UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
_____ EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
OF 1934
For the transition period from __________ to ____________
Commission file number 0-21321
CYMER, INC.
(Exact name of registrant as specified in its charter)
Nevada 33-0175463
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
16750 Via Del Campo Court, San Diego, CA
(Address of principal executive offices) 92127
(Zip Code)
Registrant's telephone number, including area code (858) 385-7300
Former name, former address and former fiscal year, if changed since last
report.
N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Common Stock, with $0.001 par value, outstanding on
May 10, 2000 was 29,033,166.
CYMER, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 3
1999 and March 31, 2000
Consolidated Statements of Operations for the 4
three months ended March 31, 1999 and 2000
Consolidated Statements of Cash Flows for the 5
three months ended March 31, 1999 and 2000
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About 24
Market Risk
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Changes in Securities and Use of Proceeds 26
ITEM 3. Defaults upon Senior Securities 26
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
SIGNATURE PAGE 27
2
PART I. FINANCIAL INFORMATION
CYMER, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
------------- -----------
1999 2000
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 75,765 $ 80,049
Short-term investments 97,564 104,016
Accounts receivable - net 69,251 70,190
Foreign exchange contracts receivable 21,706 22,559
Inventories 51,409 56,926
Deferred income taxes 16,360 16,358
Prepaid expenses and other 3,110 3,227
--------- ---------
Total current assets 335,165 353,325
PROPERTY - net 56,921 64,352
LONG-TERM INVESTMENTS 19,760 10,809
DEFERRED TAXES - NON-CURRENT 8,562 7,716
OTHER ASSETS 6,413 6,647
--------- ---------
TOTAL ASSETS $ 426,821 $ 442,849
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 20,599 $ 20,871
Accrued and other liabilities 52,292 53,046
Foreign exchange contracts payable 24,276 22,756
Income taxes payable 6,482 6,970
Revolving loan 18,395 18,241
--------- ---------
Total current liabilities 122,044 121,884
--------- ---------
LONG-TERM LIABILITIES:
Convertible subordinated notes 172,500 172,335
Other liabilities 3,271 3,253
MINORITY INTEREST 2,113 1,645
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred stock - authorized 5,000,000 shares; $.001 par value,
no shares issued or outstanding
Common stock - authorized 50,000,000 shares; $.001 par value,
issued and outstanding 28,435,000 and 28,988,000 shares 28 29
Paid-in capital 125,623 131,070
Treasury stock at cost (2,000,000 common shares) (24,871) (24,871)
Accumulated other comprehensive loss (3,620) (2,403)
Retained earnings 29,733 39,907
--------- ---------
Total stockholders' equity 126,893 143,732
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 426,821 $ 442,849
========= =========
See notes to consolidated financial statements
3
CYMER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 2000
REVENUES:
Product sales $ 39,823 $ 80,532
Other 269 85
-------- --------
Total revenues 40,092 80,617
-------- --------
COSTS AND EXPENSES:
Cost of product sales 28,116 46,151
Research and development 7,452 10,764
Sales and marketing 3,532 3,798
General and administrative 2,794 4,574
-------- --------
Total costs and expenses 41,894 65,287
-------- --------
OPERATING INCOME (LOSS) (1,802) 15,330
-------- --------
OTHER INCOME (EXPENSE):
Foreign currency exchange loss - net (234) 18
Interest and other income 1,771 2,388
Interest and other expense (2,769) (2,909)
-------- --------
Total other income (expense) - net (1,232) (503)
-------- --------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
AND MINORITY INTEREST (3,034) 14,827
-------- --------
INCOME TAX PROVISION (BENEFIT) (758) 4,448
MINORITY INTEREST (22) (205)
-------- --------
NET INCOME (LOSS) $ (2,298) $ 10,174
======== ========
EARNINGS PER SHARE:
Basic:
Earnings (loss) per share $ (0.08) $ 0.35
======== ========
Weighted average common shares outstanding 27,385 28,711
======== ========
Diluted:
Earnings (loss) per share $ (0.08) $ 0.33
======== ========
Weighted average common and potential common
shares outstanding 27,385 31,166
======== ========
See notes to consolidated financial statements.
