-K. Information concerning filing requirements applicable
to Cymer's executive officers and directors under the caption
"Compliance With Section 16(a) of the Exchange Act" in Cymer's
Proxy Statement is incorporated herein by this reference.
Item 11. Executive Compensation
The information under the captions "Executive Compensation"
and "Compensation of Directors" in Cymer's Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information under the caption "Security Ownership of
Principal Stockholders and Management" under the main caption
"Additional Information" in Cymer's Proxy Statement is
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions" in
Cymer's Proxy Statement is incorporated herein by this reference.
<PAGE>
With the exception of the information specifically
incorporated by reference from Cymer's Proxy Statement in Part
III of this Annual Report on Form 10-K, Cymer's Proxy Statement
shall not be deemed to be filed as part of this Report. Without
limiting the foregoing, the information under the captions
"Report of the Compensation Committee of the Board of Directors"
and "Company's Stock Performance" under the main caption
"Additional Information" in Cymer's Proxy Statement is not
incorporated by reference in this Annual Report on Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K:
(1) Financial Statements. The following Consolidated
Financial Statements of Cymer, Inc. and Independent Auditors'
Report are included in a separate section of this Report
beginning on page F-1:
Description Page Number
Independent Auditors' Report................... F-1
Consolidated Balance Sheets as of December 31, 1997
and 1998.... F-2
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1997 and 1998............F-3
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended December 31, 1996, 1997
and 1998......... F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998............F-6
Notes to Consolidated Financial Statements........... F-8
(2) Financial Statement Schedules. All financial
statement schedules have been omitted because the
required information is not applicable or not present
in amounts sufficient to require submission of the
schedule, or because the information required is
included in the consolidated financial statements or
the notes thereto.
(3) Exhibits. The exhibits listed under Item 14(c)
hereof are filed with, or incorporated by reference into,
this Annual Report on Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
by Registrant during the fourth quarter of the fiscal year ended
December 31, 1998.
(c) Exhibits. The following exhibits are filed as part of,
or incorporated by reference into, this Annual Report on Form 10-K:
3.1 Amended and Restated Articles of Incorporation of Registrant
(incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (as amended) no.
333-08383).
3.2 Bylaws of Registrant (incorporated herein by reference to
Exhibit 3.4 to the Registrant's Registration Statement on Form S-
1 (as amended) no. 333-08383).
4.1 Preferred Shares Rights Agreement, dated as of February 13,
1998 between
<PAGE>
Cymer and ChaseMellon Shareholder Services, L.L.C.
(incorporated herein by reference to Exhibit 1 to the
Registrant's Form 8-A, dated February 20, 1998).
4.2 Registration Rights Agreement, dated as of August 6, 1997,
by and among Cymer, Morgan Stanley & Co. Incorporated and
Montgomery Securities (incorporated herein by reference to
Exhibit 4.2 to the Registrant's Form 8-K, dated August 6, 1997).
4.3 Indenture, dated as of August 6, 1997, by and among Cymer
and State Street Bank and Trust Company of California, N.A., as
trustee thereunder (incorporated herein by reference to Exhibit
4.1 to the Registrant's Form 8-K, dated August 6, 1997.)
10.1 Form of Indemnification Agreement with Directors and
Officers (incorporated herein by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (as amended) no.
333-08383.
10.2 Standard Industrial Lease - Multi-Tenant, dated August 19,
1991, by and between Frankris Corporation and Cymer (incorporated
herein by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1 (as amended) no. 333-08383).
10.3 Master Lease Agreement, dated April 23, 1996,
between Tokai Financial Services and Cymer
(incorporated herein by 10.19 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383).
10.4 Single-Tenant Industrial Lease, dated December
19, 1996, by and between AEW/LBA Acquisition Co.
II, LLC and Cymer (incorporated herein by
reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10K filed for the year ended
December 31, 1996).
10.5 Patent License Agreement, dated October 13,
1989, by and between Cymer and Patlex Corporation
(incorporated herein by reference to Exhibit 10.13
to the Registrant's Registration Statement on Form
S-1 (as amended) no. 333-08383).
10.6 Contract Manufacturing Agreement --
Lithography Laser, dated August 28, 1992, by and
between Cymer and Seiko Instruments Inc.
(incorporated herein by reference to Exhibit 10.16
to the Registrant's Registration Statement on Form
S-1 (as amended) no. 333-08383).
10.7 Product License and Manufacturing Agreement --
High Power Laser, dated August 28, 1992, by and
between Cymer and Seiko Instruments Inc.
(incorporated herein by reference to Exhibit 10.17
to the Registrant's Registration Statement on Form
S-1 (as amended) no. 333-08383).
10.8 Agreement, dated December 14, 1994, between Cymer
and EO Technics Co., Ltd. (incorporated herein by
reference to Exhibit 10.18 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383).
10.9 Loan Agreement, dated August 15, 1991, by and
between Mitsubishi International Corporation and
Cymer (incorporated herein by reference to
<PAGE>
Exhibit 10.14 to the Registrant's Registration Statement
on Form S-1 (as amended) no. 333-08383).
10.10 Loan Agreement, dated as of December
8, 1997, by and among Silicon Valley Bank and Bank
of Hawaii, as co-lenders, and Cymer and Cymer
Japan, Inc., as borrowers (incorporated herein by
reference to Exhibit 10.10 to the Registrant's
Annual Report on form 10-K/A filed for the year
ended December 31, 1997).
10.11 Amendment to Loan Agreement, dated as of
April 27, 1998, by and among Silicon Valley Bank
and Bank of Hawaii, as co-lenders, and Cymer and
Cymer Japan, Inc., as borrowers (incorporated
herein by reference to Exhibit 10.11 to the
Registrant's Annual Report on form 10-K/A filed
for the year ended December 31, 1997).
10.12 Corporate Guaranty, dated December 8, 1997, from
Cymer to Silicon Valley Bank and Bank of Hawaii,
as co-lenders (incorporated herein by reference to
Exhibit 10.12 to the Registrant's Annual Report on
form 10-K/A filed for the year ended December 31,
1997).
10.13 1996 Stock Option Plan (incorporated herein by reference to
Exhibit 10.3 to the Registrant's Registration Statement on Form
S-1 (as amended) No. 333-08383).
10.14 1996 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 10.4 to the Registrant's Registration
Statement on Form S-1 (as amended) No. 333-08383).
10.15 1996 Director Option Plan (incorporated herein by
reference to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 (as amended) No. 333-08383).
10.16 Employment Agreement, dated November 26, 1997,
by and between Robert P. Akins and Cymer
(incorporated herein by reference to Exhibit 10.16
to the Registrant's Annual Report on form 10-K/A
filed for the year ended December 31, 1997).
10.17 Employment Agreement, dated November 26, 1997,
by and between William A. Angus, III and Cymer
(incorporated herein by reference to Exhibit 10.17
to the Registrant's Annual Report on form 10-K/A
filed for the year ended December 31, 1997).
10.18 Employment Agreement, dated November 26, 1997,
by and between Pascal Didier and Cymer
(incorporated herein by reference to Exhibit 10.18
to the Registrant's Annual Report on form 10-K/A
filed for the year ended December 31, 1997).
10.19 Employment Agreement, dated November 26, 1997, by and
between G. Scott Scholler and Cymer (incorporated herein by
reference to Exhibit 10.19 to the Registrant's Annual Report on
form 10-K/A filed for the year ended December 31, 1997).
10.20 Employment Agreement, dated October 21, 1998, by and between
Edward P. Holtaway and Cymer.
<PAGE>
21.1 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule for the year ended December 31, 1998
(d) Financial Statement Schedules. See item 14, paragraph
(a) (2), above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CYMER, INC.
Dated: March 18, 1999 By: /s/ ROBERT P. AKINS
Robert P. Akins, President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the date indicated.
