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,
1996 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:
Name of each Exchange
Title of each class on which registered
Common Stock, $.001 par value Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
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 $38.50 for shares of the
registrant's Common Stock on March 10, 1997 as reported on the Nasdaq
National Market, was approximately $531,687,772. 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 10, 1997: 13,810,072
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 April 24, 1997
(Part III).
CYMER, INC.
1996 Annual Report on Form 10-K
TABLE OF CONTENTS
PART I 1
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
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 13
Item 8. Financial Statements and Supplemental Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III 27
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV 28
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 28
CYMER is a registered trademark of Cymer, Inc.
PART I
Item 1. Business
This Business section and other parts of this Form 10K contain
forward-looking statements that involve risk and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
General
Cymer is the leading provider of excimer laser illumination sources for
use in deep ultraviolet ("DUV") photolithography systems targeted at the
pilot and volume production segments of the semiconductor manufacturing
market. The Company'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. The Company
believes that its excimer lasers constitute a substantial majority of all
excimer lasers incorporated in DUV photolithography tools. The Company's
customers include all five manufacturers of DUV photolithography systems:
ASM Lithography, Canon, Integrated Solutions, Nikon and SVG Lithography.
Photolithography systems incorporating the Company's excimer lasers have
been purchased by the world's largest semiconductor manufacturers such as
Intel, NEC, Toshiba, Hitachi, Motorola, Samsung, Texas Instruments, Mitsubishi,
Fujitsu and Philips.
Products
The Company's products consist of photolithography lasers, industrial
high power lasers and replacement parts.
Photolithography Laser Products
The Company's photolithography lasers produce narrow bandwidth pulses
of short wavelength light. The lasers permit very fine feature resolution
and high throughput. The Company has designed its lasers to be highly
reliable, easy to install and compatible with existing semiconductor
manufacturing processes.
Introduced in the third quarter of 1995, the Company's ELS-4000F KrF
excimer laser is designed to meet the requirements of photolithography tool
and semiconductor manufacturers. The laser operates at a 600Hz pulse
repetition rate and provides power output of 7.2 watts of 248nm wavelength
light. The ELS-4000F incorporates advanced discharge chamber technology and
solid state pulse power technology to excite the laser gas efficiently,
reducing the cost of ownership. The ELS-4000F achieves high resolution and
stable focus through proprietary optical modules that perform line-narrowing
and wavelength stabilization, thereby optimizing the light emitted by the
laser for the photolithography application. The list price of the ELS-4000F
is approximately $425,000.
The Company's 5000 series KrF excimer lasers, introduced in the first
quarter of 1996, are offered in both narrowband, ELS-5000, and broadband,
EX-5000, configurations. The 5000 series lasers incorporate the advanced
technological features of the Company's ELS-4000F laser but operate at a
higher pulse repetition rate and provide higher power outputs that shorten
exposure time and increase throughput, and in the case of the ELS-5000, a
narrower bandwidth. The 5000 series lasers incorporate the Company's
proprietary line narrowing and wavelength stabilization modules together
with an atomic reference for long-term accuracy of the wavemeter calibration.
The 5000 series lasers utilize a modular design that allows the Company to
outsource many of the system's subassemblies, thereby reducing manufacturing
cycle times.
The Company's lasers incorporate advanced software control and
diagnostic systems. The control system provides users with on-line
monitoring of laser operating conditions, with approximately 75 diagnostic
readings (including flow rate, temperatures, pressures and light quality),
that are automatically monitored by the photolithography tool's control
system. Additionally, approximately 140 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.
Industrial High Power Laser Products
The Company'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. The Company is currently focusing its development and marketing
efforts on its photolithography laser products, and the Company's total
revenues from industrial laser products in 1996 were $1.2 million. Sales of
industrial lasers to Tamarack Scientific Co., Inc., a supplier of equipment
used by Hewlett-Packard to manufacture InkJet print heads, accounted for
1.5% of the Company's total revenues in 1996.
Replacement Parts
Certain components and subassemblies included in the Company's lasers
require replacement or refurbishment following continued operation. For
example, the discharge chamber of the Company's lasers has a component life
of approximately two to three billion pulses, depending on the model. The
Company estimates that a laser used in a semiconductor production environment
will require one to three replacement chambers per year. Similarly, certain
optical components of the laser will deteriorate with continued exposure to
DUV light and will require periodic replacement. The Company provides these
and other spare and replacement parts for its photolithography lasers as
needed by its customers. On a limited basis, the Company also refurbishes and
resells complete laser systems.
Customers and End Users
The Company sells its photolithography laser products to each of the
five manufacturers of DUV photolithography tools:
ASM Lithography Nikon
Canon SVG Lithography
Integrated Solutions
The Company works closely with its customers to integrate the Company'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 19%, 30%
and 31%, respectively, of total revenue in 1996. ASM Lithography, Canon and
Nikon are stockholders of the Company.
The following semiconductor manufacturers have purchased one or more
DUV photolithography tools incorporating the Company's laser:
United States Japan Korea
Advanced Micro Devices Fujitsu Hyundai
Digital Equipment Corporation Hitachi Lucky Goldstar
IBM Mitsubishi Electric Samsung
Integrated Device Technology NEC
Intel Corporation NTT Europe
Micron Technology Oki Electric
Motorola Sharp C-Net
Rockwell Sony IMEC
SEMATECH* Toshiba LETI
Texas Instruments Philips
SGS Thompson
Taiwan Siemens
ERSO/ITRI
ProMos
TSMC
UMC
Vanguard International
* A semiconductor industry consortium.
Backlog
The Company schedules production of lasers based upon order backlog and
informal customer forecasts. The Company 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, the Company's backlog
as of any particular date may not be a reliable indicator of actual sales for
any succeeding period. At December 31, 1996, the Company had a backlog of
approximately $98 million, compared with a backlog of $28.5 million at
December 31, 1995.
Manufacturing
The Company's manufacturing activities consist of assembly, integration
and test. These activities are performed in a 22,800 square foot facility
in San Diego, California that includes approximately 11,000 square feet of
class 1000 clean room manufacturing and test space. In order to focus on its
core technology, leverage the expertise of its key suppliers and respond
more efficiently to customer demand, the Company has outsourced many of its
subassemblies. The Company's outsourcing strategy is exemplified by the
modular design of the Company's 5000 series laser, for which substantially
all of the nonproprietary subassemblies have been outsourced.
To meet current and anticipated demand for its products, the Company
must substantially increase the rate by which it manufactures and tests its
photolithography laser systems. In order to accomplish this objective, the
Company intends to continue to hire and train additional manufacturing
personnel, improve its assembly and test processes in order to reduce cycle
time, invest in additional manufacturing tooling and implement a multi-shift
testing schedule. This increase would follow a nearly seven-fold increase
in the manufacturing rate from December 1995 to December 1996. The Company
has been unable to manufacture and test its photolithography laser systems
fast enough to fill orders and is behind on its delivery schedules. While
the Company is not aware of any order cancellations as a result of these
delays, such delays, if they continue or recur, increase the risk that
customers will cancel orders and seek to meet all or a portion of their needs
for illumination sources from the Company's competitors. The Company is also
increasingly relying on outside suppliers for the manufacture of various
components and subassemblies used in its products and is dependent upon these
suppliers to meet the Company's manufacturing schedules. The failure by one
or more of these suppliers to supply the Company on a timely basis with
sufficient quantities of components or subassemblies that perform to the
Company's specifications could affect the Company's ability to deliver
completed lasers to its customers on schedule. Additionally, the Company may
underestimate the costs required to increase its manufacturing capacity,
which may materially adversely affect the Company's results of operations.
In December 1996, the Company leased an additional 100,000 square feet
of manufacturing facilities in San Diego. In addition to increasing
manufacturing capacity at its San Diego facility, the Company has entered
into a contract manufacturing agreement with Seiko Instruments under which
Seiko has agreed to manufacture for the Company a certain number of the
Company's photolithography excimer lasers and subsequent enhancements. In
order to ensure uniformity of product for all customers, the Company will
maintain control of all work flow design, manufacturing process, engineering
changes and component sourcing decisions. The Company will manufacture and
seal all core technology modules in San Diego. The agreement expires in 2001,
but will automatically renew for two-year terms unless one year's notice to
terminate is given by either party. Seiko began limited production of lasers
in 1996.
Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers.
In particular, there are no alternative sources for certain of the components
and subassemblies, including certain optical components and pre-ionizer tubes
used in the Company's lasers. To date, the Company has been able to obtain
adequate supplies of its components and subassemblies from existing sources
to meet its current manufacturing schedule; however, suppliers of such
components and subassemblies have recently been unable to fully satisfy the
Company's orders for such products. The Company has only recently commenced
volume production of its laser systems and the Company believes that its
recent manufacturing expansion is likely to further strain the production
capacity of certain key suppliers, including suppliers of optical components
and pre-ionizer tubes. For example, the supplier of one of the key optical
components for the Company's lasers has recently experienced diminished
manufacturing yields of the component. While the Company is working actively
with the supplier to increase production of the component, there can be no
assurance that the supplier will be able to increase its production capacity
in time to satisfy the Company's increasing requirements. Moreover, the
Company is increasingly outsourcing the manufacture of various other
subassemblies. If the Company is unable to obtain sufficient quantities of
components or subassemblies, or if such items do not meet the Company's quality
standards, delays or reductions in product shipments could occur which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Sales and Marketing
The Company's sales and marketing efforts have been predominately
focused on DUV photolithography tool manufacturers. The Company markets and
sells its products through four account managers, two of whom are located in
the United States and two of whom are based in Japan. The Company is in the
process of developing product and applications engineering teams to support
the account managers and the Company's customers. The Company believes that
to facilitate the sales process it must work closely with and understand the
requirements of semiconductor manufacturers, the end users of the Company's
products. The Company visits major semiconductor manufacturers, and their
representatives attend Company-sponsored seminars on advanced excimer
photolithography. In Japan, the Company 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
The Company 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, the Company's support personnel typically assist the customer in
site preparation and inspection and provide customers with training at the
Company'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.
The Company's field engineers and technical support specialists are
based at its San Diego headquarters, its field service office near Boston and
its Japanese facility. Support in Korea is provided by EO Technics, a
contractor trained and supported by the Company. As part of its customer
service, the Company maintains an inventory of spare parts at each of its
service facilities. As the Company's installed base grows so does the
demand for replacement parts to satisfy world wide support requirements for
customers' support organizations as well as the companies' own logistics
organization. As the Company rapidly expands its production of new systems,
it must even more rapidly expand its production of component modules which are
required not only for systems but also for support and warranty requirements.
The Company believes that the need to provide fast and responsive
service to the semiconductor manufacturers using its lasers is critical and
that it will not be able to depend solely on its customers to provide this
specialized service. Therefore, the Company believes it is essential to
establish, through trained third party sources or through its own personnel, a
rapid response capability to service its customers throughout the world.
Accordingly, the Company intends to expand its direct support infrastructure
in Japan and Europe, establish a joint service and support capability with
an independent firm to serve Korea, and establish a joint service and support
capability with an independent firm to serve Taiwan and Southeast Asia. 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 the Company 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 the Company's business, financial condition
and results of operations.
The Company generally warrants its products against defects in design,
materials and workmanship for the earlier to occur of 17 months from the date
of shipment or 12 months after acceptance by the end user.
Research and Development
The semiconductor industry is subject to rapid technological change and
new product introductions and enhancements. The Company believes that
continued and timely development and introduction of new and enhanced laser
products are essential for the Company to maintain its competitive position.
The Company intends to continue to develop its technology and innovative
products to meet customer demands. Current projects include the development
of the next generation of photolithography lasers, including ArF 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.
The Company 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. As of
December 31, 1996, the Company had 93 employees engaged in research and
development. Research and development expenses for 1994, 1995 and 1996 were
approximately $3.3 million, $6.2 million and $11.7 million, respectively.
In addition to funding its own research and development projects, the
Company 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 the Company's core
technology. Revenues generated from research and development contracts
amounted to approximately $1.2 million, $3.2 million and $2.5 million during
1994, 1995, and 1996, respectively.
Intellectual Property Rights
The Company believes that the success of its business depends more on
such factors as the technical expertise of its employees, as well as their
innovative skills and marketing and customer relations abilities, than on
patents, copyrights, trade secrets and other intellectual property rights.
Nevertheless, the success of the Company may depend in part on patents, and the
Company owns 17 United States patents covering certain aspects of technology
associated with excimer lasers which expire from January 2008 to December
2013 and has applied for 12 additional patents in the United States, two of
which have been allowed. As of December 31, 1996, the Company also has filed
57 patent applications in other countries. There can be no assurance that
the Company's pending patent applications or any future applications will be
approved, that any 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 the Company's ability to do business. In this
regard, due to cost constraints, the Company did not begin filing for patents
in Japan or other countries with respect to inventions covered by its United
States patents and patent applications until recently and has therefore lost
the right to seek patent protection in those countries for certain of its
inventions. Additionally, because foreign patents may afford less protection
under foreign law than is available under United States patent law, there can
be no assurance that any such patents issued to the Company will adequately
protect the Company's proprietary information. Furthermore, there can be no
assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company.