4
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- ------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 2000
OPERATING ACTIVITIES:
Net income (loss) ($ 2,298) $ 10,174
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 4,152 4,784
Minority interest 22 205
Deferred income taxes (461)
(Gain) loss on disposal of property (51) 95
Change in assets and liabilities:
Accounts receivable (6,226) (1,656)
Foreign exchange contracts receivable 605 (995)
Inventories 1,936 (5,451)
Prepaid expenses and other assets (446) (648)
Accounts payable (590) 43
Accrued and other liabilities 2,033 1,884
Foreign exchange contracts payable (2,160) (1,268)
Income taxes payable (510) (234)
-------- --------
Net cash (used in) provided by operating activities (3,994) 6,933
-------- --------
INVESTING ACTIVITIES:
Acquisition of property (5,748) (12,148)
Purchases of investments (40,872) (50,555)
Proceeds from sold or matured investments 53,527 53,071
Acquisition of minority interest (1,104)
-------- --------
Net cash provided by (used in) investing activities 6,907 (10,736)
-------- --------
FINANCING ACTIVITIES:
Net payments under revolving loan and security agreements 4,806
Proceeds from issuance of common stock 2,287 5,283
Payments on capital lease obligations (144) (143)
-------- --------
Net cash provided by financing activities 6,949 5,140
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 801 2,947
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,663 4,284
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 53,130 75,765
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 63,793 $ 80,049
======== ========
5
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $3,192 $ 3,284
====== ========
Income taxes paid $ 648 $ 4,100
====== ========
SUPPLEMENTAL DISCLOSURE OF NON CASH FLOW ACTIVITIES:
Conversion of debt to equity $165,000
====== ========
See notes to consolidated financial statements.
6
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial information has been
prepared by Cymer, Inc., and its wholly-owned and majority-owned subsidiaries
(collectively "Cymer"), without audit, in accordance with the instructions to
Form 10-Q and therefore does not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Cymer, Inc., its wholly-owned subsidiaries, Cymer
Japan, Inc. (Cymer Japan), Cymer Singapore Pte Ltd. (Cymer Singapore), Cymer
B.V. in the Netherlands (Cymer B.V.), and Cymer Southeast Asia, Inc., and its
majority-owned subsidiary, Cymer Korea, Inc. (Cymer Korea). (Cymer SEA).
Cymer, Inc. owns 70% of Cymer Korea. During the first quarter of 2000, Cymer,
Inc. acquired the 25% minority interest in Cymer Southeast Asia, Inc. for
$1,104,000. Cymer sells its excimer lasers in Japan primarily through Cymer
Japan. Cymer Korea, Cymer SEA, Cymer Singapore and Cymer B.V. are field
service offices for customers in those regions. All significant intercompany
balances have been eliminated in consolidation.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
UNAUDITED INTERIM FINANCIAL DATA - In the opinion of management, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the financial position and results of
operations as of and for such periods indicated. These consolidated financial
statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in Cymer's
Annual Report on Form 10-K (including items incorporated by reference
therein) for the year ended December 31, 1999. Results for the interim
periods presented herein are not necessarily indicative of results which may
be reported for any other interim period or for the entire fiscal year.
2. EARNINGS PER SHARE
EARNINGS PER SHARE - Basic Earnings Per Share ("EPS") excludes
dilution and is computed by dividing net income or loss attributable to
common stockholders by the weighted-average of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (convertible preferred
stock, warrants to purchase common stock and common stock options using the
treasury stock method) were exercised or converted into common stock.
Potential common shares in the diluted EPS computation are excluded in net
loss periods as their effect would be antidilutive. EPS for all periods have
been computed in accordance with SFAS No. 128.
7
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 2000
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income (loss) ($ 2,298) $ 10,174
======== ========
Basic earnings (loss) per share ($ 0.08) $ 0.35
======== ========
Basic weighted average common shares
outstanding 27,385 28,711
Effect of dilutive securities:
Warrants 34
Options 2,421
-------- --------
Diluted weighted average common and potential
common shares outstanding 27,385 31,166
======== ========
Diluted earnings (loss) per share ($ 0.08) $ 0.33
======== ========
Weighted average options and warrants to purchase 329,000 and 12,000
shares of common stock were outstanding for the three months ended March 31,
1999 and 2000, respectively, and were not included in the computation of
earnings per share as their effect was anti-dilutive. In addition, for the three
months ended March 31, 1999 and 2000, potential common shares attributable to
Convertible Subordinated Notes of 3,670,213 and 3,666,703, respectively, were
not included in the calculation of diluted earnings per share as they were also
anti-dilutive.