/s/ ROBERT P. AKINS President, Chief Executive
Robert P. Akins Officer, and Chairman of the
Board
(Principal Executive Officer) March 18, 1999
/s/ WILLIAM A. ANGUS Senior Vice President, Chief
William A. Angus, III Financial Officer and
Secretary
(Principal Financial Officer) March 18, 1999
/s/ NANCY J. BAKER Vice President, Corporate Finance,
Nancy J. Baker Treasurer and Chief Accounting
Officer
(Principal Accounting Officer) March 18, 1999
/s/ RICHARD P. ABRAHAM Director March 18, 1999
Richard P. Abraham
/s/ KENNETH M. DEEMER Director March 18, 1999
Kenneth M. Deemer
/s/ PETER J. SIMONE Director March 18, 1999
Peter J. Simone
/s/ GERALD F. TAYLOR Director March 18, 1999
Gerald F. Taylor
/s/ F. DUWAINE TOWNSEN Director March 18, 1999
F. Duwaine Townsen
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Cymer, Inc.:
We have audited the accompanying consolidated balance sheets of
Cymer, Inc. and subsidiaries (collectively, the "Company") as of
December 31, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended
December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Cymer, Inc. and subsidiaries as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
February 2, 1999
<PAGE>
CYMER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $51,903 $53,130
Short-term investments 80,387 85,558
Accounts receivable - net 59,140 50,909
Foreign exchange contracts receivable 31,267 22,145
Inventories 47,502 50,786
Deferred income taxes 12,690 12,824
Prepaid expenses and other 2,847 3,706
Total current assets 285,736 279,058
PROPERTY - net 48,031 51,937
LONG-TERM INVESTMENTS 42,667 23,480
DEFERRED TAXES - NON-CURRENT 1,239 2,533
OTHER ASSETS 8,446 7,310
TOTAL ASSETS $386,119 $364,318
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $22,615 $8,581
Accrued and other liabilities 26,860 33,204
Foreign exchange contracts payable 27,278 24,873
Income taxes payable 6,444 2,146
Revolving loan 11,609
Total current liabilities 83,197 80,413
LONG-TERM LIABILITIES:
Convertible Subordinated Notes 172,500 172,500
Other Liabilities 3,566 3,424
MINORITY INTEREST 1,077 1,450
COMMITMENTS AND CONTINGENCIES (NOTES 4, 5, 7, 10,
11 and 12)
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
27,174,000 shares 29 27
Paid-in capital 109,367 111,842
Treasury stock at cost (2,000,000 common shares) (24,871)
Accumulated other comprehensive loss (2,254) (1,627)
Retained earnings 18,637 21,160
Total stockholders' equity 125,779 106,531
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $386,119 $364,318
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
REVENUES:
<S> <C> <C> <C>
Product sales $62,510 $201,191 $184,828
Other 2,485 2,456 313
Total revenues 64,995 203,647 185,141
COSTS AND EXPENSES:
Cost of product sales 35,583 123,654 125,713
Research and development 11,742 24,971 30,152
Sales and marketing 5,516 11,992 14,528
General and administrative 4,270 8,586 9,487
Total costs and expenses 57,111 169,203 179,880
OPERATING INCOME 7,884 34,444 5,261
OTHER INCOME (EXPENSE):
Foreign currency exchange gain (loss)-net 161 (359) 692
Interest and other income 347 5,318 7,384
Interest and other expense (691) (4,847) (11,644)
Total other income (expense) -net (183) 112 (3,568)
INCOME BEFORE INCOME TAX (PROVISION)
BENEFIT AND MINORITY INTEREST 7,701 34,556 1,693
INCOME TAX (PROVISION) BENEFIT (1,191) (8,639) 1,250
MINORITY INTEREST 141 (420)
NET INCOME $6,510 $26,058 $2,523
EARNINGS PER SHARE:
Basic:
Earnings per share $0.33 $0.92 $0.09
Weighted average common shares
outstanding 19,868 28,212 28,226
Diluted:
Earnings per share $0.29 $0.86 $0.09
Weighted average common and potential
common shares outstanding 22,420 30,267 29,566
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Accumulated Retained
Other Earning Stockholders' Total
Common Stock Paid-in Treasury Comprehensive (Accumulated Equity Comprehensive
Shares Amount Capital Stock Income (Loss) Deficit) (Deficit) Income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 2,320 $23 $184 ($205) ($21,832) ($21,830)
Change in par value due to
reincorporation (20) 20
Exercise of common stock
options 254 93 93
Issuance of common stock
under consulting agreement 20 100 100
Initial public offering of
common stock 7,018 7 29,733 29,740
Conversion of preferred stock
and warrants to common stock 15,408 15 26,543 26,558
Secondary public offering of
common stock 2,540 3 49,985 49,988
Reversal of accretion of
redemption upon conversion
of preferred stock 7,901 7,901
Net income 6,510 6,510 $6,510
Other comprehensive income:
Translation adjustment,
net of tax (240) (240) (240)
Total comprehensive income $6,270
BALANCE, DECEMBER 31, 1996 27,560 28 106,658 (445) (7,421) 98,820
Exercise of common stock
options and warrants 1,045 1 473 474
Issuance of employee stock
purchase plan shares 119 852 852
Income tax benefit from stock
options exercised 1,802 1,802
Deferred issuance costs,
secondary public offering (418) (418)
Net income 26,058 26,058 $26,058
Other comprehensive income:
Translation adjustment, net
of tax (1,858) (1,858) (1,858)
Net unrealized gain on
available-for-sale investments,
net of tax 49 49 49
Total comprehensive income $24,249
BALANCE, DECEMBER 31, 1997 28,724 29 109,367 (2,254) 18,637 125,779
Exercise of common stock
options and warrants 365 638 638
Issuance of employee stock
purchase plan shares 85 1,236 1,236
Stock repurchase of
treasury stock (2,000) (2) ($24,871) (24,873)
Income tax benefit from
stock options exercised 601 601
Net income 2,523 2,523 $2,523
Other comprehensive income:
Translation adjustment,
net of tax 441 441 441
Net unrealized gain on
available-for-sale
investments, net of tax 186 186 186
Total comprehensive income $3,150
BALANCE, DECEMBER 31, 1998 27,174 $27 $111,842 ($24,871) (1,627) $21,160 $106,531
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $6,510 $26,058 $2,523
Adjustments to reconcile net income
to net cash provided by
(used for) operating activities:
Depreciation and amortization 2,284 7,606 16,001
Minority interest (141) 420
Deferred income taxes (1,432) (11,295) (1,683)
Loss on disposal of property 223 436
Change in assets and liabilities:
Accounts receivable (15,436) (43,467) 12,865
Foreign exchange contracts
receivable (9,317) (24,819) 12,022
Inventories (10,512) (32,288) (2,110)
Prepaid expenses and other assets (4,919) (1,029) (331)
Accounts payable 5,501 15,684 (12,815)
Accrued and other liabilities 8,769 18,602 5,344
Foreign exchange contracts
payable 8,396 21,397 (5,664)
Income taxes payable 2,609 6,166 (3,789)
Other (674) 194
Net cash provided by (used for)
operating activities (7,998) (17,332) 23,219
INVESTING ACTIVITIES:
Acquisition of property (11,090) (42,209) (19,621)
Disposal of property 16 147
Purchases of investments (13,715) (140,939) (74,604)
Proceeds from sold or matured
investments 1,900 29,370 88,571
Net cash used for investing
activities (22,889) (153,631) (5,654)
FINANCING ACTIVITIES:
Net borrowings (payments) under
revolving loan and security agreements (1,036) (1,750) 10,083
Proceeds from issuance of
convertible subordinated notes 172,500
Debt issue costs (5,228)
Proceeds from issuance of redeemable
convertible preferred stock 6,050
Proceeds from issuance of common
stock 79,935 2,125 1,874
Purchase of treasury stock (24,871)
Net discounting of commercial drafts (1,240)
Payments on capital lease obligations (159) (395) (579)
Net cash provided by (used for)
financing activities 83,550 167,252 (13,493)
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 727 209 (2,845)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 53,390 (3,502) 1,227
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,015 55,405 51,903
CASH AND CASH EQUIVALENTS AT END OF YEAR $55,405 $51,903 $53,130
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $467 $671 $6,617
Income taxes paid $14 $11,991 $4,205
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of Redeemable Convertible
Preferred Stock to common stock
upon initial public offering $26,558
Capital lease obligations incurred
for furniture and equipment $573 $1,950 $102
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Cymer, Inc., its wholly-owned and
majority-owned subsidiaries, (collectively, "Cymer") is
engaged primarily in the development, manufacturing and
marketing of excimer lasers for sale to manufacturers of
photolithography tools in the semiconductor equipment
industry. Cymer sells its product to customers primarily in
Japan, the Netherlands and the United States.