Others may have filed and in the future may file patent applications
that are similar or identical to those of the Company. To determine the
priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that
could result in substantial cost to the Company. No assurance can be given that
any such patent application will not have priority over patent applications
filed by the Company.
The Company also relies upon trade secret protection, employee and
third-party nondisclosure agreements and other intellectual property
protection methods to protect its confidential and proprietary information.
Despite these efforts, there can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or
disclose such technology or that the Company can meaningfully protect its
trade secrets.
The Company has in the past been, and may in the future be, notified
that it may be infringing intellectual property rights possessed by third
parties. In November 1993, the Company was notified by Coherent, the parent
corporation of Lambda Physik, one of the Company's competitors, that certain
aspects of the Company's products might infringe upon a patent owned by
Coherent. In June 1996, the Company was notified by Coherent that certain
aspects of its products might infringe a second patent owned by Coherent. In
September 1996, Coherent and Lambda-Physik commenced a patent infringement
action against the Company with respect to the first patent in the United
States District Court for the Northern District of California. On November 1,
1996, the Company entered into a settlement agreement with Coherent and
Lambda Physik. Under the terms of the settlement, Coherent and Lambda-Physik
agreed to (i) dismiss the patent infringement action with prejudice and
(ii) release the Company from any claims either may have with respect to the
two disputed patents. In return, the Company agreed to make annual payments
to Coherent over a 13-year period. Such annual payments are not material to
the Company's financial position or results of operations.
In July 1996, the Company's prospective Japanese manufacturing partner,
Seiko, was notified by Komatsu, one of the Company's competitors, that
certain aspects of the Company's lasers might infringe certain claims
furnished by Komatsu to Seiko that Komatsu advised Seiko were included in a
patent application filed by Komatsu in Japan (the "Patent Claims"). Seiko
in turn notified the Company of this claim. In connection with its
manufacturing agreement with Seiko, the Company has agreed to indemnify
Seiko against such claims under certain circumstances. A patent has now been
issued by the Japanese Patent Office, covering the Patent Claims, and Komatsu
has advised Seiko of its intention to enforce its rights under that patent
against Seiko if Seiko engages in manufacturing activities for the Company.
The Company has been advised by its patent counsel in this matter, Wilson
Sonsini Goodrich & Rosati, Professional Corporation, which is relying in part
on the opinion of the Company's Japanese patent counsel, that in the opinion of
such firm the Company's products do not infringe any valid Patent Claims.
However, there can be no assurance that litigation will not ensue with
respect to these claims, that the Company and Seiko would ultimately prevail
in any such litigation, that Komatsu will not assert infringement claims
under additional patents or that Seiko will continue to manufacture lasers
under the threat of potential litigation.
Any patent litigation would, at a minimum, be costly and could divert
the efforts and attention of the Company's management and technical personnel,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that other infringement claims by third parties or other claims for
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. If any
such claims are asserted against the Company, the Company may seek to obtain
a license under the third party's intellectual property rights. There can be
no assurance, however, that a license will be available on reasonable terms
or at all. The Company could decide, in the alternative, to resort to
litigation to challenge such claims or to design around the patented
technology. Such actions could be costly and would divert the efforts and
attention of the Company's management and technical personnel, which would
materially adversely affect the Company's business, financial condition and
results of operations.
The Company has registered the trademark CYMER in the United States and
certain other countries and is seeking additional registrations in certain
countries. In Japan, the Company's application for registration was rejected
on the grounds that it is similar to a trademark previously registered by a
Japanese company for a broad range of products. The Company is seeking a
partial nullification of the other registration with respect to laser devices
and related components and does not believe that the holder of the other
trademark is engaged in any business similar to that of the Company. For
this reason, the Company is continuing to use the trademark CYMER in Japan
and believes that it will ultimately be permitted to register such mark for use
with its products and that it is not infringing the other company's
trademark. There can be no assurance that the Company will ultimately
succeed in its efforts to register its trademark in Japan or that it will not
be subjected to an action for trademark infringement, which could be costly
to defend and, if successful, would require the Company to cease use of the
mark and, potentially, to pay damages.
Effective August 1, 1989 and lasting until the expiration of the
licensed patents, the Company entered into an agreement for a nonexclusive
worldwide license to certain patented laser technology with Patlex Corp., a
patent holding company ("Patlex"). Under the terms of the agreement, the
Company is required to pay royalties ranging from 0.25% to 5% of gross sales
and leases of its lasers, as defined, based on total revenues earned. During
1995 and 1996, royalty fees totaled $64,000 and $226,000, respectively.
The Company has granted to Seiko the exclusive right in Japan and the
non-exclusive right outside of Japan to manufacture and sell the Company's
industrial high power laser and subsequent enhancements thereto. The Company
has also granted Seiko a right of first refusal to fund the Company's
development of, and receive a license to, new industrial laser technologies
not developed with funding from other parties. In exchange for these rights,
the Company received upfront license fees of $3.0 million. The Company 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 the Company
and Seiko will be at a 15% discount from the respective companies' list
prices. The agreement terminates in August 2012.
Competition
The Company, believes that the principal elements of competition in the
Company'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. The Company believes that it competes favorably with
respect to these factors.
The Company currently has two significant competitors in the market for
photolithography laser systems, Lambda-Physik, a German-based subsidiary of
Coherent, and Komatsu located in Japan. Both of these companies are larger
than the Company, have access to greater financial, technical and other
resources than the Company and are located in closer proximity to certain of
the Company's customers than is the Company. Although the Company believes
that these competitors are not yet supplying excimer lasers in volume, the
Company believes that both companies are aggressively seeking to gain larger
positions in the market for photolithography applications. The Company
believes that its customers have each purchased one or more products offered
by these competitors and that its customers may consider further purchases,
in part as a result of delays in deliveries by the Company in recent months
as the Company has been seeking to expand its manufacturing capacity. The
Company also believes that its customers are actively seeking a second source
for excimer lasers. Furthermore, photolithography tool manufacturers may
seek to develop or acquire the capability to manufacture internally their own
excimer lasers. In the future, the Company will likely experience
competition from other technologies, such as X-ray, electron beam and ion
projection processes. To remain competitive, the Company believes that it
will be required to manufacture and deliver products to customers on a timely
basis and without significant defects and that it will also be required to
maintain a high level of investment in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to continue to make the investments necessary to maintain its
competitive position. In addition, the market for excimer lasers is still
relatively small and immature and there can be no assurance that larger
competitors with substantially greater financial resources, including other
manufacturers of industrial lasers, will not attempt to enter the market.
There can be no assurance that the Company will remain competitive. A
failure to remain competitive would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors-Competition."
Employees
On December 31, 1996, there were 336 persons employed by the Company,
including 18 in Japan. No employees are currently covered by collective
bargaining agreements or are members of any labor organization as far as the
Company is aware. The Company 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 the Company and their ages as of December 31, 1996.
Name Age Position
Dr. Robert P. Akins 45 Chairman of the Board, Chief Executive
Officer and President
William A. Angus, III 50 Senior Vice President, Chief Financial
Officer and Secretary
G. Scott Scholler 46 Senior Vice President of Operations
Dr. Richard L. Sandstrom 46 Vice President of Advanced Research
Thomas C. Dannemiller 36 Vice President of Manufacturing
Robert B. MacKnight, III 47 Vice President and General Manager,
After Market Operations
Robert G. Ozarski 49 Vice President of Engineering
Louis A. Kaplan 54 Vice President, Human Resources
Nancy J. Baker 34 Director, Corporate Finance and
Treasurer
Dr. Robert P. Akins, a co-founder of the Company, has served as its
President, Chief Executive Officer and Chairman of the Board since its
inception in January 1986. From 1980 to 1985, Dr. 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. Dr. 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 the Company 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.
G. Scott Scholler has served as Senior Vice President of Operations of
the Company 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 telephony 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.
Dr. Richard L. Sandstrom, a co-founder of the Company, has served as its
Vice President of Advanced Research since June 1994. From February 1986 to
June 1994, Dr. Sandstrom served as Vice President of Technology for the
Company. Dr. Sandstrom received a B.A. in Physics in 1972 and a Ph.D. in
Engineering Physics in 1979 from the University of California, San Diego.
Thomas C. Dannemiller has served as Vice President of
Manufacturing of the Company since July 1995. From May 1991 to July 1995,
Mr. Dannemiller served as Director of Logistics at A.G. Associates, Inc., a
manufacturer of rapid thermal processing equipment for the semiconductor
industry. From September 1988 to February 1991, he was Director of
Operations for KLA. From 1986 to 1988, Mr. Dannemiller served as
Manufacturing Manager for Applied Materials, Inc., a supplier of equipment to
the semiconductor industry. Mr. Dannemiller graduated from the DeVry
Institute of Technology with a B.S. in Electronics Engineering Technology in
1982.
Robert B. MacKnight, III joined the Company in September 1996 as Vice
President and General Manager, After Market Operations. From June 1995 to
May 1996, Mr. MacKnight was Senior Vice President, Worldwide Business
Development, and from September 1994 to June 1995, General Manager of Flat
Panel Operations, of Watkins-Johnson Company, a maker of semiconductor
equipment and electronic products for wireless communications and defense.
From January 1990 to September 1994, Mr. MacKnight was the founder and
President of Aktis Corporation, a developer and manufacturer of advanced
thermal processing technology and equipment for the flat panel display
industry. From 1984 to 1989, Mr. MacKnight was a co-founder and Executive Vice
President of Peak Systems Inc., a manufacturer of semiconductor capital
equipment specializing in rapid thermal processing technology. Mr. MacKnight
received a B.S. in Business Administration in 1971, and an M.B.A. in 1973,
from the University of Massachusetts.
Robert G. Ozarski joined the Company in September 1996 as Vice President
of Engineering. From August 1992 to September 1996, Mr. Ozarski served in
various engineering management positions at Applied Materials, Inc., a
supplier of equipment to the semiconductor industry. From March 1995 to
September 1996, Mr. Ozarski was Director of Engineering and Production for its
Silicon Etch Division, from August 1994 to March 1995, Director of
Engineering for its MCVD Division, from September 1993 to August 1994,
Director of Manufacturing Engineering for its CVD Division, and from August
1992 to September 1993, Director of Engineering for its ACET Division. From
October 1991 to August 1992, Mr. Ozarski served as Director of Engineering
for Etec Systems, Inc., a manufacturer of semiconductor capital equipment.
From September 1989 to October 1991, Mr. Ozarski served as Director of
Engineering of Airco Coating Technology, Inc., a manufacturer of sputtering
equipment for architectural glass coatings and of electron-beam evaporation
systems principally used for semiconductor coating applications. From 1985
to 1989, Mr. Ozarski was Director of Engineering for General Signal Thinfilm
Co., a maker of semiconductor capital equipment for thin film deposition and
metrology. Mr. Ozarski received a B.S. in 1970, and an M.S. in 1972, in
Electrical Engineering from Wayne State University.
Louis A. Kaplan joined the Company in December 1996 as Vice President,
Human Resources. From July 1995 to November 1996, Mr. Kaplan served as
Director, Human Resources and Organizational Development for Advanced Micro
Devices, a manufacturer of integrated circuits for the personal and networked
computer and communication markets. From June 1986 to July 1995, he was a
principal in Consulting About Management, a consulting firm primarily
oriented toward turnaround situations in the high technology, health care and
printing industries. From 1981 to 1986, Mr. Kaplan served as Vice President,
Administration and Human Resources for North Star Computers, a manufacturer of
micro computers. Mr. Kaplan received a B.S. in Vocational Rehabilitation
Counseling from Pennsylvania State University in 1963 and an M.S. in
Industrial Relations in 1977 from Loyola University, Chicago.
Nancy J. Baker has served as Director, Corporate Finance and Treasurer
since October 1996. From August 1992 to October 1996, she served as
Controller of the Company. From March 1987 to April 1992, Ms. Baker was
Accounting Manager at International Totalizer Systems, Inc., a designer,
manufacturer and distributor of lottery and racetrack wagering systems. Ms.
Baker graduated from the University of Texas with a B.B.A. in Accounting in
1985.
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 the Company.
Item 2. Properties
Cymer's headquarters are located at 16750 Via Del Campo Court in an
approximate 37,000 square foot facility and a manufacturing facility is
housed in an approximately 66,000 square foot building located in San Diego,
California which the Company leases under leases expiring in January 1, 2010.
For use as a field service office, the Company also leases a 400 square foot
facility near Boston, Massachusetts under a lease expiring on August 31,
1998, and, for use as a field service and sales office, the Company leases
404 square meters of facilities in Ichikawa, Japan under four renewable one
and two year leases expiring at various times but cancelable by the Company
upon three months notice. The Company intends to add additional field
service offices as necessary to service its customers. In December 1996, the
Company leased the 37,000 building housing the corporate headquarters and an
additional 100,000 square feet of manufacturing facilities in San Diego.