3. BALANCE SHEET DETAILS
DECEMBER 31, MARCH 31,
1999 2000
-------- -----------
(IN THOUSANDS)
INVENTORIES:
Raw Materials $ 16,199 $ 14,630
Work-in-progress 18,661 24,078
Finished goods 28,849 29,218
-------- --------
63,709 67,926
Allowance for excess and obsolete (12,300) (11,000)
-------- --------
Total $ 51,409 $ 56,926
======== ========
ACCRUED AND OTHER LIABILITIES:
Warranty and installation accruals $ 24,600 $ 29,500
Payroll and payroll related 11,952 8,020
Interest 11,371 10,751
Other 4,369 4,775
-------- --------
Total $ 52,292 $ 53,046
======== ========
4. REPORTING COMPREHENSIVE INCOME
The accumulated balance of other comprehensive income (loss) is
disclosed as a separate component of stockholders' equity. For Cymer,
comprehensive income includes foreign currency translation adjustments and
unrealized holding gains and losses on available-for-sale securities.
8
The following table summarizes the change in each component of
accumulated other comprehensive loss for the periods ended December 31, 1999 and
March 31, 2000:
Total unrealized
gains (losses) on Accumulated
Translation available-for-sale other
adjustment, investments, comprehensive
net of tax net of tax income (loss)
----------------- --------------------- ------------------
January 1, 1999 Balance ($1,862) $ 235 ($1,627)
Period net change (1,719) (274) (1,993)
------- ------- -------
December 31, 1999 Balance (3,581) (39) (3,620)
Period net change 1,206 11 1,217
------- ------- -------
March 31, 2000 Balance ($2,375) ($ 28) ($2,403)
======= ======= =======
5. CLASS ACTION LAWSUITS
Cymer has been named as a defendant in several putative shareholder
class action lawsuits which were filed in September and October, 1998 in the
U.S. District Court for the Southern District of California. Certain executive
officers and directors of Cymer are also named as defendants. The plaintiffs
purport to represent a class of all persons who purchased Cymer's Common Stock
between April 24, 1997 and September 26, 1997 (the "Class Period"). The
complaints allege claims under the federal securities laws. The plaintiffs
allege that Cymer and the other defendants made various material
misrepresentations and omissions during the Class Period. The complaints do not
specify the amount of damages sought. The complaints have been consolidated into
a single action and a class representative has been appointed by the court. A
consolidated amended complaint was filed in early August 1999. On November 5,
1999 Cymer and the other defendants filed a motion to dismiss the consolidated
amended claim for failure to state a cause of action. On April 1, 2000 the court
granted defendant's motion to dismiss with leave to amend the complaint by the
plaintiffs. Accordingly, no provision for any liability or loss that may result
from adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.
6. CONVERTIBLE SUBORDINATED NOTES
In the first quarter of 2000, $165,000 of Cymer's subordinated notes
were converted to 3,510 shares of common stock.
7. CONTINGENCIES
Cymer's Japanese manufacturing partner has been notified that its
manufacture of Cymer's laser systems in Japan may infringe a Japanese patent
held by another Japanese company. Cymer has agreed to indemnify its Japanese
manufacturing partner against patent infringement claims under certain
circumstances. Cymer believes, based upon the advice of counsel, that Cymer's
products do not infringe any valid claim of the asserted patent or that it is
entitled to prior user rights in Japan.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AN ASTERISK ("*") DENOTES A FORWARD-LOOKING STATEMENT REFLECTING
CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS, AND
STOCKHOLDERS OF CYMER, INC. (TOGETHER WITH ITS WHOLLY-OWNED AND MAJORITY-OWNED
SUBSIDIARIES COLLECTIVELY "CYMER") SHOULD CAREFULLY REVIEW THE CAUTIONARY
STATEMENTS SET FORTH IN THIS FORM 10-Q, INCLUDING "RISK FACTORS" BEGINNING ON
PAGE 14 HEREOF. CYMER MAY FROM TIME TO TIME MAKE ADDITIONAL WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS CONTAINED IN CYMER'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IN ITS REPORTS TO STOCKHOLDERS.