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 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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes requirements for disclosure of comprehensive
income and became effective for Cymer for the year ending
December 31, 1998. Comprehensive income includes such items
as foreign currency translation adjustments and unrealized
holding gains and losses on available for sale securities
that are currently being presented by Cymer as a component of
stockholders' equity. Cymer adopted this standard as of
December 31, 1998 and the December 31, 1997 and 1996
financial statements have been reclassified to reflect the
change. See Note 8.
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. Cymer adopted this new
standard as of December 31, 1998. This standard does not
materially affect current reporting or disclosures. See Note
13.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits.
SFAS No. 132 standardizes the disclosure requirements for
<PAGE>
pension and other postretirement benefits to the extent
practicable, requires additional information on changes in
benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain
disclosure. It does not change the measurement or
recognition of those plans. Cymer adopted this standard as
of December 31, 1998. This standard does not materially
effect Cymer's current reporting or 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 Cymer for the year ending December
31, 2000. Interim reporting of this standard will be
required. Cymer has not yet assessed the effect of this
standard on Cymer's current reporting and disclosures.
Cash Equivalents - Cash equivalents consist of money market
instruments, commercial paper and other highly liquid
investments purchased with an original maturity of three
months or less.
Investments - Cymer's investments are composed 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 at fair value. Net unrealized holding gains were
$49,000 at December 31, 1997 and $235,000 at December 31,
1998 and are included in stockholders' equity as accumulated
other comprehensive income (loss). See Note 3.
Inventories - Inventories are carried at the lower of cost
(first-in, first-out) or market. Cost includes material,
labor and manufacturing overhead costs.
Property - Property is stated at cost. Depreciation is
provided using the straight-line method over the estimated
useful lives of the assets (generally three to five years).
Leasehold improvements are amortized, using the straight-line
method, over the shorter of the life of the improvement or
the remaining lease term. Lasers built for internal use are
capitalized and depreciated using the straight-line method
over three years.
Impairment of Long-Lived Assets - Effective January 1, 1996,
Cymer adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. SFAS No. 121 requires that long-lived assets be reviewed
for impairment and written down to fair value whenever events
or changes in circumstances indicate that the carrying value
may not be recoverable. Under the provisions of SFAS No.
121, impairment losses are recognized when expected future
cash flows are less than the assets' carrying value. No such
losses occurred in 1997 or 1998.
Fair Value of Financial Instruments - The following methods
and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents - The carrying amount reported in
the consolidated balance sheets for cash and cash equivalents
approximates fair value because of the short maturity of
those instruments.
Investments - Investments consist primarily of government and
corporate fixed income securities, certificates of deposit
and commercial paper (see "Investments" and Note 3). Such
assets are carried at fair value which is based on quoted
market prices for such securities.
<PAGE>
Foreign Exchange Contracts - The fair value of foreign
exchange contracts is determined using the quoted exchange
rate (see "Foreign Exchange Contracts").
Convertible Subordinated Notes - Convertible Subordinated
Notes are recorded at face value of $172.5 million (see Note
5). The fair value of such debt, based on quoted market
prices at December 31, 1998 was $134.9 million.
Revenue Recognition - Revenue from product sales is generally
recognized at the time of shipment unless customer agreements
contain inspection or other conditions, in which case revenue
is recognized at the time such conditions are satisfied.
Product sales include sales of lasers, replacement parts, and
product service contracts. Other revenue primarily
represents revenue earned from funded development activities
and license fees. Such revenue is recognized on a basis
consistent with the performance requirement of the
agreements. Payments received in advance of performance are
recorded as deferred revenue. Long-term contracts are
accounted for on the percentage-of-completion method based
upon the relationship of costs incurred to total estimated
costs, after giving effect to estimates of costs to complete.
Research and development revenues totaled $2,485,000,
$2,456,000 and $313,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
Warranty Expense - Cymer generally warrants its products
against defects for the earlier of 17 to 24 months from the
date of shipment or 12 months after acceptance by the end-
user. Cymer accrues a provision for warranty expense for all
products sold which is included in cost of product sales in
the consolidated statements of income. The amount of the
provision is based on actual historical expenses incurred and
estimated probable future expenses related to current sales.
Warranty costs incurred are charged against the provision.
Stock-Based Compensation - Effective January 1, 1996, Cymer
adopted SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 encourages, but does not require
companies to record compensation cost for stock-based
employee compensation plans at fair value. Cymer has chosen
to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the
excess, if any, of the quoted market price of Cymer's stock
at the date of the grant over the amount an employee must pay
to acquire the stock. See Note 7.
Foreign Currency Translation - Gains and losses resulting
from foreign currency translation are accumulated as a
separate component of consolidated stockholders' equity as
accumulated other comprehensive income (loss). Gains and
losses resulting from foreign currency transactions are
included in the consolidated statements of operations.
Foreign Exchange Contracts - 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.
Cymer recognized net gains from the above foreign currency
exchange contracts of $1,920,000, $5,758,000 and $4,547,000
for the years ended December 31, 1996, 1997 and 1998,
respectively.
<PAGE>
The face amount of the underlying contracts was $16,123,000,
$88,339,000 and $83,006,000 at December 31, 1996, 1997 and 1998,
respectively. Cymer had outstanding forward foreign exchange contracts
at December 31, 1998 to buy $33.2 million for 4.2 billion yen under
foreign currency exchange facilities with banks in Japan and the United
States (see Note 4). The total unrecorded deferred loss and
discount on these contracts as of December 31, 1998 was
approximately $720,000 and $662,000, respectively. Such
contracts expire on various dates through September 1999.
Concentration of Credit Risk - Cymer invests its excess cash
in an effort to preserve capital, provide liquidity, maintain
diversification and generate returns relative to Cymer's
corporate investment policy and prevailing market conditions.
Cymer has not experienced any losses on its cash and
investment accounts. Cymer has a small number of significant
customers and maintains a reserve for potential credit losses
and such losses, to date, have been minimal (see "Major
Customers and Related Parties").
Major Customers and Related Parties - Revenues from major
customers are detailed as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
Customer (in thousands)
<S> <C> <C> <C>
A $20,123 $80,156 $57,900
B 19,134 51,480 36,916
C 12,586 49,441 67,729
D 6,555 11,697 10,833
</TABLE>
Receivables from these customers totaled $51,467,000 and
$42,320,000 at December 31, 1997 and 1998, respectively.
Revenues from Japanese customers, generated primarily by
Cymer Japan, accounted for 61%, 65% and 48% of revenues for
the years ended December 31, 1996, 1997 and 1998,
respectively. Revenues from a customer in the Netherlands
accounted for 19%, 24% and 37% of revenues for the years
ended December 31, 1996, 1997 and 1998, respectively.
Revenues from stockholders totaled $52,114,000, $131,636,000
and $94,816,000 for the years ended December 31, 1996, 1997
and 1998, respectively.
Earnings Per Share - In February 1997, the FASB issued 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 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 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 and the
1996 financial statements have been restated to reflect the
change. Reconciliation of the basic and diluted EPS is as
follows:
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
(In thousands, except
per share amounts)
<S> <C> <C> <C>
Net income $6,510 $26,058 $2,523
Basic earnings per share $0.33 $0.92 $0.09
Basic weighted average
common shares outstanding 19,868 28,212 28,226
Effect of dilutive securities:
Warrants 560 121 111
Options 1,992 1,934 1,229
Diluted weighted average
common and potential
common shares outstanding 22,420 30,267 29,566
Diluted earnings per share $0.29 $0.86 $0.09
</TABLE>
Weighted average options to purchase 9,764, 412,000 and
2,364,000 shares of common stock, which expire at various
dates through 2008 were outstanding for the years ended
December 31, 1996, 1997 and 1998, respectively, and were not
included in the computation of diluted earnings per share as
the options' exercise prices were greater than the average
market prices of the common shares. In addition, for the
years ended December 31, 1997 and 1998, Convertible
Subordinated Notes and related interest expense of $4,249,000
and $9,732,000, respectively, were not included in the
diluted earnings per share computation as they were also anti-
dilutive.