Item 3. Legal Proceedings
For a description of certain patent infringement claims against the
Company and its Japanese manufacturing partner, see the fourth, fifth and
sixth paragraphs under "Intellectual Property Rights" in Item 1 of this
Annual Report. Neither the Company, nor any of its subsidiaries, is a party
to any other litigation, other than non-material litigation incidental to the
Company's business.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is publicly traded over-the-counter on the
Nasdaq National Market under the symbol CYMI. The following table lists the
high and low closing sales prices of the Company's Common Stock since its
initial public offering on September 18, 1996.
High Low
Third quarter of 1996 $17 3/4 $13 5/8
Fourth quarter of 1996 $48 1/4 $13 3/8
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Company'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, 1994, 1995, and 1996 and the consolidated balance sheet data at
December 31, 1995 and 1996 are derived from, and are qualified by reference
to, the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K, which have been audited by Deloitte & Touche LLP. The
consolidated statement of operations data for the years ended December 31,
1992 and 1993 and the consolidated balance sheet data at December 31, 1992,
1993, and 1994 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.
Years Ended December 31,
1992 1993 1994 1995 1996
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
Product sales $7,423 $3,393 $7,705 $15,576 $62,510
Other 1,708 2,306 1,216 3,244 2,485
Total revenues 9,131 5,699 8,921 18,820 64,995
Costs and expenses:
Cost of product sales 4,404 2,726 4,797 8,786 35,583
Research and development 2,673 2,733 3,283 6,154 11,742
Sales and marketing 2,182 2,154 1,780 2,353 5,516
General and administrative 989 782 849 1,181 4,270
Total costs and expenses 10,248 8,395 10,709 18,474 57,111
Operating income (loss) (1,117) (2,696) (1,788) 346 7,884
Other income (expense) - net (51) (7) (199) (241) (183)
Income (loss) before provision (1,168) (2,703) (1,987) 105 7,701
for income taxes
Provision for income taxes 100 221 58 36 1,191
Net income (loss) (1,268) (2,924) (2,045) 69 6,510
Primary earnings per share (1) $0.58
Weighted average common and
common equivalent shares
outstanding (1) 11,210
December 31,
1992 1993 1994 1995 1996
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents $1,537 $ 715 $2,326 $2,015 $55,405
Working capital 2,289 (122) (1,557) 3,845 84,743
Total assets 6,265 5,805 9,172 15,619 129,467
Total debt (2) 1,026 2,717 6,879 4,164 2,217
Redeemable convertible
preferred stock 12,889 12,989 19,290 28,409
Stockholders' equity (deficit) (8,947) (11,828) (19,752) (21,830) 98,820
(1) See note 1 of Notes to Consolidated Financial Statements for
an explanation of the determination of shares used in computing
earnings per share for 1996.
(2) Total debt includes indebtedness for borrowed money and capital lease
obligations.
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 the Company's statements of
operations as a percentage of total revenues for the periods indicated:
Years Ended December 31,
1994 1995 1996
Revenues:
Product sales 86.4% 82.8% 96.2%
Other 13.6 17.2 3.8
Total revenues 100.0 100.0 100.0
Cost and expenses:
Cost of product sales 53.8 46.7 54.7
Research and development 36.8 32.7 18.1
Sales and marketing 20.0 12.5 8.5
General and administrative 9.5 6.3 6.6
Total costs and expenses 120.1 98.2 87.9
Operating income (loss) (20.1) 1.8 12.1
Other income (expense) - net (2.2) (1.3) (0.3)
Income (loss) before provision
for income taxes (22.3) 0.5 11.8
Provision for income taxes 0.7 0.2 1.8
Net income (loss) (23.0)% 0.3% 10.0%
Gross margin on product sales 37.7% 43.6% 43.1%
YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenues. The Company's total revenues consist of product sales, which
include sales of laser systems and spare parts and service and training, and
other revenues, which primarily include 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 increased 301% from $15.6 million in 1995 to $62.5 million
in 1996, primarily due to increased sales of DUV photolithography laser
systems. A total of 145 laser systems were sold in 1996 compared to 34 laser
systems in 1995. Funded development revenues decreased 23% from $3.2 million
in 1995 to $2.5 million in 1996, primarily due to the completion in 1995 of a
laser research project sponsored by SEMATECH.
The Company's sales are generated primarily by shipments to customers in
Japan, the Netherlands, and the United States. Approximately 54%, 69% and 81%
of the Company's sales in 1994, 1995, and 1996, respectively, were derived from
customers outside the United States. The Company maintains a wholly-owned
Japanese subsidiary which sells to the Company's Japanese customers. Revenues
from Japanese customers, generated primarily by this subsidiary, accounted
for 33%, 50% and 61% of revenues in 1994, 1995, and 1996, respectively. The
activities of the Company's Japanese subsidiary are limited to sales and
service of products purchased by the subsidiary from the parent corporation.
All costs of development and production of the Company's products, including
costs of shipment to Japan, are recorded on the books of the parent company.
The Company anticipates that international sales will continue to account for a
significant portion of its net sales.
Cost of Product Sales. Cost of product sales includes direct material and
labor, warranty expenses, license fees, manufacturing and service overhead,
and foreign exchange gains and losses on foreign currency exchange contracts
associated with purchases of the Company's inventories by the Japanese
subsidiary for resale under firm third-party sales commitments. Net gains or
losses from foreign currency exchange contracts are recorded on the date the
inventories are received by the Japanese subsidiary and are included in cost
of product sales in the consolidated statements of operations as the related
sales are consummated. The Company recognized net gains on such contracts of
$496,000 and $1.9 million for the years ended December 31, 1995 and 1996,
respectively. Cost of product sales rose 305% from $8.8 million in 1995 to
$35.6 million in 1996 due to the increase in sales volume. The gross margin
on these sales remained relatively consistent at approximately 43% in 1995 and
1996.
Research and Development. Research and development expenses include costs
of internally-funded and customer-funded projects as well as continuing
research support expenses which primarily include employee and material
costs, depreciation of equipment and other engineering related costs.
Research and development expenses increased 91% from $6.2 million in 1995 to
$11.7 million in 1996, due primarily to increased product support efforts
associated with the release of the Company's 5000 series lasers and the
hiring of additional technical personnel. As a percentage of total revenues,
such expenses declined from 32.7% to 18.1% in the respective periods due to
the growth in the Company's revenues.
Sales and Marketing. Sales and marketing expenses include the expenses of
the sales, marketing and customer support staffs and other marketing
expenses. Sales and marketing expenses increased 134% from $2.4 million in
1995 to $5.5 million in 1996, due primarily to increased sales commissions
and increased sales support efforts and marketing activities as more lasers
were placed in the field. As a percentage of total revenues, such expense
declined from 12.5% to 8.5% in the respective periods due to the growth in
the Company's revenues.
General and Administrative. General and administrative expenses consist
primarily of management and administrative personnel costs, professional
services and administrative operating costs. These expenses increased 262%
from $1.2 million in 1995 to $4.3 million in 1996, due to an increase in
general and administrative support as the Company's sales volume,
manufacturing capacity and overall level of business activity increased, in
addition to a $705,000 receivable reserve recorded in 1996. As a percentage
of total revenue, such expenses excluding the receivable reserve decreased
from 6.3% to 5.5% in the respective periods. Overall, total expenses
increased to 6.6% of revenue in 1996.
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 U.S. dollar. Net other expense decreased from $241,000 in 1995 to
$183,000 in 1996, primarily due to the increase in interest income associated
with the investment of excess cash during the period, larger exchange gains
against the yen, offset by higher interest expense reflective of borrowing
requirements for the first nine months of 1996. Foreign currency exchange
gains totaled $10,000, interest income totaled $32,000, and interest expense
totaled $283,000 for 1995, compared to $161,000, $347,000, and $691,000,
respectively, for 1996.
The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar due to the fact that sales
by the Company to its Japanese subsidiary are denominated in dollars, and
sales by the subsidiary to customers in Japan are denominated in yen. The
Company's subsidiary manages its exposure to such fluctuations by entering
into foreign currency exchange contracts to hedge its purchase commitments to
the Company. The gains or losses from these contracts are recorded as a
component of cost of product sales, while the remaining foreign currency
exposure is recorded as other income (expense) in the consolidated statements
of operations. Gains and losses resulting from foreign currency translation
are accumulated as a separate component of consolidated stockholders' equity
(deficit).
Provision for Income Taxes. The provision for income taxes was
insignificant in 1995 and primarily represented taxes in Japan for research
and development revenues generated from agreements with Seiko. The tax
provision of $1.2 million in 1996 was primarily attributable to the
substantial growth in the Company's pretax income. As of December 31, 1996,
the Company had Federal and state tax business credit carryforwards available
to offset future tax liabilities of $1,833,000 and $293,000, respectively.
Such Federal and state tax credit carryforwards expire at various dates
beginning with the year 1997 and 2003, respectively.
YEARS ENDED DECEMBER 31, 1994 AND 1995
Revenues. Product sales increased 102% from $7.7 million in 1994 to
$15.6 million in 1995, reflecting significant increases in sales of DUV
photolithography laser systems and replacement parts and, to a lesser extent,
increases in sales of industrial laser systems. The Company sold 10 and 26
DUV photolithography systems in 1994 and 1995, respectively, and sold seven
and eight industrial laser systems during the same periods. Funded
development revenues increased 167%, from $1.2 million in 1994, to $3.2
million in 1995. This increase was primarily due to increased customer
interest in the development of production-worthy illumination sources. The
Company expects that funded development revenues will decrease as a
percentage of total revenues as the Company focuses on product sales.
Cost of Product Sales. Cost of product sales increased 83% from $4.8
million in 1994 to $8.8 million in 1995, as the Company's product sales
increased. Gross margin on product sales increased from 37.7% in 1994 to
43.6% in 1995. This increase was due primarily due to economies of scale
realized as the Company's sales volume increased.
Research and Development. Research and development expenses increased
87% from $3.3 million in 1994 to $6.2 million in 1995. The substantial
increase in 1995 was primarily due to the Company's research contract with
SEMATECH for the EX-5000 series laser system and to continuing product
development and enhancements associated with the ELS-4000F series laser system.
As a percentage of revenues, research and development expenses decreased from
36.8% to 32.7% in 1994 and 1995 due to the growth in the Company's revenues
in those periods.
Sales and Marketing. Sales and marketing expenses increased 32% from
$1.8 million in 1994 to $2.4 million in 1995. This increase was primarily
the result of increased industry interest in DUV photolithography and the
associated sales and marketing expenses, including sales commissions incurred
to support the interest. As a percentage of total revenues, these expenses
declined from 20.0% to 12.5% in 1994 and 1995, respectively.
General and Administrative. General and administrative expenses
increased 39% from $849,000 in 1994 to $1.2 million in 1995, reflecting
increases in general and administrative support as the Company's sales volume
increased and its scope of operations expanded. As a percentage of total
revenues, these expenses decreased from 9.5% to 6.3% in 1994 and 1995,
respectively, reflecting economies of scale as total revenues increased.
Other Income (Expense) - net. In 1994, the Company reported other net
expense of $199,000 primarily reflecting increased interest expense on bridge
financing obtained from the Company's investors to support is expanding
operations. This debt financing was subsequently converted into equity by the
investors in February 1995. The Company reported other expense of $241,000
in 1995 due to interest expense of $283,000, partially offset by foreign
exchange gains of $10,000 and interest income of $32,000.
Provision for Income Taxes. The Company's provision for income taxes,
which primarily represented taxes paid in Japan for license fees and research
and development revenues generated from agreements with Seiko, decreased from
$58,000 to $36,000 in 1994 and 1995, respectively, as revenues from these
activities decreased over these periods.
To date, inflation has not had a significant effect on the Company or
its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the cash flow generated
from the Company's September 18, 1996 initial public offering, resulting in
net proceeds to the Company of approximately $29.7 million and the public
offering on December 12, 1996, resulting in net proceeds of approximately $50.0
million, the private sale of equity securities over the Company's ten year
history totaling approximately $27.1 million and short term bank borrowings.
As of December 31, 1996, the Company had approximately $55.4 million in cash
and cash equivalents, $10.4 million in short term investments, $84.7 million in
working capital and $1.8 million in bank debt.
Net cash used in operating activities was approximately $2.1 million in
1995 and $8.0 million in 1996. The increase in cash used in operations
during 1996 was primarily attributable to an increase in accounts receivable
and inventory as the working capital requirements of the Company increased
due to the business expanding during the period.
Net cash used for investing activities was approximately $2.4 million in
1995 as compared to $22.9 million in 1996. The increase in cash used for
investing activities during 1996 primarily reflects the investment of funds
received through the Company's public offerings, and the purchase of computer
equipment, test equipment, research and development tools, manufacturing
process machinery and tenant improvements in the manufacturing area in order
to accommodate the business expansion for the period.