CYMER DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT THAT MAY BE
MADE FROM TIME TO TIME BY OR ON BEHALF OF CYMER.
RESULTS OF OPERATIONS
The following table sets forth certain items in Cymer's statements of
operations as a percentage of total revenues for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 2000
Revenues:
Product sales 99.3% 99.9%
Other .7 .1
------ ------
Total revenues 100.0% 100.0%
Cost and expenses:
Cost of product sales 70.0 57.2
Research and development 18.6 13.4
Sales and marketing 8.8 4.7
General and administrative 7.0 5.7
------ ------
Total costs and expenses 104.4 81.0
------ ------
Operating income (loss) (4.4) 19.0
Other income (expense) - net (3.1) (.6)
------ ------
Income before income tax provision (benefit)
and minority interest (7.5) 18.4
Income tax provision (benefit) (1.9) 5.5
Minority interest (.1) (.3)
------ ------
Net income (loss) (5.7%) 12.6%
------ ------
Gross margin on product sales 29.4% 42.7%
------ ------
10
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUES. Cymer's total revenues consist of product sales, which
include sales of laser systems, spare parts, service and training, and other
revenues, which primarily include revenues from funded development activities
performed for SEMATECH. Revenue from product sales is generally recognized at
the time of shipment, unless customer agreements contain inspection or other
conditions, in which case revenue is recognized at the time such conditions are
satisfied. Funded development contracts are accounted for on the
percentage-of-completion method based on the relationship of costs incurred to
total estimated costs, after giving effect to estimates of costs to complete the
development project.
Product sales increased 102% from $39.8 million in the three months
ended March 31, 1999 to $80.5 million in the three months ended March 31, 2000,
primarily due to increased sales of DUV photolithography laser systems. Due to
the increase in Cymer's installed base of lasers, Cymer's revenues from spares,
replacement parts and services has increased and has become a larger component
of product sales. Funded development revenues decreased from $269,000 for the
three months ended March 31, 1999 to $85,000 for the three months ended March
31, 2000, primarily due to the completion of various laser research projects
sponsored by customers and SEMATECH in 2000 compared to the addition of various
projects in 1999.
Cymer's sales are generated primarily by shipments to customers in
Japan, the Netherlands, and the United States. Approximately 88%, 85% and 91% of
Cymer's sales in 1998, 1999 and the first three months of 2000, respectively,
were derived from customers outside the United States. Cymer maintains a
wholly-owned Japanese subsidiary which sells to Cymer's Japanese customers.
Revenues from Japanese customers, generated primarily by this subsidiary,
accounted for 48%, 37% and 43% of revenues from 1998, 1999 and the first three
months of 2000, respectively. The activities of Cymer's Japanese subsidiary are
limited to sales and service of products purchased by the subsidiary from the
parent corporation. All costs of development and production of Cymer's products,
including costs of shipment to Japan, are recorded on the books of the parent
company. Cymer anticipates that international sales will continue to account for
a significant portion of its net sales.*
COST OF PRODUCT SALES. Cost of product sales includes direct material
and labor, warranty expenses, license fees, manufacturing and service overhead,
and foreign exchange gains and losses on foreign currency exchange contracts
associated with purchases of Cymer's products by the Japanese subsidiary for
resale under firm third-party sales commitments.
Cost of product sales increased 64% from $28.1 million for the three
months ended March 31, 1999 to $46.2 million for the three months ended March
31, 2000 due to the increase in sales volume. The gross margin on these sales
increased from 29.4% for the three months ended March 31, 1999 to 42.7% for the
same three month period in 2000. This increase was primarily due to increased
product sales absorbing fixed manufacturing facility costs and reduced costs due
to improved efficiencies in some manufacturing processes.