Stock Split - On August 7, 1997, Cymer declared a 2-for-1
stock split of its common stock effective August 21, 1997.
The par value of the common stock of $.001 per share remained
unchanged. All common share amounts and earnings per share
for all periods presented have been adjusted to give effect
to this stock split.
Reclassifications - Certain amounts in the prior years'
financial statements have been reclassified to conform to
current period presentation.
December 31,
2. BALANCE SHEET DETAILS 1997 1998
(in thousands)
ACCOUNTS RECEIVABLE:
Trade $56,856 $49,052
Other 3,030 2,629
59,886 51,681
Less allowance for doubtful accounts (746) (772)
Total $59,140 $50,909
<PAGE>
December 31,
1997 1998
(in thousands)
INVENTORIES:
Raw materials $24,365 $25,471
Work-in-progress 18,394 12,946
Finished goods 4,743 12,369
Total $47,502 $50,786
PROPERTY - at cost:
Furniture and equipment $30,202 $38,465
Capitalized lasers 10,163 15,960
Leasehold improvements 19,083 21,695
Construction in process 1,435 3,309
60,883 79,429
Less accumulated depreciation and
amortization (12,852) (27,492)
Total $48,031 $51,937
ACCRUED AND OTHER LIABILITIES:
Warranty and installation reserves $15,730 $19,000
Payroll and payroll related 2,735 3,622
Interest 3,920 7,651
Other 4,475 2,931
Total $26,860 $33,204
3. INVESTMENTS
Investments consist of the following:
December 31,
1997 1998
(in thousands)
Short-term:
Municipal Bonds $32,923 $50,053
Corporate Bonds 14,151 21,143
Certificates of Deposit 14,113
Commercial Paper 8,900 7,863
Auction Market Preferred 5,000
U.S. Government Agencies 3,000 4,999
Other 2,300 1,500
Total $80,387 $85,558
Long-term:
Municipal Bonds $29,670 $16,426
Corporate Bonds 12,997 7,054
Total $42,667 $23,480
<PAGE>
Investments are recorded at fair value. Short-term
investments mature within one year and long-term investments
mature in one year to 18 months. See also "Investments" in
Note 1.
4. CREDIT FACILITIES
Loan and Security Agreement - In 1996, Cymer had a Loan and
Security Agreement (the "Agreement") that provided for three
revolving loan facilities and a loan with a bank to provide
for combined borrowings of up to a maximum of $11,000,000
with interest on outstanding borrowings ranging from prime to
prime plus 0.25% (8.25% and 8.50%, respectively, at December
31, 1996). In 1997, the outstanding balance was paid off and
the Agreement was terminated.
Revolving Loan Agreements - In 1997 Cymer had a loan
Agreement (the "1997 Agreement") which provided for two
revolving loan facilities with a bank to provide for combined
borrowings of up to a maximum of $5.0 million with interest
on outstanding borrowings at prime less 0.50% or LIBOR plus
2.25%. The 1997 Agreement provides for the following: (i) an
unsecured $2.0 million revolving bank line of credit and (ii)
an unsecured $3.0 million Optional Currency revolving line of
credit. There were no borrowings outstanding under this
Agreement at December 31, 1997.
In 1998 Cymer entered into a Loan Agreement (the "Agreement")
which provides for an unsecured optional currency revolving
loan facility with two banks to provide for combined
borrowings of up to a maximum of $15.0 million with interest
on outstanding borrowings at LIBOR plus 1.40%. There was
$11.6 million outstanding under this Agreement at December
31, 1998 at an interest rate of 2.13%.
The Agreement requires Cymer to maintain compliance with
certain financial statement and other covenants including,
among other items, tangible net worth, quick ratio and
profitability requirements. As of December 31, 1998, Cymer
was in compliance with all such covenants.
Advances Against Commercial Drafts - In 1997 Cymer had
advances against commercial drafts representing funds
advanced by two banks in Japan, without recourse, in
connection with the discounting of certain commercial drafts
received from customers as payment for the purchase of
merchandise. The advances against commercial drafts were for
a maximum of 10.7 billion yen (approximately $81.9 million)
as of December 31, 1997. These commercial drafts were
discounted at 2.125% at December 31, 1997 and matured within
120 days. There were no drafts outstanding at December 31,
1998.
Foreign Exchange Facilities - Cymer has foreign exchange
facilities with banks in Japan and a bank in the United
States. The first facility with a bank in Japan provides up
to 14.3 billion yen in 1997 and 1998 to be utilized for
forward contracts for periods of up to one year. As of
December 31, 1997 and 1998, respectively, 4.2 billion yen
($36.4 million) and 1.1 billion yen ($8.9 million) was being
utilized under the foreign exchange facility (see "Foreign
Exchange Contracts" in Note 1).
The foreign exchange facility with the United States bank
provides up to $100.0 million in 1997 and 1998 to be utilized
for spot and future foreign exchange contracts for periods of
up to one year. $44.9 million and $24.3 million was being
utilized under the foreign exchange facility as of December
31, 1997 and 1998, respectively. This facility is part of
the Revolving Loan Agreements discussed above and is subject
to the same covenants.
<PAGE>
5. CONVERTIBLE SUBORDINATED NOTES
In the third quarter of 1997, Cymer issued $172.5 million
aggregate principal amount of Step-Up Convertible
Subordinated Notes (the "Notes") due August 6, 2004 with
interest payable semi-annually February 6 and August 6,
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 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. As of December 31, 1997 and 1998, $172.5 million in
Convertible Subordinated Notes was outstanding.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon Cymer's initial public offering in September 1996, all
Redeemable Convertible Preferred Stock (approximately 15.4
million shares) and Redeemable Convertible Preferred Stock
warrants (to purchase 566,000 shares of such stock) were
automatically converted into Cymer's common stock or warrants
to purchase common stock. The conversion of the preferred
stock and warrants to common stock was on a 1 for 1 basis,
except for the Series E preferred stock and warrants, which
were converted on an approximate 1.5 to 1 basis. Upon
conversion of the preferred stock and warrants, all preferred
stock dividends and other rights previously assigned ceased.
In addition, upon the September 1996 conversion discussed
above, the cumulative accretion on the Redeemable Convertible
Preferred Stock of $7,901,000 was recorded as a reduction of
the accumulated deficit.
7. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock - Pursuant to Cymer's Articles of
Incorporation, the Board of Directors has the authority,
without further action by the stockholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and
to fix the designations, powers, preferences, privileges, and
relative participation, optional or special rights and the
qualifications, limitations or restrictions thereof,
including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences, any or all
of which may be greater than the rights of the common stock.
Common Stock Warrants - At December 31, 1998, Cymer had
warrants outstanding to purchase 124,000 shares of its common
stock at a weighted average purchase price of $1.69 per
share. The warrants expire in 2000 and 2001.
<PAGE>
Stock Option and Purchase Plans - Cymer has three plans as
follows:
Common Shares
Designated for
Issuance
(i) 1987 Stock Plan 3,000,000
(ii) 1996 Stock Option Plan 4,250,000
(iii) 1996 Employee Stock Purchase Plan 500,000
Total 7,750,000
(i) 1987 Stock Option Plan (the "1987 Plan") - The 1987 Plan
provides that incentive and nonstatutory options to purchase
shares of common stock may be granted to employees and
consultants at prices that are not less than 100% (85% for
nonstatutory options) of the fair market value of Cymer's common
stock on the date the options are granted. The 1987 Plan also
provides for various restrictions regarding option terms, prices,
transferability and other matters. Options issued under the 1987
Plan expire five to ten years after the options are granted and
generally become exercisable ratably over a four-year period
following the date of grant.