The Company's financing activities provided net cash of approximately $4.3
million and $83.6 million for 1995 and 1996, respectively. During 1995, the
Company sold Redeemable Convertible Preferred Stock for approximately $3.4
million, and increased its bank borrowings by $1.2 million. In 1996, the
Company received net proceeds of approximately $6.1 million from the sale of
Redeemable Convertible Preferred Stock and received net proceeds of
approximately $79.7 million from its public offerings. Upon the Company's
initial public offering in September 1996, all Redeemable Convertible
Preferred Stock (approximately 7.7 million shares) and Redeemable Convertible
Preferred Stock warrants (to purchase 283,000 shares of such stock) were
automatically converted into the Company's common stock or warrants to
purchase common stock.
The Company has available credit arrangements with a bank permitting
borrowings of up to $11.0 million. These borrowings are secured by
substantially all of the Company's assets, including its intellectual
property, and provide for the following facilities: (i) a $5.0 million
revolving line of credit expiring June 27, 1997, which is based on eligible
accounts receivable of the Company's Japanese subsidiary and eligible
inventory of the Company and its subsidiary and is partially guaranteed by
the Export-Import Bank of the United States; (ii) a $3.0 million revolving
line of credit expiring March 5, 1997 based on eligible international
accounts receivable and inventory (excluding Japan) and partially guaranteed
by the Export-Import Bank of the United States; (iii) a $1.0 million domestic
revolving loan facility expiring March 5, 1997 based on eligible domestic
accounts receivable; and (iv) a $2.0 million term loan facility which is due
September 30, 1998. The Company also has through its subsidiary in Japan a
2.1 billion yen (approximately $18.1 million) facility for the receipt of
funds from a bank in Japan, without recourse, in connection with the
discounting of certain commercial drafts received from customers as payment for
merchandise. As of December 31, 1996, 1.2 billion yen (approximately $10.4
million) was being utilized under the facility. The Company also has three
foreign currency exchange facilities. The Company had forward foreign
exchange contracts at December 31, 1996 to buy $43.2 million for 4.7 billion
yen. The total unrecorded deferred gain and premium on these contracts
as of December 31, 1996 was $1.8 million.
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company's future capital requirements will depend on many
factors, including the rate of the Company's manufacturing expansion, the
timing and extent of spending to support product development efforts and
expansion of sales and marketing and field service and support, the timing of
introductions of new products and enhancements to existing products, and
market acceptance of the Company's products. The Company believes that it
has sufficient working capital and available bank credit to sustain
operations and provide for the future expansion of its business during the next
fiscal year.
RISK FACTORS
The last paragraph under the heading "Liquidity and Capital Resources"
contains forward-looking statements. The Company may from time to time make
additional written and oral forward-looking statements, including statements
contained in the Company's filings with the Securities and Exchange Commission
and in its reports to stockholders. Such forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below. The Company does not undertake to update any forward-
looking statement that may be made from time to time by or on behalf of the
Company. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and
Exchange Commission.
Likely Fluctuations in Operating Results. The Company's operating
results have in the past fluctuated and are likely in the future to fluctuate
significantly depending upon a variety of factors. Such factors may include:
the demand for semiconductors in general and, in particular, for leading edge
devices with smaller circuit geometries; cyclicality in the market for
semiconductor manufacturing equipment; the timing and size of orders from the
Company's small base of customers; the ability of the Company to manufacture,
test and deliver laser systems in a timely and cost effective manner; the
ability of the Company's competitors to obtain orders from the Company's
customers; the timing of new product announcements and releases by the Company
and its competitors; the entry of new competitors into the market for DUV
photolithography illumination sources; the ability of the Company to manage
its costs as it begins to supply its products in volume; and the Company's
ability to manage effectively its exposure to foreign currency exchange rate
fluctuations, principally with respect to the yen (in which sales by the
Company's Japanese subsidiary are denominated).
The Company has historically derived a substantial portion of its
quarterly and annual revenues from the sale of a relatively small number of
systems, which are priced at up to $450,000. As a result, the precise timing
of the recognition of revenue from an order for one or a small number of
systems can have a significant impact on the Company's total revenues and
operating results for a particular period. The Company's operating results
for a particular period could be adversely affected if orders for a small
number of systems, or even one system, are canceled or rescheduled by
customers or cannot be filled in time to recognize revenue during that period
due to, for example, unanticipated manufacturing, testing, shipping or
product acceptance delays. The Company had a backlog of orders at December
31, 1996 of approximately $98 million for shipment during the next 12 months.
However, customers may cancel or delay orders with little or no penalty, and
because of the Company's limited experience in producing lasers in volume,
there can be no assurance that the Company will recognize revenue on any
significant portion of this backlog. The Company's expense levels are based,
in large part, on the Company's expectations as to future revenues and are,
therefore, relatively fixed in the short term. If revenue levels fall below
expectations, net income will be disproportionately and adversely affected. The
impact of these and other factors on the Company's revenues and operating
results in any future period cannot be forecast with any degree of certainty.
The Company believes that semiconductor manufacturers are currently
developing capability for pilot production of 0.25um devices. The Company
also believes that demand for its excimer lasers for DUV photolithography
tools is currently being driven by the efforts to develop such capability.
Once semiconductor manufacturers have acquired such capability, the company
believes that they will not invest in DUV photolithography tools to expand
their capacity to manufacture 0.25um devices until such time as their sales
forecasts justify such investment. As a result, the Company believes that
once current demand is satisfied, the Company's revenues could flatten or
even decline in future periods before resuming growth in response to future
demand, if any. Accordingly, the Company currently expects that demand for
its DUV excimer lasers, and thus its revenues, may decrease in the second
half of 1997, as compared to the first half of 1997.
Recently, the Company has significantly increased the scale of its
operations and its manufacturing capacity, including hiring additional
personnel and substantially increasing the number of systems in production.
This expansion has resulted in higher materials and work-in-process inventory
levels and significantly higher operating expenses, and has required the
Company to implement a variety of new systems, procedures and controls.
Based on its backlog of orders at December 31, 1996, the Company expects to
continue to increase its inventories and operating expenses. If orders
received by the Company do not result in sales, or if the Company is unable to
sustain its revenues at anticipated levels, the Company's operating results
would be materially adversely affected.
Due to the foregoing factors, as well as other unanticipated factors, it
is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts or investors. In such
event, the price of the Company's Common Stock would be materially adversely
affected.
History of Losses; Unpredictability of Future Operating Results. The
Company was founded in 1986 and shipped its first prototype laser system in
1988. Although the Company's revenues have increased over the last three
years and each of the last eight quarters, the Company has incurred annual
operating losses from inception through 1994 and incurred an operating loss in
the quarters ended March 31, 1995 and 1996. There can be no assurance that
the Company's revenues will grow or be sustained in future periods or that
the Company will be profitable in any future period. The Company's history of
annual and quarterly operating losses, its substantial expansion in
manufacturing capacity, its limited experience in supplying products in volume
and the difficulty of predicting the demand for its products, among other
factors, make the prediction of future operating results difficult if not
impossible.
Risks Associated with Rapid and Substantial Manufacturing Expansion. To
meet current and anticipated demand for its products, the Company must
continue to increase the rate by which it manufactures and tests its
photolithography laser systems. This increase would follow a nearly
seven-fold increase in the manufacturing rate from December 1995 to December
1996. The Company is currently unable to manufacture and test its
photolithography laser systems fast enough to fill orders and is behind on
its delivery schedules. While the Company is not aware of any order
cancellations as a result of these delays, such delays, if they continue or
recur, increase the risk that customers will cancel orders and seek to meet
all or a portion of their needs for illumination sources from the Company's
competitors. The Company is also increasingly relying on outside suppliers
for the manufacture of various components and subassemblies used in its
products and is dependent upon these suppliers to meet the Company's
manufacturing schedules. The failure by one or more of these suppliers to
supply the Company on a timely basis with sufficient quantities of components or
subassemblies that perform to the Company's specifications could affect the
Company's ability to deliver completed lasers to its customers on schedule.
Additionally, the Company may underestimate the costs required to increase its
manufacturing capacity, which may materially adversely affect the Company's
results of operations.
In addition to increasing manufacturing capacity at its facilities in
San Diego, California, the Company is also seeking to qualify Seiko
Instruments, Inc. ("Seiko") of Japan as a contract manufacturer of its
photolithography lasers. While Seiko began limited production of lasers for
the Company in 1996, there can be no assurance that Seiko will be successfully
qualified and commence production on schedule. The failure of Seiko to be so
qualified or to commence production on schedule could have a material adverse
effect on the Company's business, financial condition and results of operations.
Seiko has been advised by Komatsu, Ltd. ("Komatsu"), a competitor of the
Company, that certain aspects of the Company's lasers might infringe a patent
that has been issued to Komatsu in Japan and that Komatsu intends to enforce
its rights under that patent against Seiko if Seiko engages in manufacturing
activities for the Company. Cymer has been advised by its patent counsel
that in the opinion of such firm the Company's products do not infringe any
valid claims included in the Komatsu patent. In the event that,
notwithstanding its manufacturing agreement with the Company, Seiko should
determine not to commence or continue manufacturing the Company's products
until resolution of the matter with Komatsu, the Company's ability to meet the
anticipated demand for its products could be materially adversely affected.
Dependence on Key Suppliers. Certain of the components and subassemblies
included in the Company's products are obtained from a single supplier or a
limited group of suppliers. In particular, there are no alternative sources
for certain of the components and subassemblies, including certain optical
components and pre-ionizer tubes used in the Company's lasers. In addition,
the Company is increasingly outsourcing the manufacture of various
subassemblies. Although to date the Company has been able to obtain adequate
supplies of its components and subassemblies in a timely manner from existing
sources, the Company has only recently commenced volume production of its
laser systems. The Company believes that its recent manufacturing expansion
has significantly strained the production capacity of certain key suppliers,
including suppliers of optical components and pre-ionizer tubes. If the
Company is unable to obtain sufficient quantities of components or
subassemblies, or if such items do not meet the Company's quality standards,
delays or reductions in product shipments could occur which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Single Product Line. The Company's only product line is
excimer lasers, the primary market for which is for use in DUV
photolithography equipment for manufacturing deep-submicron semiconductor
devices. Demand for the Company's products will depend in part on the rate
at which semiconductor manufacturers adopt excimer lasers as the illumination
source for their photolithography tools. Impediments to such adoption
include a shortage of engineers with experience implementing, utilizing and
maintaining DUV photolithography systems that incorporate excimer laser
illumination sources, instability of photoresists used in DUV
photolithography and a shortage of specialized glass used in DUV optics.
There can be no assurance that such impediments can or will be overcome, and, in
any event, such impediments may materially reduce the demand for the
Company's products. In addition, to the extent that such manufacturers are
able to produce semiconductors with smaller critical feature sizes by
extending the performance capabilities of mercury lamp illumination sources
used in existing i-line or DUV photolithography tools, the demand for the
Company's products would also be materially reduced. Further, if the Company's
customers experience reduced demand for DUV photolithography tools, or if the
Company's competitors are successful in obtaining significant orders from
such customers, the Company's results of operations would be materially
adversely affected.
Risk of Excessive Inventory Buildups by Photolithography Tool
Manufacturers. Substantially all of the Company's customers are
photolithography tool manufacturers, which in turn sell their systems to
semiconductor manufacturers. Over the past year, the Company's customers
have substantially increased their forecasted shipments of DUV
photolithography tools. The Company believes that the increase in demand for
DUV photolithography tools coupled with the dependence of the manufacturers of
these tools on a limited number of laser suppliers may have caused a degree
of over-ordering of the Company's products. The Company is working with its
customers to better understand end user demand for DUV photolithography
tools. However, there can be no assurance that the Company will be
successful in this regard, or that is customers will not build excessive
laser inventories. Excessive customer laser inventories could result in a
material decline in the Company's revenues and operating results in future
periods as such inventories are brought into balance.
Limited Production Use of Excimer Lasers. The Company first shipped its
lasers for photolithography applications in 1988. The Company is not aware of
any semiconductor manufacturer using the Company's laser for volume
production of semiconductor devices. There can be no assurance that the
Company's products will meet production specifications when subjected to
prolonged and intense use in volume production in semiconductor manufacturing
processes. If any semiconductor manufacturer is not able to successfully
achieve volume production using the Company's lasers, the Company's
reputation with semiconductor manufacturers or the limited number of
photolithography tool manufacturers could be damaged, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Small Number of Customers. The Company's primary customer
base is composed of a small number of manufacturers of DUV photolithography
tools. Four large firms, ASM Lithography, Canon, Nikon and SVG Lithography
(a subsidiary of Silicon Valley Group, Inc.), dominate the photolithography
tool business and collectively accounted for approximately 65% and 90% of the
Company's total revenues in 1995 and 1996, respectively. Sales to ASM
Lithography, Canon, Nikon and SVG Lithography accounted for approximately
19%, 30%, 31% and 10%, respectively, of total revenues in 1996 and 18%, 19%, 27%
and 1%, respectively, of total revenues in 1995. The Company expects that
sales of its systems to these customers will continue to account for
substantially all of its revenues in the foreseeable future. None of the
Company's customers is obligated to purchase a minimum number of the
Company's products. Loss of any significant business from any one of these
customers or a significant reduction in orders from any one of these customers,
including reductions caused by changes in a customer'scompetitive position, a
decision to purchase illumination sources from other suppliers or economic
conditions in the semiconductor and photolithography tool industries, would have
a material adverse effect on the Company's business, financial condition and
results of operations.