(ii) 1996 Stock Option Plan (the "1996 Stock Plan") - The 1996
Stock Plan provides for the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and nonqualified stock options to
employees, directors and consultants of Cymer. Incentive stock
options may be granted only to employees. The 1996 Stock Plan is
administered by the Board of Directors or by a committee
appointed by the Board of Directors, which determines the terms
of options granted, including the exercise price and the number
of shares subject to the option. The exercise price of incentive
stock options granted under the 1996 Stock Plan must be at least
equal to the fair market value of Cymer's common stock on the
date of grant and the exercise price of nonqualified stock
options must be at least equal to 85% of the fair market value of
Cymer's common stock on the date of grant. Options issued under
the 1996 Stock Plan expire five to ten years after the options
are granted and generally become exercisable ratably over a four-
year period following the date of grant. This plan was amended
in 1998 by the shareholders to increase the plan shares issuable
from 3,000,000 to 4,250,000.
(iii) 1996 Employee Stock Purchase Plan (the "ESPP") - The
ESPP is intended to qualify under Section 423 of the Code.
Under the ESPP, an eligible employee may purchase shares of
common stock from Cymer through payroll deductions of up to
10% of his or her base compensation (excluding bonuses,
overtime and sales commissions), at a price per share equal
to 85% of the lower of (i) the fair market value of Cymer's
common stock as of the first day of each offering period
under the ESPP or (ii) the fair market value of the common
stock at the end of the offering period.
In 1996 Cymer had adopted a 1996 Director Option Plan (the
"Director Option Plan") whereby 200,000 shares were reserved
for Board of Director option grants. There were 80,000
options issued under the Director Option Plan in 1997. The
plan was dissolved in October 1997 by the Board of Directors.
<PAGE>
Stock option transactions are summarized as follows (in
thousands, except per share data):
Weighted Average
Number of Exercise Price
Shares Per Share
Outstanding, January 1, 1996 1,922 $ 0.33
Granted 1,444 $ 7.16
Exercised (254) $ 0.37
Terminated (78) $ 1.16
Outstanding, December 31, 1996 3,034 $ 3.48
Granted 1,838 $ 27.20
Exercised (608) $ 0.78
Terminated (217) $ 8.93
Outstanding, December 31, 1997 4,047 $ 14.39
Granted 1,731 $ 20.31
Exercised (359) $ 1.74
Terminated (1,351) $ 25.90
Outstanding, December 31, 1998 4,068 $ 14.21
Exercisable, December 31, 1996 586 $ 0.31
Exercisable, December 31, 1997 846 $ 3.73
Exercisable, December 31, 1998 1,447 $ 8.26
Cymer applies APB Opinion No. 25 and related interpretations
in accounting for its employee stock option and stock
purchase plans (see Note 1). Accordingly, no compensation
expense has been recognized for its stock-based compensation
plan, as the options are granted at the fair market value of
Cymer's common stock on the date of grant.
The following table summarizes the impact had compensation
cost been determined based upon the fair value at the
grant date for awards under the plan consistent with
the methodology prescribed under SFAS No. 123:
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1997 1998
<S> <C> <C> <C>
Impact on net income ($218,000) ($7,600,000) ($15,228,000)
Impact on earnings per share:
basic ($0.01) ($0.27) ($0.54)
diluted ($0.01) ($0.25) ($0.52)
Estimated weighted average
fair market value of options
granted or shares purchased
using the Black-Scholes
pricing model:
Options $1.75 $17.36 $11.57
ESPP $9.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
1996 1997 1998
<S> <C> <C> <C>
Weighted average assumptions:
dividend yield None None None
volatility rate 107% 88% 85%
risk free interest rates 5.33% to 6.68% 5.37% to 6.83% 4.07% to 5.66%
assumed forfeiture rate 3% 5% 5%
expected life - Options 5 years 5 years 5 years
ESPP N/A N/A .5 years
</TABLE>
The following table summarizes information as of December 31,
1998 concerning currently outstanding and exercisable
options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
(in thousands) (years) (in thousands)
<C> <C> <C> <C> <C> <C>
$0.25-$2.50 1,174,650 1.66 $1.14 833,349 $1.04
$3.00-$19.34 895,701 6.33 $13.16 225,855 $9.99
$20.13-$21.03 1,017,239 5.84 $20.58 294,810 $20.77
$22.56-$27.38 885,804 8.37 $23.22 56,581 $25.94
$33.75-$33.75 94,218 3.56 $33.75 36,897 $33.75
4,067,612 5.24 $14.21 1,447,492 $8.26
</TABLE>
Common Shares Reserved - As of December 31, 1998, Cymer had
reserved the following number of shares of common stock for
issuance (in thousands):
Issuance under stock option and purchase plans 1,790
Exercise of common stock purchase warrants 124
Total 1,914
Treasury Stock - On January 28, 1998, Cymer's Board of
Directors authorized Cymer to repurchase up to $50.0 million of
Cymer's common stock from time to time on the open market or in
privately negotiated transactions. As of December 31,
1998, Cymer had repurchased 2,000,000 shares at a cost of
$24.9 million.
Option Repricing - On January 28, 1998, Cymer's Board of
Directors authorized an incentive stock option repricing
effective March 2, 1998 at a new option price of $22.56 per
share. The repricing took effect on 839,020 options with
original prices ranging from $21.03 to $33.75 per share granted
from December 1996 through October 1997. The four year vesting
period of the repriced options also began on March 2, 1998 and
the term of such options was set at ten years. In accordance
with APB Opinion No. 25, Cymer did not incur any compensation
expense as a result of this repricing for the year ended December
31, 1998.
Stockholder Rights Plan - On February 13, 1998, Cymer's Board of
Directors adopted a Stockholder Rights Plan. Under the terms of
the plan, rights were distributed as a dividend at a rate of one
preferred share purchase right on each outstanding share of
Cymer's common stock held by
<PAGE>
stockholders of record as of the close of business on March 2, 1998.
All additional shares of common stock issued prior to February 13, 2008,
the expiration date for all rights, are to receive the dividend at the
same rate. The exercise price for each one-thousandth of a preferred
share issuable pursuant to the exercise of a right shall
initially be $100.00, subject to adjustment under the plan. Such
rights are exercisable only upon certain change of ownership
events as defined in the plan. The rights are designed to assure
that all Cymer stockholders receive fair and equal treatment in
the event of any proposed takeover of Cymer and to guard against
partial tender offers and other abusive tactics to gain control
of Cymer without paying all stockholders the fair value of their
shares, including a control premium.
8. 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
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 three years
in the period ended December 31, 1998:
<TABLE>
<CAPTION>
Total unrealized
gains on Accumulated
Translation available-for-sale other
adjustment, investments, comprehensive
net of tax net of tax income (loss)
<S> <C> <C> <C>
January 1, 1996
Beginning balance ($205) ($205)
Period net charge (240) (240)
December 31, 1996
Balance (445) (445)
Period net charge (1,858) $49 (1,809)
December 31, 1997
Balance (2,303) 49 (2,254)
Period net charge 441 186 627
December 31, 1998
Balance ($1,862) $235 ($1,627)
</TABLE>
9. INCOME TAXES
The components of the provision for income taxes are
summarized as follows:
Year ended December 31,
1996 1997 1998
(in thousands)
Current income taxes:
Federal $1,605 $16,174 ($751)
State 1,127 10
Foreign 1,004 2,700 1,213
Total 2,609 20,001 472
<PAGE>
Year ended December 31,
1996 1997 1998
(in thousands)
Deferred income taxes:
Federal (131) (5,103) (2,029)
State (12) (360) (552)
Foreign (352) (611) 859
Total (495) (6,074) (1,722)
Reduction in valuation
allowance (923) (5,288)
Income tax provision (benefit) $1,191 $8,639 ($1,250)
The income tax provision (benefit) is different from that
which would be obtained by applying the statutory Federal
income tax rate (35%) to income before income tax expense
(benefit). The items causing this difference for the period
are as follows:
Year ended December 31,
1996 1997 1998
Provision at statutory rate $2,618 $12,095 $592
Foreign provision in excess of
Federal statutory rate 562 1,659 2,504
State income taxes, net of
Federal benefit (123) 484 (152)
Foreign sales corporation taxes,
net of Federal tax (339) (449) (3,270)
Federal tax credits (193) (587) (499)
Japanese imported product credits (622)
Tax exempt interest, net of
disallowed expenses (563)
Miscellaneous/other items 245 968 138
Reduction in valuation allowance (1,579) (4,909)
Provision (benefit) at effective
tax rate $1,191 $8,639 ($1,250)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of Cymer's net deferred tax assets are as follows:
December 31,
1997 1998
(in thousands)
Reserves and accruals not
currently deductible $11,780 $12,699
Accrued Japanese enterprise tax 739 296
State taxes (563) (756)
Tax credits carryforwards 1,577
Difference between book and tax
basis of inventory and fixed assets 355 (91)
Tax effect of foreign currency
translation adjustments 1,239 945
Other 379 687
Net deferred tax assets $13,929 $15,357
Less: current portion (12,690) (12,824)
Net non-current deferred tax assets $1,239 $2,533
<PAGE>
Cymer eliminated its valuation allowance in 1997 due to management's
belief that current year activity made realization of such benefit more
likely than not.
10. COMMITMENTS AND CONTINGENCIES
Leases - Cymer leases its primary facilities under non-cancelable operating
leases. The lease terms are through January 1, 2010 and provide for certain
rent abatements and minimum annual increases and options to extend the
terms. Cymer also leases certain other facilities and equipment under
capital and short-term operating lease agreements. The capital leases
expire on various dates through 2002.
Under the terms of an operating lease for an office building entered into
in December 1996, Cymer has deposited approximately $2,224,000 in an escrow
account in lieu of a security deposit for the premises. The majority of
this amount is included with prepaid expenses and other assets on the
consolidated balance sheets.
Rent expense under operating leases is recognized on a straight-line basis
over the life of the related leases and totaled approximately $1,052,000,
$2,863,000 and $4,043,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
The net book value of assets under capital leases at December 31, 1997 and
1998 was approximately $2,101,000 and $1,651,000, net of accumulated
depreciation of approximately $523,000 and $915,000, respectively.
Total future minimum lease commitments under operating and capital leases
are as follows (in thousands):
Year Ending December 31, Operating Capital
1999 $2,923 $738
2000 2,959 730
2001 3,004 383
2002 2,892 28
2003 2,724 5
Thereafter 18,033
Total $32,535 1,884
Less amount representing interest 365
Present value of minimum lease payments 1,519
Less current portion 580
Long term obligations under capital leases $939
Patent License Agreement - Cymer has a patent license agreement for
a non-exclusive worldwide license to certain patented laser technology.
Under the terms of the agreement, Cymer is required to pay royalties
ranging from 0.25% to 5.0% of gross sales and leases as defined
<PAGE>
depending on the total amounts attained. Royalty fees totaled $226,000,
$49,000 and $100,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
Employee Savings Plan - Cymer has a 401(k) plan that allows participating
employees to contribute a percentage of their salary, subject to annual
limits. The Plan is available to substantially all full-time United
States employees. Effective January 1, 1997, Cymer matched 100% of each
eligible employee's contributions, up to $500.00 per year. Cymer
contributed $187,000 to the plan for the year ended December 31, 1997 and
$221,000 for the year ended December 31, 1998. There were no matching
contributions in 1996.
Retirement Plan - During the year ended December 31, 1996, Cymer Japan
adopted a retirement benefit plan for all Cymer Japan employees and
Japanese directors. The plan consists of a multi-employer retirement
plan covering all employees and life insurance policies covering all
employees and Japanese directors. The multi-employer retirement plan
was established under the Small and Medium-Size Enterprise Retirement
Allowance and Pension Plan accounted for using the book reserve method.
Expense under these plans totaled $37,000, $172,000 and $379,000 for
the years ended December 31, 1996, 1997 and 1998 respectively.
Contingency - On November 1, 1996, Cymer entered into a settlement
agreement for the dismissal of a patent infringement complaint filed
against Cymer in September, 1996. Under the terms of the settlement,
the plaintiffs agreed to (i) release Cymer from any claims they may
have with respect to the disputed patent and (ii) dismiss the patent
infringement action with prejudice. In return, Cymer agreed to make
annual payments to the plaintiffs over a 13-year period. Such annual
payments and the related expense are not material to Cymer's financial
position, results of operations or cash flows.
In addition, Cymer's Japanese manufacturing partner has been notified
that its manufacture of Cymer's laser systems in Japan may infringe a
Japanese patent held by another Japanese company. Cymer has agreed to
indemnify its Japanese manufacturing partner against patent infringement
claims under certain circumstances. Cymer believes, based upon the
advice of counsel, that Cymer's products do not infringe any valid claim
of the asserted patent.
11. 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 fo 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. No lead plaintiff has yet
been appointed and a consolidated amended complaint has not yet been
filed. 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.
<PAGE>
12. RELATED PARTY TRANSACTIONS
Collaborative Arrangement - Cymer has a collaborative arrangement with a
Japanese company that is also a stockholder of Cymer. The arrangement,
entered into in August 1992, includes a (i) stock purchase agreement,
(ii) research and development agreement, (iii) product license
agreement and (iv) contract manufacturing agreement. The general
provisions of these agreements are as follows:
Stock Purchase Agreement - The stockholder purchased 470,590 shares of
Cymer's Series D Redeemable Convertible Preferred Stock at $4.25 per
share with net proceeds to Cymer of $1,909,000. Such stock was
converted into common stock in 1996 (see Note 6).
Product License Agreement - Cymer granted to the stockholder the
exclusive right in Japan to manufacture and sell one of Cymer's
products and subsequent enhancements thereto. Cymer also granted
the stockholder the right of first refusal to license and fund the
development of new technologies not developed with funding from other
parties. In exchange for these rights, Cymer received up-front
license fees and is also entitled to royalties of 5% on related
product sales through September 1999, after which the royalty rate
is subject to renegotiation. The license agreement also provides
that product sales between Cymer and the stockholder will be at a
15% discount from the respective companies' list price. The
agreement terminates in August 2012. There was no activity under
this agreement in 1996, 1997 and 1998.
Contract Manufacturing Agreement - The stockholder has agreed to
manufacture for Cymer another of its products. Cymer will be
required to purchase a specified percentage of its total annual
product, as defined, from the stockholder. The agreement expires
in August 2001, and will automatically renew for two-year terms
unless one year's notice is given by either party. Cymer made
$477,000, $14.1 million and $13.9 million in purchases under this
agreement in 1996, 1997 and 1998, respectively.
Service Agreement - Cymer has a service agreement with another Japanese
company who is also a stockholder of Cymer. The general provisions of
the service agreement are as follows:
Sales and Marketing - The Japanese company is to assist Cymer in
establishing sales, marketing, manufacturing, and maintenance
capabilities in exchange for consideration equal to a percentage
of net sales of certain products in Japan. The agreement initially
expired in March 1996 and automatically extends until the total
consideration paid under the agreement aggregates $2,000,000.
Under certain conditions, if the agreement is terminated, Cymer may
be required to pay liquidated damages equal to $2,000,000 less the
aggregate of previous consideration plus other eligible consideration
paid to the Japanese company as defined in the agreement. Consideration
expensed under the agreement for the years ended December 31, 1996 and
1997 totaled $1,284,000 and $150,000, respectively. The aggregate
$2,000,000 consideration was met in January, 1997.
Royalties - Cymer has also agreed to pay the Japanese company additional
royalties on net sales of certain products manufactured by the third
party contractor as well as a fee for each laser chamber refurbished
by the third party contractor. Such royalties are applicable only for
the period subsequent to the expiration of the original agreement and
shall continue as long as products are manufactured by the third party
contractor. Consideration expensed under the agreement for the years
ended December 31, 1997 and 1998 was $252,000 and $293,000, respectively.