Need to Manage a Changing Business. The Company recently has
dramatically expanded the scope of its operations and the number of employees in
most of its functional areas. For example, the Company increased the number of
its employees from 136 to 336 between December 31, 1995 and 1996. The Company
also substantially increased its manufacturing capacity during that period and
installed a new management information system. If demand for the Company's
products continues to grow, the Company will be required to continue this
expansion. The management of such growth, if such growth occurs, will require
the Company to continue to improve and expand its management, operational and
financial systems, procedures and controls, including accounting and other
internal management systems, procedures and control, delivery and field
service and customer support capabilities. The Company will also be required
to manage effectively its expanding international operations, effect timely
deliveries of its products or maintain the product quality and reliability
required by its customers. The Company has experienced, and may continue to
experience, delays in deliveries to customers as a result of its inability to
increase its manufacturing capacity fast enough to meet demand. Any failure to
manage the Company's growth, if such growth occurs, would materially
adversely effect the Company's financial condition and results of operations.
Balanced Production between Systems and Replacement Parts. The Company
expects that the demand for replacement parts and component modules will
increase as the installed base of lasers increases. As a result, the Company
will be required to rapidly expand its production of component modules, which
are also required for new laser systems.
Because the Company prioritizes the reliable operation of its installed
units at semiconductor manufacturers above all other requirements, the
failure to rapidly expand the production of component modules could necessitate
the delay in shipment of new laser systems as component modules would be
utilized first to support existing systems in the field. Such delays in system
shipments could have a material adverse effect on the Company's business,
financial condition and results of operations.
Need to Expand Field Service and Support Organization. The Company
believes that the need to provide fast and responsive service to the
semiconductor manufacturers using its lasers is critical and that it will not be
able to depend solely on its customers to provide this specialized service.
Therefore, the Company believes it is essential to establish, through trained
third-party sources or through its own personnel, a rapid response capability
to service its lasers throughout the world. Accordingly, the Company intends to
expand its direct support infrastructure in Japan and Europe, expand its field
service and support in Korea through an independent firm, and establish a
joint service and support capability with an independent firm to serve
Taiwan and Southeast Asia. The establishment of these activities will entail
recruiting and training qualified personnel, 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 the Company 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 the Company's business,
financial condition and results of operations.
Dependence on Semiconductor Industry. Substantially all of the
Company's revenues are derived from photolithography tool manufacturers that
in turn depend on the demand for their products from semiconductor
manufacturers. Semiconductor manufacturers correspondingly depend on the
demand from manufacturers of end-products or systems that use semiconductors.
The semiconductor industry is highly cyclical and has historically
experienced periodic and significant downturns, which often have had a severe
effect on the demand for semiconductor manufacturing equipment, including
photolithography tools. The Company believes that downturns in the
semiconductor manufacturing industry will occur in the future, and will result
in decreased demand for semiconductor manufacturing equipment. In addition,
the Company believes that its ability to reduce expenses in a future downturn
will be constrained by the need for continual investment in research and
development, and the need to maintain extensive ongoing customer service and
support capability. Accordingly, any downturn in the semiconductor industry
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition. The Company currently has two significant competitors in
the market for excimer laser systems for photolithography applications.
Lambda-Physik R&D ("Lambda-Physik"), a German-based subsidiary of Coherent, Inc.
("Coherent") and Komatsu, Ltd., located in Japan. Both of these companies
are larger than the Company, have access to greater financial, technical and
other resources than does the Company and are located in closer proximity to
the Company's customers than is the Company. Although the Company believes that
these competitors are not yet supplying excimer lasers in volume for
photolithography applications, the Company believes that both companies are
aggressively seeking to gain larger positions in this market. The Company
believes that its customers have each purchased one or more products offered
by these competitors and that its customers will consider further purchases, in
part as a result of delays in deliveries by the Company in recent months as
the Company has been seeking to expand its manufacturing capacity. The
Company also believes that its customers are actively seeking a second source
for excimer lasers. Furthermore, photolithography tool manufacturers may seek to
develop or acquire the capability to manufacture internally their own excimer
lasers. In the future, the Company will likely experience competition from
other technologies, such as X-ray, electron beam and ion projection processes.
To remain competitive, the Company believes that it will be required to
manufacture and deliver products to customers on a timely basism and without
significant defects and that it will also be required to maintain a high
level of investment in research and development and in sales and marketing.
There can be no assurance that the Company will have sufficient resources to
continue to make the investments necessary to maintain its competitive
position. In addition, the market for excimer lasers is still small and
immature and there can be no assurance that larger competitors with
substantially greater financial resources, including other manufacturers of
industrial lasers, will not attempt to enter the market. There can be no
assurance that the Company will remain competitive. A failure to remain
competitive would have a material adverse effect on the Company's business,
financial condition and results of operations.
Rapid Technological Change; New Product Introductions. Semiconductor
manufacturing equipment and processes are subject to rapid technological
change. The Company believes that its future success will depend in part
upon its ability to continue to enhance its excimer laser products and their
process capabilities and to develop and manufacture new products with
improved capabilities. In order to enhance and improve its products and
develop new products, among other things, the Company must work closely with
its customers, particularly in the product development stage, to integrate its
lasers with its customer's photolithography tools. There can be no assurance
that future technologies, such as X-ray, electron beam and ion projection
processes, will not render the Company's excimer laser products obsolete or
that the Company will be able to develop and introduce new products or
enhancements to its existing products and processes in a timely manner that
satisfy customer needs or achieve market acceptance. The failure to do so could
materially adversely affect the Company's business, financial condition and
results of operations.
Uncertainty Regarding Patents and Protection of Proprietary Technology.
The Company believes that the success of its business depends more on such
factors as the technical expertise of its employees, as well as their
innovative skills and marketing and customer relations ability, than on
patents, copyrights, trade secrets and other intellectual property rights.
Nevertheless, the success of the Company may depend in part on patents, and
as of December 31, 1996, the Company owned 17 United States patents covering
certain aspects of technology associated with excimer lasers which expire from
January 2008 to December 2013 and had applied for 12 additional patents in
the United States, two of which have been allowed. As of December 31, 1996,
the Company had filed 57 patent applications in other countries. There can be
no assurance that the Company's pending patent applications or any future
applications will be approved, that any patents will provide it with
competitive advantages or will not be challenged by third parties, or that
the patents of others will not have an adverse effect on the Company's
ability to do business. In this regard, due to cost constraints, the Company
did not begin filing for patents in Japan or other countries with respect to
inventions covered by its United States patents and patent applications until
recently and has therefore lost the right to seek patent protection in those
countries for certain of its inventions. Additionally, because foreign patents
may afford less protection under foreign law than is available under United
States patent law, there can be no assurance that any such patents issued to
the Company will adequately protect the Company's proprietary information.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate the Company's products or, if patents are
issued to the Company, design around the patents issued to the Company.
Others may have filed and in the future may file patent applications that
are similar or identical to those of the Company. To determine the priority
of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that
could result in substantial cost to the Company. No assurance can be given
that any such patent application will not have priority over patent
applications filed by the Company.
The Company also relies upon trade secret protection, employee and
third-party nondisclosure agreements and other intellectual property
protection methods to protect its confidential and proprietary information.
Despite these efforts, there can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or
disclose such technology or that the Company can meaningfully protect its
trade secrets.
The Company has in the past been, and may in the future be, notified
that it may be infringing intellectual property rights possessed by third
parties.
In July 1996, the Company's prospective Japanese manufacturing partner,
Seiko, was notified by Komatsu, one of the Company's competitors, that
certain aspects of the Company's lasers might infringe certain claims
furnished by Komatsu to Seiko that Komatsu advised Seiko were included in a
patent application filed by Komatsu in Japan (the "Patent Claims"). Seiko in
turn notified the Company of this claim. In connection with its
manufacturing agreement with Seiko, the Company has agreed to indemnify Seiko
against such claims under certain circumstances. A patent has now been issued by
the Japanese Patent Office covering the Patent Claims and Komatsu has advised
Seiko of its intention to enforce its rights under that patent against Seiko
if Seiko engages in manufacturing activities for the Company. The Company
has been advised by its patent counsel in this matter, Wilson, Sonsini,
Goodrich & Rosati, Professional Corporation, which is relying in part on the
opinion of the Company's Japanese patent counsel, that in the opinion of such
firm the Company's products do not infringe any valid Patent Claims.
However, there can be no assurance that litigation will not ensue with
respect to these claims or that the Company and Seiko would ultimately
prevail in any such litigation.
Any patent litigation would at a minimum be costly and could divert the
efforts and attention of the Company's management and technical personnel,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that other infringement claims by third parties or other claims for
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. If any
such claims are asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance, however, that a license will be available on reasonable terms or
at all. The Company could decide, in the alternative to resort to litigation to
challenge such claims or to design around the patented technology. Such
actions could be costly and would divert the efforts and attention of the
Company's management and technical personnel, which would materially
adversely affect the Company's business, financial condition and results of
operations.
The Company has registered the trademark CYMER in the United States and
certain other countries and is seeking additional registrations in certain
countries. In Japan, the Company's application for registration was rejected
on the grounds that it is similar to a trademark previously registered by a
Japanese company for a broad range of products. The Company is seeking a
partial nullification of the other registration with respect to laser devices
and related components and does not believe that the holder of the other
trademark is engaged in any business similar to that of the company. For
this reason, the Company is continuing to use the trademark CYMER in Japan
and believes that it will ultimately be permitted to register such mark for use
with its products and that it is not infringing the other company's
trademark. There can be no assurance that the Company will ultimately
succeed in its efforts to register its trademark in Japan or that it will not be
subjected to an action for trademark infringement, which could be costly to
defend and, if successful, would require the Company to cease use of the mark
and, potentially, to pay damages.
Dependence on Key Personnel. The Company is highly dependent on the
services of a number of key employees in various areas, including
engineering, research and development, sales and marketing and manufacturing.
In particular, there are a limited number of experts in excimer laser
technology and competition for such personnel is intense. The Company has in
the past experienced difficulty in hiring personnel, including experts in
laser technology. The Company believes that, to a large extent, its future
success will depend upon the continued services of its engineering, research
and development, sales and marketing and manufacturing personnel and on its
ability to attract and retain highly skilled personnel in each of these
areas. The Company does not have employment agreements with any of its
employees, and there is no assurance that the Company will be able to retain
its key employees. The failure of the Company to hire and retain such
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks of International Sales and Operations. Approximately 54%, 69% and
81% of the Company's revenues in 1994, 1995 and 1996, respectively, were
derived from customers located outside the United States. Because a
significant majority of the Company's principal customers are located in other
countries, the Company anticipates that international sales will continue to
account for a significant portion of its revenues. In order to support its
overseas customers, the Company maintains a subsidiary in Japan, is expanding
its field service and support operations in Japan and Europe, is working with an
independent firm to expand field service and support in Korea, is seeking to
establish with an independent firm a joint field service and support
capability to serve Taiwan and Southeast Asia, and is seeking to qualify
Seiko as a manufacturer of its products in Japan. There can be no assurance
that the Company will be able to manage these operations effectively or that
the Company's investment in these activities will enable it to compete
successfully in international markets or to meet the service and support
needs of its customers. Additionally, a significant portion of the Company's
sales and operations could be subject to certain risks, including tariffs and
other barriers, difficulties in staffing and managing foreign subsidiary and
branch operations, currency exchange risks and exchange controls, potentially
adverse tax consequences and the possibility of difficulty in accounts
receivable collection. Further, while the Company has experienced no
difficulty to date in complying with U.S. export controls, these rules could
change in the future and make it more difficult or impossible for the Company to
export its products to various countries. There can be no assurance that any
of these factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar due to sales by the Company to
its Japanese subsidiary being dominated in dollars, and sales by the
subsidiary to customers in Japan being dominated in yen. The Company's
subsidiary manages its exposure to such fluctuations by entering into foreign
currency exchange contracts to hedge its purchase commitments. Although
management will continue to monitor the Company's exposure to currency
fluctuations, and, when appropriate, use financial hedging techniques to
minimize the effect of these fluctuations, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's results of operations or financial condition. In the future, the
Company could be required to sell its products in other currencies, which
would make the management of currency fluctuations more difficult and expose
the Company to greater risks in this regard.
The Company's products are subject to numerous foreign government
standards and regulations that are continually being amended. Although the
Company endeavors to meet foreign technical and regulatory standards, there
can be no assurance that the Company's products will continue to comply with
foreign government standards and regulations, or changes thereto, or that it
will be cost effective for the Company to redesign its products to comply
with such standards and regulations. The inability of the Company to design
or redesign products to comply with foreign standards could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Environmental and Other Government Regulations. Federal, state and local
regulations impose various controls on the storage, handling, discharge and
disposal of substances used in the Company's manufacturing process and on the
facility leased by the Company. The Company believes that its activities
conform to present governmental regulations applicable to its operations and
its current facilities, including those related to environmental, land use,
public utility utilization and fire code matters. There can be no assurance
that such governmental regulations will not in the future impose the need for
additional capital equipment or other process requirements upon the Company or
restrict the Company's ability to expand its operations. The adoption of
such measures or any failure by the company to comply with applicable
environmental and land use regulations or to restrict the discharge or
hazardous substances could subject the Company to future liability or could
cause its manufacturing operations to be curtailed or suspended.
Risks of Product Liability Claims. The Company faces a significant risk
of exposure to product liability claims in the event that the use of its
products results in personal injury or death, and there can be no assurance
that the Company will not experience material product liability losses in the
future. The Company maintains insurance against product liability claims in
the amount of $5.0 million per occurrence and $6.0 million in the aggregate,
but there can be no assurance that such coverage will continue to be
available on terms acceptable to the Company or that such coverage will be
adequate for liabilities actually incurred. Also, in the event that any of
the Company's products prove to be defective, the Company may be required to
recall or redesign such products. A successful claim brought against the
Company in excess of available insurance coverage, or any claim or product
recall that results in significant adverse publicity against the Company,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Risks Associated with Customer-Funded Research and Development. The
Company has in the past funded a significant portion of its research and
development expenses from research and development revenues received from
photolithography tool manufacturers and from SEMATECH, a semiconductor industry
consortium, in connection with the design and development of specific
products. The Company's staffing levels and other expenditures for research
and development are, in part, determined by the level of funding that the
Company expects to receive for specific projects. No assurance can be given
that the Company will continue to generate research and development revenues
to offset a sufficient portion of its production development costs. Any
material cancellation of this funding or a failure to secure research and
development funding commensurate with the Company's expectations could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the recognition of research and
development revenues is dependent on the company accomplishing certain
research and development milestones. If such milestones are not achieved,
the Company will not recognize the associated research and development
revenues, which could have a material adverse effect on its business,
financial condition and results of operations. Although the Company
anticipates that it will continue to receive research and development
revenues in the future, there can be no assurance that this level of support
will be maintained at past levels, and the company believes that such
revenues will constitute a decreasing percentage of its overall revenues. As
a result, the Company may have to bear a greater proportion of the cost of
design and development of its products which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company's arrangements with photolithography tool
manufacturers and SEMATECH seek to clarify the ownership of the intellectual
property arising from research and development services performed by the
Company, there can be no assurance that disputes over the ownership or rights to
use or market such intellectual property will not arise between the Company and
such parties. Any such dispute could result in restrictions on the Company's
ability to market its products and could have a material adverse effect on
the Company's business, financial condition and results of operations.
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
the Company's directors under the caption "Nominees" under the main caption
"Proposal One - Election of Directors" in the Company'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 the
Company's fiscal year ended December 31, 1996, is incorporated herein by this
reference. For information regarding the identification and business
experience of the Company'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 the Company's executive officers
and directors under the caption "Compliance With Section 16(a) of the
Exchange Act" in the Company'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 the Company'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 the Company's Proxy Statement is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions" in the
Company's Proxy Statement is incorporated herein by this reference.
With the exception of the information specifically incorporated by
reference from the Company's Proxy Statement in Part III of this Annual
Report on Form 10-K, the Company'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 the Company'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,
1995 and 1996 F-2
Consolidated Statements of Operations for the
Years Ended December 31, 1994, 1995 and 1996 F-3
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended December 31, 1994,
1995 and 1996 F-4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1994, 1995 and 1996 F-5
Notes to Consolidated Financial Statements F-7
(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, 1996.
(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)
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)
10.6 Series A Preferred Stock Purchase Agreement, dated
May 3, 1988 (incorporated herein by reference to
Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.7 Series B Preferred Stock Purchase Agreement, dated
June 28, 1989 (incorporated herein by reference to
Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.8 Series C Preferred Stock Purchase Agreement, dated
April 16, 1990 (incorporated herein by reference
to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.9 Series D Preferred Stock Purchase Agreement, dated
March 15, 1991 (incorporated herein by reference
to Exhibit 10.9 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.10 Series E Preferred Stock Purchase Agreement,
dated February 25, 1994 (incorporated herein by
reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.11 Series F Preferred Stock Purchase Agreement,
dated February 28, 1995 (incorporated herein by
reference to Exhibit 10.11 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.12 Series G Preferred Stock Purchase Agreement,
dated January 30, 1996 (incorporated herein by
reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.13 Patent License Agreement, dated October 13,
1989, by and between the Company 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)
10.14 Loan Agreement, dated August 15, 1991, by and
between Mitsubishi International Corporation and
the Company (incorporated herein by reference to
Exhibit 10.14 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.15 Standard Industrial Lease - Multi-Tenant,
dated August 19, 1991, by and between Frankris
Corporation and the Company (incorporated herein
by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.16 Contract Manufacturing Agreement -
Lithography Laser, dated August 28, 1992, by and
between the Company 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)
10.17 Product License and Manufacturing Agreement -
High Power Laser, dated August 28, 1992, by and
between the Company 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)
10.18 Agreement, dated December 14, 1994, between
the Company 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)
10.19 Master Lease Agreement, dated April 23, 1996, between
Tokai Financial Services and the Company (incorporated herein by
reference to Exhibit 10.19 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.20 Single-Tenant Industrial Lease, dated December 19,
1996, by and between AEW/LBA Acquisition Co. II, LLC and the
Company.
11.1 Calculation of earnings per share
21.1 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
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 19, 1997 By: /s/ ROBERT P. AKINS
_________________________________
Dr. 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 March 19, 1997
___________________________ Officer, and Chairman of the
Robert P. Akins Board
/s/ WILLIAM A. ANGUS, III Senior Vice President, Chief March 19, 1997
___________________________ Financial Officer and
William A. Angus, III Secretary
/s/ NANCY J. BAKER Director, Corporate Finance, March 19, 1997
___________________________ Treasurer and Chief Accounting
Nancy J. Baker Officer
/s/ RICHARD P. ABRAHAM Director March 19, 1997
___________________________
Richard P. Abraham
/s/ KENNETH M. DEEMER Director March 19, 1997
___________________________
Kenneth M. Deemer
/s/ PETER J. SIMONE Director March 19, 1997
___________________________
Peter J. Simone
/s/ F. DUWAINE TOWNSEN Director March 19, 1997
___________________________
F. Duwaine Townsen
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Cymer, Inc.:
We have audited the accompanying consolidated balance sheets of Cymer, Inc.
(successor to Cymer Laser Technologies) and its subsidiary (collectively the
"Company") as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. 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 the Company as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, during 1994
the Company changed its method of accounting for the accretion of the 8% per
annum redemption provision on the Company's Redeemable Convertible Preferred
Stock.
DELOITTE & TOUCHE LLP
San Diego, California
January 29, 1997
CYMER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
1995 1996
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $2,015 $55,405
Short-term investments 10,449
Accounts receivable - net 4,832 18,833
Foreign exchange contracts receivable 9,317
Inventories 5,315 15,678
Deferred income taxes 1,432
Prepaid expenses and other 306 1,880
Total current assets 12,468 112,994
PROPERTY - net 3,053 11,707
OTHER ASSETS 98 4,766
TOTAL ASSETS $15,619 $129,467
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving loan and security agreements $2,786 $1,750
Advances against commercial drafts 1,305
Accounts payable 2,369 7,095
Accrued and other liabilities 2,163 8,401
Foreign exchange contracts payable 8,396
Income taxes payable 2,609
Total current liabilities 8,623 28,251
OTHER LIABILITIES 417 2,396
COMMITMENTS AND CONTINGENCIES (Note 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK -
authorized 9,834,880 shares; $.01 stated
par value; issued and outstanding 6,496,000
shares (liquidation preference - $28,409,000)
at December 31, 1995 28,409
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - authorized 5,000,000
shares; $.001 par value, no shares issued
or outstanding
Common stock - authorized 25,000,000 shares;
$.001 par value, issued and outstanding
13,780,000 shares at December 31, 1996 14
Common stock - authorized 15,000,000 shares;
$.01 stated par value, issued and outstanding
1,160,000 shares at December 31, 1995 12
Paid-in capital 195 106,672
Accumulated deficit (21,832) (7,421)
Cumulative translation adjustment (205) (445)
Total stockholders' equity (deficit) (21,830) 98,820
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $15,619 $129,467
See Notes to Consolidated Financial Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
1994 1995 1996
REVENUES:
Product sales $7,705 $15,576 $62,510
Other 1,216 3,244 2,485
Total revenues 8,921 18,820 64,995
COSTS AND EXPENSES:
Cost of product sales 4,797 8,786 35,583
Research and development 3,283 6,154 11,742
Sales and marketing 1,780 2,353 5,516
General and administrative 849 1,181 4,270
Total costs and expenses 10,709 18,474 57,111
OPERATING INCOME (LOSS) (1,788) 346 7,884
OTHER INCOME (EXPENSE):
Foreign currency exchange gain - net 65 10 161
Interest and other income 17 32 347
Interest and other expense (281) (283) (691)
Total other income (expense)-net (199) (241) (183)
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,987) 105 7,701
PROVISION FOR INCOME TAXES 58 36 1,191
NET INCOME (LOSS) (2,045) 69 6,510
EARNINGS PER SHARE:
Primary:
Earnings per share $0.58
Weighted average common and common
equivalent shares 11,210
Fully Diluted:
Earnings per share $0.56
Weighted average common and common
equivalent shares 11,566
See Notes to Consolidated Financial Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Common Stock Paid-in Accumulated Translation Stockholders'
Shares Amount Capital Deficit Adjustment Equity
(Deficit)
BALANCE, JANUARY 1, 1994 1,063 $11 $149 $(11,956) $ (32) $(11,828)
Exercise of common stock options 28 15 15
Net loss (2,045) (2,045)
Accretion of redeption - preferred
stock (5,897) (5,897)
Cumulative translation adjustment 3 3
BALANCE, DECEMBER 31, 1994 1,091 11 164 (19,898) (29) (19,752)
Exercise of common stock options 69 1 31 32
Net income 69 69
Accretion of redemption - preferred
stock (2,003) (2,003)
Cumulative translation adjustment (176) (176)
BALANCE, DECEMBER 31, 1995 1,160 12 195 (21,832) (205) (21,830)
Change in par value due to
reincorporation (10) 10
Exercise of common stock options 127 93 93
Issuance of common stock under
consulting agreement 10 100 100
Initial public offering of common
stock, net of issuance costs 3,509 3 29,737 29,740
Conversion of preferred stock and
warrants to common stock 7,704 8 26,550 26,558
Secondary public offering of common
stock, net of issuance costs 1,270 1 49,987 49,988
Net income 6,510 6,510
Reversal of accretion of redemption
upon conversion of preferred stock 7,901 7,901
Cumulative translation adjustment (240) (240)
BALANCE, DECEMBER 31, 1996 13,780 14 106,672 (7,421) (445) 98,820
See Notes to Consolidated Financial Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
1994 1995 1996
OPERATING ACTIVITIES:
Net income (loss) $(2,045) $69 $6,510
Adjustments to reconcile net
(loss) to net cash used for
operating activities:
Depreciation and amortization 677 820 2,284
Loss on disposal of property 223
Change in assets and liabilities:
Accounts receivable (207) (2,574) (15,436)
Foreign exchange contracts
receivable (9,317)
Inventories (1,205) (2,813) (10,512)
Deferred income taxes (1,432)
Prepaid expenses and other assets (233) 99 (4,919)
Accounts payable 424 1,404 5,501
Foreign exchange contracts payable 8,396
Accrued and other liabilities 407 379 8,769
Income taxes payable 2,609
Other (17) 502 (674)
Net cash used for operating
activities (2,199) (2,114) (7,998)
INVESTING ACTIVITIES:
Acquisition of property (640) (2,653) (11,090)
Disposal of property 91 226 16
Purchases of investments (13,715)
Sales of investments 1,900
Net cash used for investing
activities (549) (2,427) (22,889)
FINANCING ACTIVITIES:
Net (payments) borrowings under
revolving loan and security
agreements (42) 1,240 (1,036)
Proceeds from issuance of redeemable
convertible preferred stock 404 3,407 6,050
Proceeds from issuance of common
stock 15 32 79,935
Net advances against (discounting of)
commercial drafts 945 (390) (1,240)
Payments on capital lease obligations (27) (159)
Net proceeds from issuance of
subordinated promissory notes 3,150
Net cash provided by financing
activities 4,472 4,262 83,550
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (113) (32) 727
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,611 (311) 53,390
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 715 2,326 2,015
CASH AND CASH EQUIVALENTS AT END
OF YEAR 2,326 2,015 55,405
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid 162 219 467
Income taxes paid 58 36 14
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 100 573
Net book value of property
transferred to inventory for resale 39 177
Conversion of subordinated promissory
notes and related interest payable
to Redeemable Convertible Preferred
Stock 3,755
See Notes to Consolidated Financial Statements.