There was no consideration under the agreement in 1996.
<PAGE>
13. SEGMENTED INFORMATION
Cymer designs, manufactures and sells excimer laser systems,
replacement parts and support services for use in photolithography
systems used in the manufacture of semiconductors with critical
feature sizes. In accordance with SFAS No. 131, Cymer currently
considers its business to consist of one reportable operating
segment. See Note 1.
Geographic Information
Presented below is information regarding sales, income from operations,
and identifiable assets, classified by operations located in the United
States, Japan, Korea, Taiwan, Singapore and the Netherlands. Cymer
sells its excimer lasers in Japan through Cymer Japan. Intercompany
sales to the subsidiaries are primarily at 85% of the price of products
sold to outside customers. All significant intercommpany balances are
eliminated in consolidation. The majority of consolidated costs and
expenses are incurred in the United States and are reflected in the
operating loss from the United States operations.
Year Ended December 31
1996 1997 1998
Sales:
United States $26,918 $75,432 $93,144
Japan 38,077 128,075 88,571
Korea, Taiwan, Singapore
and Netherlands 140 3,426
Total $64,995 $203,647 $185,141
Operating income (loss):
United States ($13,974) ($30,186) ($44,117)
Japan 21,858 65,786 47,359
Korea, Taiwan, Singapore
and Netherlands (1,156) 2,019
Total $7,884 $34,444 $5,261
Indentifiable assets:
United States $105,902 $310,019 $287,871
Japan 23,565 72,427 67,792
Korea, Taiwan, Singapore
and Netherlands 3,673 8,655
Total $129,467 $386,119 $364,318
<PAGE>
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY RESULTS OF OPERATIONS
(in thousands except for per share data)
Year ended December 31, 1997
1st 2nd 3rd 4th
Revenues $36,971 $50,132 $57,468 $59,076
Gross Profit $14,749 $19,027 $20,289 $23,472
Operating income (loss) $6,970 $7,970 $9,605 $9,899
Net income (loss) $4,408 $7,430 $7,047 $7,173
Basic earnings (loss)
per share $0.16 $0.26 $0.25 $0.25
Diluted earnings (loss)
per share $0.14 $0.24 $0.23 $0.24
Year ended December 31, 1998
1st 2nd 3rd 4th
Revenues $49,679 $53,022 $44,448 $37,992
Gross profit $18,998 $18,792 $15,557 $5,768
Operating income (loss) $4,854 $3,991 $3,090 ($6,674)
Net income (loss) $2,703 $1,689 $1,453 ($3,322)
Basic earnings (loss)
per share $0.09 $0.06 $0.05 ($0.12)
Diluted earnings (loss)
per share $0.09 $0.06 $0.05 ($0.12)
<PAGE>
Exhibit 10.20
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
effective as of October 21, 1998, by and between Edward P. Holtaway
(the "Employee") and Cymer, Inc., a Nevada corporation (the "Company").
RECITALS
A. The Company may from time to time need to address the possibility of
an acquisition transaction or change of control event. The Board of Directors
of the Company (the "Board") recognizes that such events can be a distraction
to the Employee and can cause the Employee to consider alternative employment
opportunities. The Board has determined that it is in the best interests of
the Company and its stockholders to assure that the Company will have the
continued dedication and objectivity of the Employee, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below)
of the Company, although no such Change is now contemplated.
B. The Board believes that it is in the best interests of the Company and its
stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon a Change of Control and, under certain circumstances,
upon termination of the Employee's employment in connection with a Change of
Control, which benefits are intended to provide the Employee with financial
security and provide sufficient incentive and encouragement to the Employee
to remain with the Company notwithstanding the possibility of a Change of
Control.
D. To accomplish the foregoing objectives, the Board has directed the Company,
upon execution of this Agreement by the Employee, to agree to the terms
provided herein.
E. Certain capitalized terms used in this Agreement are defined in Section 7
below.
AGREEMENT
In consideration of the mutual covenants herein contained, and in consideration
of the continuing employment of the Employee by the Company, the parties
agree as follows:
1. Duties and Scope of Employment. The Company shall employ the Employee in
the position of Senior Vice President, Process Quality, as such position has
been defined in terms of responsibilities and compensation as of the effective
date of this Agreement; provided, however, that the Board shall have the
right, at any time prior to the occurrence of a Change of Control, to revise
such responsibilities and compensation as the Board in its discretion may
deem necessary or appropriate. The Employee shall comply with and be bound
by the Company's operating policies, procedures and practices from time
to time in effect during his employment. During the term of the Employee's
employment with the Company, the Employee shall continue to devote his full
time, skill and attention to his duties and responsibilities, and shall
perform them faithfully, diligently and competently, and the Employee shall
use his best efforts to further the business of the Company and its
affiliated entities.
2. Base Compensation. The Company shall pay the Employee as compensation
for her services a base salary at the annualized rate of $175,000.00. Such
salary shall be paid periodically in accordance with normal Company payroll
practices. The Board or Compensation Committee of the Board shall review the
base salary of the Employee according to normal Company practice, but no less
frequently than annually, and may in its discretion increase but not
decrease the base salary below the amount specified in this agreement.
3. Annual Incentive. Beginning with the Company's current fiscal year and
for each fiscal year thereafter during the term of this Agreement, the
Employee shall be eligible to receive an annual bonus under the Company's
annual incentive plan (the "Annual Incentive") based upon performance
targets approved by the Compensation Committee of the Board (the "Target
Incentive"). The Annual Incentive payable hereunder shall be payable in
accordance with the Company's normal practices and policies.
4. Employee Benefits. The Employee shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained
by the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans,
stock option, incentive or other bonus plans, life, disability, health,
accident and other insurance programs, paid vacations, and similar plans
or programs, subject in each case to the generally applicable terms and
conditions of the applicable plan or program in question and to the
sole determination of the Board or any committee administering such plan
or program.
5. Employment Relationship. The Company and the Employee acknowledge that
the Employee's employment is and shall continue to be at-will, as defined
under applicable law. If the Employee's employment terminates for any
reason, the Employee shall not be entitled to any payments, benefits,
damages, awards or compensation other than as provided by this Agreement,
or as may otherwise be available in accordance with the Company's
established employee plans and policies at the time of termination.
6. Termination Benefits. Subject to Sections 8 and 9 below, in the
event Employee's employment terminates as a result of an Involuntary
Termination other than for Cause upon or within 18 months after a Change
of Control, then the Employee shall be entitled to receive severance
and other benefits as follows:
(a) Pay Continuation. The Employee shall be entitled to monthly
payments equal to the Employee's monthly Base Compensation as in
effect immediately prior to the Change of Control plus one-twelfth
(1/12) of the average of the annual bonus amount paid to the
Employee with respect to the three previous calendar years. Such
monthly amounts shall be paid according to the normal payroll
practice of the Company for 12 months following the date of
termination (the "Termination Period").
(b) Annual Incentive. The Employee shall be entitled to receive a
percentage of the Employee's Target Incentive for the calendar year
in which such termination occurrs. Such percentage shall equal a
fraction, the numerator of which shall be the number of days in such
calendar year up to and including the date of such termination and
the denominator of which shall be the number of days in such calendar
year. Such amount shall be payable according to the normal practice
of the Company with respect to the payment of bonuses.
(c) Options. The unvested portion of any stock option(s) held by
the Employee under the Company's stock option plans shall vest and
become exercisable in full upon the date of such termination.
(d) Medical Benefits. The Company shall reimburse the Employee for
the cost of the Employee's group health, vision and dental plan
coverage in effect until the end of the Termination Period. The
Employee may use this payment, as well as any other payment made
under this Section 6, for such continuation coverage or for any
other purpose. To the extent the Employee pays the cost of such
coverage, and the cost of such coverage is not deductible as a
medical expense by the Employee, the Company shall "gross-up" the
amount of such reimbursement for all taxes payable by the Employee
on the amount of such reimbursement and the amount of such gross-up.
7. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:
(a) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment
of the Employee, (ii) conviction of a felony that is injurious to the
Company, (iii) a willful act by the Employee which constitutes gross
misconduct and which is injurious to the Company, and (iv) continued
violations by the Employee of the Employee's obligations under
Section 1 of this Agreement that are demonstrably willful and deliberate
on the Employee's part after there has been delivered to the Employee
a written demand for performance from the Company which describes the
basis for the Company's belief that the Employee has not substantially
performed his duties.
(b) Change of Control. "Change of Control" shall mean the occurrence
of any of the following events:
(i) The acquisition by any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) (other than the
Company or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Company)
of the "beneficial ownership" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting
power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of Directors of the
Company occurring within a two-year period, as a result of which
fewer than a majority of the directors are Incumbent Directors.
"Incumbent Directors" shall mean directors who either (A) are
directors of the Company as of the date hereof, or (B) are
elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority
of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual not otherwise an
Incumbent Director whose election or nomination is in connection
with an actual or threatened proxy contest relating to the
election of directors to the Company); or
(iii) A merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities
of the surviving entity) at least fifty percent (50%) of the total
voting power represented by the voting securities of the Company
or such surviving entity outstanding immediately after such merger
or consolidation, or the approval by the stockholders of the
Company of a plan of complete liquidation of the Company or of an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(c) Disability. "Disability" shall mean that the Employee has been
unable to substantially perform his duties under this Agreement as the
result of his incapacity due to physical or mental illness, and such
inability, at least 26 weeks after its commencement, is determined
to be total and permanent by a physician selected by the Company or its
insurers and acceptable to the Employee or the Employee's legal
representative (such agreement as to acceptability not to be
unreasonably withheld).
(d) Exchange Act. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(e) Involuntary Termination. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, the significiant
reduction of the Employee's duties or responsibilities relative to the
Employee's duties or responsibilities in effect immediately prior to
such reduction; provided, however, that a reduction in duties or
responsibilities solely by virtue of the Company being acquired and
made part of a larger entity (as, for example, when the Chief Financial
Officer of Company remains as such following a Change of Control and
is not made the Chief Financial Officer of the acquiring corporation)
shall not constitute an "Involuntary Termination"; (ii) without the
Employee's express written consent, a substantial reduction, without
good business reasons, of the facilities and perquisites (including
office space and location) available to the Employee immediately prior
to such reduction; (iii) without the Employee's express written consent,
a material reduction by the Company in the Base Compensation or Target
Incentive of the Employee as in effect immediately prior to such reduction,
or the ineligibility of the Employee to continue to participate in any
long-term incentive plan of the Company; (iv) a material reduction by
the Company in the kind or level of employee benefits to which the
Employee is entitled immediately prior to such reduction with the result
that the Employee's overall benefits package is significantly reduced;
(v) the relocation of the Employee to a facility or a location more than
50 miles from the Employee's then present location, without the Employee's
express written consent; (vi) any purported termination or the Employee
by the Company which is not effected for death or Disability or for
Cause, or any purported termination for which the grounds relied upon
are not valid or (vii) the failure of the Company to obtain the assumption
of this agreement by any successors contemplated in Section 10 below.
8. Limitation on Payments.
(a) In the event that the severance and other benefits provided for in
this Agreement or otherwise payable to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii) but for this
Section 8 would be subject to the excise tax imposed by Section 4999
of the Code, then the Employee's severance benefits under Section 6 shall
be payable either (i) in full, or (ii) as to such lesser amount which
would result in no portion of such severance benefits being subject to
excise tax under Section 4999 of the Code, whichever of the foregoing
amounts, taking into account the applicable federal, state and local
taxes and the excise tax imposed by Section 4999, results in the receipt
by the Employee on an after-tax basis, of the greatest amount of
severance benefits under this Agreement, nothwithstanding that all or
some portion of such severance benefits may be taxable under Section
4999 of the Code.
(b) If a reduction in the payments and benefits that would otherwise be
paid or provided to the Employee under the terms of this Agreement is
necessary to comply with the provisions of Section 8(a), the Employee
shall be entitled to select which payments or benefits will be reduced
and the manner and method of any such reduction of such payments or
benefits (including but not limited to the number of options that
would vest under Section 6(b) subject to reasonable limitations
(including, for example, express provisions under the Company's benefit
plans) (so long as the requirements of Section 8(a) are met). Within
thirty (30) days after the amount of any required reduction in payments
and benefits is finally determined in accordance with the provisions of
Section 8(c), the Employee shall notify the Company in writing regarding
which payments or benefits are to be reduced. If no notification is
given by the Employee, the Company will determine which amounts to reduce.
If, as a result of any reduction required by Section 8(a), amounts
previously paid to the Employee exceed the amount to which the Employee is
entitled, the Employee will promptly return the excess amount to the
Company.
(c) Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 8 shall be made in writing by
the Company's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon the Employee
and the Company for all purposes. For purposes of making the calculations
required by this Section 8, the Accountants may make reasonable assumptions
and approximations concerning applicable taxes and may rely on reasonable,
good faith interpretations concerning the application of Sections 280G
and 4999 of the Code. The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may
reasonably request in order to make a determination under this Section.
The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 8.
9. Certain Business Combinations. In the event it is determined by the
Board, upon receipt of a written opinion of the Company's independent public
accountants, that the enforcement of any Section or subsection of this
Agreement, including, but not limited to, Section 6(b) hereof, which allows
for the acceleration of vesting of options to purchase shares of the Company's
common stock upon a termination in connection with a Change of Control, would
preclude accounting for any proposed business combination of the Company
involving a Change of Control as a pooling of interests, and the Board
otherwise desires to approve such a proposed business transaction which
requires as a condition to the closing of such transaction that it be
accounted for as a pooling of interests, then any such Section of this
Agreement shall be null and void, but only if the absence of enforcement
of such Section would preserve the pooling treatment. For purposes of this
Section 9, the Board's determination shall require the unanimous approval
of the disinterested Board members.
10. Successors.
(a) Company's Successors. Any successors to the Company (whether direct
or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's
business and assets shall assume the obligations under this Agreement
and agree expressly to perform the obligations under this Agreement in
the same mannner annd to the same extent as the Company would be required
to perform such obligations in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include any
successor to the Company's business and assets which executes and delivers
the assumption agreement described in this Section 10(a) or which becomes
bound by the terms of this Agreement by operation of law.
(b) Employee's Successor. The terms of this Agreement and all rights of
the Employee hereunder shall inure to the benefit of, and be enforceable
by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, devisees and legatees.
11. Notice. Notice and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. In the case of the
Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case
of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
12. Miscellaneous Provisions
(a) Waiver. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(b) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not
expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(c) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State
of California.
(d) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(e) Arbitration. Any dispute or controversy arising out of, relating
to or in connection with this Agreement shall be settled exclusively by
binding arbitration in San Diego, California, in accordance with the
National Rules for the Resolution of Employment Disputes of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. The Company and the
Employee shall each pay one-half of the costs and expenses of such
arbitration, and each shall separately pay its counsel fees and expenses.
Punitive damages shall not be awarded.
(f) No Assignment of Benefits. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment
or other creditor's process, and any action in violation of this Section 12(g)
shall be void.
(g) Assignment by Company. The Company may assign its rights under this
Agreement to an affiliate, and an affilate may assign its rights under this
Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of the
assignment. In the case of any such assignment, the term "Company" when
used in a section of this Agreement shall mean the corporation that actually
employs the Employee.
(h) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY: CYMER, INC.
/s/ ROBERT P. AKINS
By: Robert P. Akins
Title: Chairman of the Board, Chief Executive Officer
and President
EMPLOYEE: /s/ EDWARD P. HOLTAWAY
Edward P. Holtaway
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-16559 on Form S-8, Registration Statement No. 333-67491 on Form S-8
and Registration Statement No. 333-39101 on Form S-3 of our report dated
February 2, 1999, appearing in this Annual Report on Form 10-K of Cymer,
Inc., for the year ended December 31, 1998 and to the reference to us
under the heading "Selected Financial Data" in such Form 10-K.
DELOITTE & TOUCHE, LLP
San Diego, California
March 24, 1999
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