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Cymer, Inc. (successor to Cymer Laser Technologies)
and its subsidiary (collectively the "Company") is engaged primarily in the
development, manufacturing and marketing of excimer lasers for sale to
manufacturers of photolithography tools in the semiconductor equipment industry.
The Company sells its product to customers primarily in Japan, the Netherlands
and the United States.
Reincorporation and Recapitalization - The Company's Board of Directors and
stockholders approved a reincorporation into the State of Nevada that became
effective on August 21, 1996. In connection with the reincorporation, the
Company increased its authorized common stock to 25,000,000 shares. The Board
of Directors and stockholders also approved the creation of a new class of
5,000,000 shares of undesignated preferred stock which was authorized on the
closing of the Company's initial public offering.
The Company completed its initial public offering of 3,509,000 shares of
common stock on September 18, 1996, resulting in net proceeds to the Company of
approximately $29.7 million. In connection with the offering, all outstanding
Redeemable Convertible Preferred Stock and related outstanding warrants, were
converted into 7,704,000 shares of common stock (see Note 6). On December 12,
1996, the Company completed a secondary public offering of 1,270,000 shares of
common stock, resulting in net proceeds to the Company of approximately $50
million.
Principles of Consolidation - The consolidated financial statements include
the accounts of Cymer, Inc. and its wholly-owned subsidiary, Cymer Japan, Inc.
The Company sells its excimer lasers in Japan primarily through Cymer Japan,
Inc. 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.
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 - The Company's investments are composed primarily of government
and corporate fixed income securities. While it is the Company's general intent
to hold such securities until maturity, management will occasionally sell
particular securities for cash flow purposes. Therefore, the Company's
investments are classified as available-for-sale and are carried at fair value.
Gains and losses on these investments were not material in 1996. See Note 3.
Inventories - Inventories are carried at the lower of cost (first-in,
first-out) or market.
Property - Property is stated at cost. Depreciation is provided using the
straight-line or declining balance methods 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, the Company
adopted Financial Accounting Standards Board Statement No. 121 (FAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". FAS 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 FAS 121, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. In 1996, the
Company recorded expense related to impairment losses totaling $223,000.
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 requirements 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 $1,216,000, $3,244,000 and
$2,485,000 for the years ended December 31, 1994, 1995, and 1996, respectively.
Warranty Expense - The Company generally warrants its products against
defects for the earlier to occur of 17 months from the date of shipment or 12
months after acceptance by the end-user. The Company accrues a provision for
warranty expense for all products sold. 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, the Company adopted
Financial Accounting Standards Board Statement No. 123 (FAS 123), "Accounting
for Stock-Based Compensation". FAS 123 encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 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
the Company'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 (deficit). Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of operations.
Foreign Exchange Contracts - The Company enters into foreign currency
exchange contracts in order to reduce the impact of currency fluctuations
related to purchases of the Company's inventories by Cymer Japan, Inc. for
resale under firm third-party sales commitments. Net gains or losses are
recorded on the date the inventories are received by Cymer Japan, Inc. (the
transaction date) and are included in cost of product sales in the consolidated
statements of operations 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.
The Company recognized net gains from the above foreign currency exchange
contracts of $496,000 and $1,920,000 for the years ended December 31, 1995 and
1996, respectively. The net gain of $496,000 for the year ended December 31,
1995 was reclassified to cost of product sales for consistency with the 1996
presentation. The face amount of the underlying contracts was $4,048,000 and
$16,123,000 at December 31, 1995 and 1996, respectively. The Company also had
forward foreign exchange contracts at December 31, 1996 to buy $43.2 million for
4.7 billion yen under foreign currency exchange facilities with banks in Japan
(see Note 4). The total unrecorded deferred gain and premium on these contracts
as of December 31, 1996 was $1,814,000. Such contracts expire on various dates
through September 1997.
Concentration of Credit Risk - The Company invests its excess cash in an
effort to preserve capital, provide liquidity, maintain diversification and
generate returns relative to the Company's corporate investment policy and
prevailing market conditions. The Company has not experienced any losses on
its cash accounts. The Company 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:
Year ended December 31,
1994 1995 1996
Customer (in thousands)
A $2,134 $5,035 $20,123
B 3,557 19,134
C 1,472 3,395 12,586
D 6,555
E 1,320 1,954
F 1,231
Receivables from these customers totaled $2,576,000 and $16,183,000 at
December 31, 1995 and 1996, respectively.
Revenues from Japanese customers, generated primarily by the Company's
subsidiary, accounted for 33%, 50% and 61% of revenues for the years ended
December 13, 1994, 1995 and 1996, respectively. Revenues from a customer in the
Netherlands accounted for 17%, 18% and 19% of revenues for the years ended
December 31, 1994, 1995 and 1996, respectively.
Revenues from stockholders totaled $2,917,000, $9,085,000 and $52,114,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
Earnings Per Share - Primary earnings per share is computed based on the
weighted average number of common and common equivalent shares (common stock
options and warrants) outstanding during each period using the treasury stock
method. Fully diluted earnings per share reflect the maximum dilution of per
share earnings utilizing the end of the year market price per share under
the treasury stock method. All shares of common stock and common stock
equivalents issued within twelve months of an initial public offering at a
price per share less than the estimated offering price are considered to be
outstanding for all periods presented in the same manner as a stock split.
Accordingly, all shares of common stock and common stock equivalent issued in
1996 prior to the Company's initial public offering at a price per share below
the initial public offering price are considered to be outstanding for all of
1996. Earnings (loss) per share information is not presented for 1994 and
1995 as such presentation prior to the Company's initial public offering would
not be meaningful.
Reclassifications - Certain amounts in the prior years' financial statements
have been reclassified to conform to current period presentation.
2. BALANCE SHEET DETAILS
December 31,
1995 1996
(in thousands)
ACCOUNTS RECEIVABLE:
Trade $ 3,412 $19,072
Other 1,420 466
Subtotal 4,832 19,538
Less allowance for doubtful accounts (705)
Total 4,832 18,833
INVENTORIES:
Raw materials 2,114 6,243
Work-in-progress 2,232 6,680
Finished goods 969 2,755
Total 5,315 15,678
PROPERTY - at cost:
Furniture and equipment 4,113 10,888
Capitalized lasers 1,788 3,474
Leasehold improvements 245 1,713
Construction in process 587 1,229
Subtotal 6,733 17,304
Less accumulated depreciation and
amortization (3,680) (5,597)
Total 3,053 11,707
3. INVESTMENTS
Investments consist of the following as of December 31, 1996 (in thousands):
Short-term:
Weekly Municipal Floater $4,602
Municipal Bonds 3,706
Floating Rate Bonds 950
Commercial Paper 591
Medium-Term Notes 300
U.S. Government Agencies 300
Total 10,449
Long-term:
Municipal Bonds 1,061
Medium-Term Notes 300
Total 1,361
Investments are recorded at fair value, which approximated cost as of
December 31, 1996. Short-term investments mature within one year and long-term
investments mature in one year to 17 months. Long-term investments are included
with other long-term assets on the consolidated balance sheet. See also
"Investments" in Note 1.
4. CREDIT FACILITIES
Revolving Loan Facility - The Company had a revolving loan facility ("Loan
Facility") providing for borrowings of up to $1,000,000 and guaranteed by a
preferred stockholder of the Comany (see Note 10). Interest was payable
quarterly, and the balance was due on the earlier of March 31, 1997 or the
completion of the Company's initial public offering. The $1,000,000 balance
owed plus accrued interest due against the Loan Facility was paid upon
completion of the Company's initial public offering in September 1996.
Loan and Security Agreement - The Loan and Security Agreement (the
"Agreement") provides 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). Borrowings under the Agreement
are secured by substantially all of the Company's assets. The Agreement
provides for the following (i) a $2,000,000 bank loan which is secured by the
Company's assets, bears interest at a rate of prime plus .25% per annum, is
payable in equal quarterly installments which begin December 31, 1996 through
September 30, 1998, (ii) a $1,000,000 revolving bank line of credit which is
also secured by the Company's assets, bears interest at a rate of prime per
annum, is due March 5, 1997 and (iii) $8,000,000 under lines of credit secured
by the Company's foreign receivables and inventory and guaranteed by the U.S.
Export-Import Bank, which bears interest at prime rate per annum, and are due
March 5, 1997 (as to $3,000,000) and June 27, 1997 (as to $5,000,000). There
was $1,750,000 outstanding under the Agreement at December 31, 1996.
The Agreement requires the Company to maintain compliance with certain financial
statement and other covenants including, among other items, limitation on
additional debt, total liabilities to tangible net worth and minimum tangible
net worth. As of December 31, 1996, the Company was in compliance with all
such covenants.
In connection with the original Agreement, the Company issued the bank a
five-year warrant to purchase 15,000 shares of the Company's Series D
Redeemable Convertible Preferred Stock at $8.50 per share. In February 1995,
warrants to purchase 16,000 shares of the Company's Series E Redeemable
Convertible Preferred Stock at $4.00 per share were exchanged for the 15,000
Series D warrants (see Note 6).
Advances Against Commercial Draft - Advances against commercial drafts
represent funds advanced by a bank 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 are for a maximum of 2.1 billion yen (approximately $18,125,000 at
December 31, 1996), are discounted at the bill discount rate plus 0.5% (1.875%
at December 31, 1996) and generally mature within 120 days. The Company has
deposited $459,000 with the bank under lien to the bank as security under the
agreement.
Foreign Exchange Facilities - The Company 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 $43.2 million to be utilized for forward
contracts for periods of up to one year. As of December 31, 1996, $18.7
million was being utilized under the foreign exchange facility (see "Foreign
Exchange Contracts" in Note 1). The Company has guaranteed approximately $1.7
million as security under this agreement.
The second foreign exchange facility with another bank in Japan provides
up to $32.4 million to be utilized for forward contracts for periods of up to
eight months. As of December 31, 1996, $24.5 million was being utilized under
the foreign exchange facility (see "Foreign Exchange Contracts" in Note 1).
The facility is part of the agreement providing advances against commercial
drafts and is subject to the same security.
The foreign exchange facility with the United States Bank provides up to
$3.5 million to be utilized for spot and future foreign exchange contracts.
The total gross amount to be settled within 2 business days is not to exceed
$1 million (settlement limit) at any one time. The settlement limit may be
increased against the revolving credit line availability or advance payment
arranged prior to delivery of the foreign currency overseas. There were no
foreign exchange contracts outstanding under this agreement at December 31,
1996. This facility is part of the Loan and Security Agreement discussed
above and is subject to the same security and covenants.
5. CONVERSION OF SUBORDINATED PROMISSORY NOTES - STOCKHOLDERS
During 1995, principal totaling $3,622,000 plus accrued interest of
$133,000 relating to loans obtained from certain stockholders in 1994 were
converted into 1,073,000 fully-paid and non-assessable shares of Series F
Redeemable Convertible Preferred Stock of the Company at $3.50 per share.
In connection with the original loan, the Company also issued warrants to
purchase shares of Series F Redeemable Convertible Preferred Stock (see
Note 6).
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon the Company's initial public offering in September 1996, all
Redeemable Convertible Preferred Stock (approximately 7.7 million shares) and
Redeemable Convertible Preferred Stock warrants (to purchase 283,000 shares of
such stock) were automatically converted into the Company's common stock or
warrants to purchase common stock. The conversion of the preferred stock and
warrants to common 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 1994, the Company changed its method of accounting for the 8% per annum
accretion of the redemption price for the Company's Redeemable Convertible
Preferred Stock. Prior to 1994, the Company did not record the accretion, as
it was not probable that funds would be available for redemption. However, in
1994, the Company's prospects improved, justifying the change in method in
accounting for the accretion. The impact of the change was to increase the
balance of Redeemable Convertible Preferred Stock by $5,897,000 with a
respective increase in the accumulated deficit in stockholders' deficit as of
December 31, 1994. Upon the September 1996 conversion discussed above, the
cumulative accretion of $7,901,000 was recorded as a reduction of the
accumulated deficit.
7. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock - Pursuant to the Company'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, 1996, the Company had warrants
outstanding to purchase 323,000 shares of its common stock at a weighted average
purchase price of $3.42 per share. The warrants expire in 2000 and 2001.
Stock Option and Purchase Plans - The Companyy has four plans that are
described in the following as:
Common Shares Designated
for Issuance
<s)
(i) 1987 Stock Plan 1,500,000
(ii) 1996 Stock Option Plan 1,500,000
(iii) 1996 Employee Stock Purchase Plan 250,000
(iv) 1996 Director Option Plan 100,000
Total 3,350,000
(i) 1987 Stock 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 the Company'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 the
Company. Incentive stock options may be granted only to employees. The 1996
Stock Plan is administered by the Board of Directors or by a committee
appointed by the Board of Directors, which determines the terms of options
granted, including the exercise price and the number of shares subject to the
option. The exercise price of incentive stock options granted under the 1996
Stock Plan must be at least equal to the fair market value of the Company's
common stock on the date of grant and the exercise price of nonqualified stock
options must be at least equal to 85% of the fair market value of the Company's
common stock on the date of grant. The maximum term of options granted under
the 1996 Stock Plan is ten years.
(iii) 1996 Employee Stock Purchase Plan (the "Purchase Plan") - The
Purchase Plan is intended to qualify under Section 423 of the Code. Under
the Purchase Plan, an eligible employee may purchase shares of common stock
from the Company through payroll deductions of up to 10% of his or her base
compensation (excluding bonuses, overtime and sales commissions), at price
per share equal to 85% of the lower of (i) the fair market value of the
Company's common stock as of the first day of each offering period under
the Purchase Plan or (ii) the fair market value of the common stock at the
end of the offering period. Each six month offering period will commence
the first day on which the national stock exchanges and the Nasdaq National
Market are open for trading on or after May 1 and November 1 of each year,
except that the first offering period began on the date of the Company's
initial public offering and will end on April 30, 1997. In the event of a
merger or asset sale, the offering period then in progress will be
shortened so that each participant's options will be exercised before the
date of the merger or sale. Any employee who is customarily employed
for at least 20 hours per week and more than five months per calendar year
and who has been so employed for at least three consecutive months on or
before the commencement date of an offering period is eligible to
participate in the Purchase Plan.
(iv) 1996 Director Option Plan (the "Director Option Plan") - The
Director Option Plan went into effect upon the completion of the Company's
initial public offering. Each director who is elected or appointed to the
Board of Directors subsequent to the adoption of the Director Option Plan and
who is not an employee of the Company automatically receives a nonstatutory
option to purchase 10,000 shares of common stock of the Company on the date
such person becomes a director. In addition, each non-employee director shall
receive an option to acquire 2,500 shares of the Company's common stock upon
such director's reelection at each Annual Meeting of Stockholders, provided
that on such date such director shall have served on the Board of Directors
for at least six months. Each option granted under the Director Option Plan
is exercisable at 100% of the fair market value of the Company's common stock
on the date such option is granted. Of the options granted under the Director
Option Plan, 6.25% vest three months after their dates of grant, with an
additional 6.25% vesting at the end of each subsequent three month period. The
Plan is in effect for a term of ten years unless sooner terminated by the
Board. There were no options issued under the Plan in 1996.
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, 1994 492 $0.78
Granted 67 $0.50
Exercised (28) $0.59
Terminated (107) $0.72
Outstanding, December 31, 1994 424 $0.76
Granted 979 $0.61
Exercised (59) $0.70
Terminated (383) $0.67
Outstanding, December 31, 1995 961 $0.65
Granted 694 $14.31
Exercised (127) $0.73
Terminated (39) $2.32
Outstanding, December 31, 1996 1,489 $6.96
Exercisable, December 31, 1996 293 $0.62
The Company applies APB 25 and related interpretations in accounting for
its employee stock option plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plan, as the options are granted
at the fair market value of the Company's common stock. 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 FAS 123, the
Company's net income for the year ended December 31, 1995 would have been
reduced by approximately $19,000 and the Company's net income and earnings per
share for the year ended December 31, 1996 would have been reduced by
approximately $218,000 or $.02 per share. The fair value of the options
granted during 1995 is estimated as $599,000 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield or volatility rate, risk free interest rates of 5.57% to 7.54%, assumed
forfeiture rate of 3% and an expected life of five years. The fair value of
the options granted during 1996 is estimated as $9,700,000 on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
no dividend yield, volatility rate of 107%, risk free interest rates of 5.33%
to 6.68%, assumed forfeiture rate of 3% and an expected life of five years.
The following table summarized information as of December 31, 1996
concerning currently outstanding and exercisable options:
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)
$0.25 - $3.00 801 3.30 $0.63 293 $0.62
$4.00 - $8.00 333 4.19 5.32
$9.50 187 4.68 9.50
$22.75 30 4.79 22.75
$41.00 138 4.91 41.00
__________ _________
1,489 293
Common Shares Reserved - As of December 31, 1996, the Company had reserved
the following number of shares of common stock for issuance (in thousands):
Issuance under stock option and purchase plans 1,502
Exercise of common stock purchase warrants 323
_______
Total 1,825
8. INCOME TAXES
Income taxes in the statement of operations for years ended December 31,
1994 and 1995 primarily represent taxes paid in Japan for research and
development revenues generated from agreements with Japanese companies (see
Note 10).
The components of the provision for income taxes are summarized as follows
for the year ended December 31, 1996 (in thousands):
Current income taxes:
Federal $1,605
Foreign 1,004
Total 2,609
Deferred income taxes:
Federal (131)
State (12)
Foreign (352)
Total (495)
Reduction in valuation allowance (923)
Provision for income taxes $1,191
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate (34%) to income
before provision for income taxes. The items causing this difference for the
period ended December 31, 1996 are as follows:
Provision at statutory rate 34.0%
Foreign provision in excess of Federal statutory rate 7.3
State income taxes, net of Federal benefit (1.6)
Foreign sales corporation taxes, net of Federal benefit (4.4)
Federal tax credits (2.5)
Miscellaneous/other items 3.2
Reduction in valuation allowance (20.5)
Provision at effective rate 15.5%
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 the Company's net deferred tax assets are as follows:
December 31,
1994 1995 1996
(in thousands)
Tax credit carryforwards $1,241 $1,829 $2,126
Net operating loss carryforwards 3,608 3,195
Capitalized research and development costs 298 359 243
Reserves and accruals not currently deductible 254 339 3,290
Differences between book and tax basis of
inventory and fixed assets 242 450 594
Unearned revenues 199 307 108
Deferred rent 141 159 175
State taxes (351) (427) (65)
Deferred taxes - foreign 352
Settlement costs (103)
Net deferred tax assets before valuation allowance 5,632 6,211 6,720
Valuation allowance (5,632) (6,211) (5,288)
Total $ - $ - $1,432
The Company has Federal and state tax business credit carryforwards
available to offset future tax liabilities of $1,833,000 and $293,000,
respectively. Such Federal and state tax credit carryforwards expire at
various dates beginning with the year 1997 and 2003, respectively.
The Company recorded a valuation allowance equal to the total net
deferred tax asset balance at December 31, 1994 and 1995. The Company reduced
its valuation allowance in 1996 by $923,000 to the extent management believes
current year activity made realization of such benefit more likely than not.
9. COMMITMENTS AND CONTINGENCIES
Leases - The Company 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 term. The Company also leases certain other facilities and equipment under
capital and short-term operating lease agreements. The capital leases expire
on various dates through 2000.
Under the terms of an operating lease for an office building entered into
in December 1996, the Company 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 other long-term assets on the consolidated
balance sheet.
Rent expense under operating leases is recognized on a straight-line basis
over the life of the related leases and totaled approximately $555,000,
$736,000, and $1,052,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
The net book value of assets under capital leases at December 31, 1995 and
1996 was approximately $85,000 and $528,000, net of accumulated amortization of
approximately $16,000 and $145,000, respectively.
Total future minimum lease commitments under operating and capital leases
are as follows (in thousands):
Year Ending December 31, Operating Capital
1997 $ 1,864 $ 181
1998 2,388 154
1999 2,443 148
2000 2,502 100
2001 2,560
Thereafter 23,418
________ _______
Total 35,175 583
Less amount representing interest 116
Present value of minimum lease payments 467
Less current portion 148
Long term obligations under capital leases $ 319
Patent License Agreement - The Company has a patent license agreement
for a non-exclusive worldwide license to certain patented laser technology.
Under the terms of the agreement, the Company is required to pay royalties
ranging from 0.25% to 5% of gross sales and leases as defined depending on the
total amounts attained. Royalty fees totaled $30,000, $64,000 and $226,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.
Employee Savings Plan - The Company 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. The Company is not required to make contributions and
through December 31, 1996, no contributions had been made.
Retirement Plan - During the period ended December 31, 1996, Cymer Japan,
Inc. adopted a retirement benefit plan for all Cymer Japan, Inc. 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 Benefits Cooperative Law.
Total expense under the plan for the year ended December 31, 1996 amounted to
$37,000.
Contingency - On November 1, 1996, the Company entered into a settlement
agreement for the dismissal of a patent infringement complaint filed against
the Company in September, 1996. Under the terms of the settlement, the
plaintiffs agreed to (i) release the Company from any claims they may have with
respect to the disputed patent and (ii) dismiss the patent infringement action
with prejudice. In return, the Company agreed to make annual payments to the
plaintiffs over a 13 year period. Such annual payments and the related expense
are not material to the Company's financial position, results of operations or
cash flows.
In addition, the Company's Japanese manufacturing partner has been notified
that its manufacture of the Company's laser systems in Japan may infringe a
Japanese patent held by another Japanese company. The Company has indemnified
its Japanese manufacturing partner against patent infringement claims under
certain circumstances. The Company believes, based upon the advice of counsel,
that the Company's products do not infringe any valid claim of the asserted
patent.
10. RELATED PARTY TRANSACTIONS
Collaborative Arrangement - The Company has a collaborative arrangement
with a Japanese company that is also a stockholder of the Company. 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 235,295 shares of the
Company's Series D Redeemable Convertible Preferred Stock at $8.50 per share
with net proceeds to the Company of $1,909,000. Such stock was converted to
common stock in 1996 (see Note 6).
Research and Development Agreement - The stockholder will reimburse the
Company 50% of the Company's total research and development expenses under
annual sub-agreements, as defined, to a maximum of $500,000 per year.
Reimbursements of $375,000 and $250,000 were received under the agreement for
the years ended December 31, 1994 and 1995, respectively. The agreement
expired in June 1995.
Product License Agreement - The Company granted to the stockholder the
exclusive right in Japan and the non-exclusive right outside Japan to
manufacture and sell one of the Company's products and subsequent enhancements
thereto. The Company 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, the Company 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 the Company 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 1994, 1995 and 1996.
Contract Manufacturing Agreement - The stockholder has agreed to
manufacture for the Company another of its products. The Company will be
required to purchase a specified percentage of its total annual product, as
defined. The agreement expires on August 2001, and will automatically renew
for two-year terms unless one year's notice is given by either party. The
Company made $477,000 in purchases under this agreement in 1996. No purchases
were made in 1994 and 1995.
Design and Development Agreements - During 1995, the Company entered into
design and development agreements with certain of its major customers who are
also stockholders. Such agreements generally provide, among other things,
discounts to these customers on future sales of the related lasers. Revenues
from such agreements are not a material component of 1995 or 1996 revenues.
Service Agreement - The Company has a service agreement with another
Japanese company who is also a stockholder of the Company. The general
provisions of the service agreement are as follows:
Sales and Marketing - The Japanese company is to assist the Company 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, the Company 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,
1994, 1995 and 1996, totaled $67,000, $211,000 and $1,284,000, respectively.
Business Strategy - In addition, the Japanese company has agreed to assist
the Company in establishing a business strategy for the Japanese market,
evaluating third party contractors, preparing and negotiating the terms and
conditions of a license proposal with third party contractors, and finding new
investors. In exchange for such assistance, the Company agreed to pay the
Japanese company a percentage of any (i) up-front license fees, (ii) royalties
received on certain sales, and (iii) funding received from new investors. No
payments were made under the agreement in 1994, 1995 and 1996.
Royalties - The Company 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 reburbished by the
third party contractor. Such royalties are applicable only for the period
subsequent to the expiration of the original agreement.
11. GEOGRAPHIC INFORMATION
Presented below is information regarding sales, income (loss) from
operations, and identifiable assets, classified by operations located in the
United States and Japan. The Company sells its excimer lasers in Japan through
Cymer Japan, Inc. Intercompany sales to Cymer Japan, Inc. are primarily at
85% of the price of products sold to outside customers. All significant
intercompany balances are eliminated in consolidation. The majority of
consolidated costs and expenses are incurred in the United States and are
reflected in the operating income (loss) from the United States operations.
Year Ended December 31,
1994 1995 1996
(in thousands)
Sales:
United States $ 6,661 $11,303 $ 26,918
Japan 2,260 7,517 38,077
Total 8,921 18,820 64,995
Operating income (loss):
United States (2,312) (3,425) (13,974)
Japan 524 3,275 21,858
Total (1,788) (150) 7,884
December 31,
1994 1995 1996
Identifiable assets:
United States 6,414 10,876 105,902
Japan 2,758 4,743 23,565
Total 9,172 15,619 129,467