Net gains or losses from foreign currency exchange contracts are
included in cost of product sales in the consolidated statements of operations
as the related sales are recognized. Cymer recognized a net loss on such
contracts of $951,000 for the three months ended March 31, 1999 compared to a
gain of $746,000 for the three months ended March 31, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses include
costs of internally-funded and externally-funded projects as well as continuing
research support expenses which primarily include employee and material costs,
depreciation of equipment and other engineering related costs. Research and
development expenses increased 44% from $7.5 million for the three months ended
March 31, 1999 to $10.8 million for the three months ended March 31, 2000, due
primarily to increased product development effort related to an increase in
projected product introductions. Research and development expenses in 1999
consisted of costs
11
associated with the initial development stages of the Orion or ELS-6000 laser
system. During the first quarter of 2000, the increased expenses reflect the
continued development efforts for the ELS-6000 laser system. As a percentage
of total revenues, such expenses decreased from 18.6% to 13.4% in the
respective periods due to substantially increased 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 8% from $3.5 million for the
three months ended March 31, 1999 to $3.8 million for the three months ended
March 31, 2000 due primarily to increased staffing expenses due to expanded
operations in the areas of product marketing and sales administration. As a
percentage of total revenues, such expenses decreased from 8.8% to 4.7% in the
respective periods due to higher sales volumes.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of management and administrative personnel costs, professional
services and administrative operating costs. General and administrative expenses
increased 64% from $2.8 million in the three months ended March 31, 1999 to $4.6
million for the three months ended March 31, 2000, due to the continuing process
quality development efforts, including the implementation of a new Enterprise
Resource Planning ("ERP") system which is currently in process and the required
general and administrative support activities. As a percentage of total
revenues, such expenses decreased from 7% to 5.7% from period to period.
OTHER INCOME (EXPENSE) - NET. Net other income (expense) consists
primarily of interest income and expense and foreign currency exchange gains and
losses associated with the fluctuations in the value of the Japanese yen against
the United States dollar. Net other expense decreased from $1.2 million for the
three months ended March 31, 1999 to $503,000 for the three months ended March
31, 2000, primarily due to the increase in interest income associated with
higher market yields in 2000 on the investment of increased cash balances.
Foreign currency exchange losses totaled $234,000, interest income totaled $1.8
million and interest expense totaled $2.8 million for the three months ended
March 31, 1999, compared to an exchange gain of $18,000, interest income of $2.4
million and $2.9 million in interest expense for the three months ended March
31, 2000.
Cymer's results of operations are subject to fluctuations in the value
of the Japanese yen against the United States dollar. Sales by Cymer to its
Japanese subsidiary are denominated in dollars, and sales by the subsidiary to
customers in Japan are denominated in yen. Cymer's Japanese subsidiary manages
its exposure to such fluctuations by entering into foreign currency exchange
contracts to hedge its purchase commitments to Cymer. The gains or losses from
these contracts are recorded as a component of cost of product sales, while the
remaining foreign currency exposure is recorded as other income (expense) in the
consolidated statements of operations. Gains and losses resulting from foreign
currency translation are accumulated as a separate component of consolidated
stockholders' equity.
INCOME TAX PROVISION (BENEFIT). The tax benefit of $758,000 reported
for the three months ended March 31, 1999 reflects an annual effective tax rate
of 25%. The provision for income taxes for the three months ended March 31, 2000
of $4,448,000 reflects an annual effective tax rate of 30%. The annual effective
tax rates for both periods are less than the U.S. statutory rate of 35%
primarily as a result of permanent book/tax differences and tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Since its initial public offering and a second public offering, both
in 1996, Cymer has funded its operations primarily through a convertible
subordinated note offering on August 6, 1997, which generated $167.3 million in
net proceeds, and from bank borrowings, cash flow from operations and the
proceeds from employee stock option exercises. As of March 31, 2000, Cymer had
approximately $80.0 million in cash and cash equivalents, $104.0 million in
short-term
12
investments, $10.8 million in long-term investments, $231.4 million in working
capital and $18.2 million in bank debt.
Net cash used for operating activities was approximately $4.0 million
for the three months ended March 31, 1999. For the three months ended March 31,
2000, operating activities provided $6.9 million in cash. The reversal from cash
use to cash provided was due primarily to Cymer's return to profitable
operations. For the quarter ended March 31, 1999, a net loss of $2.3 million was
recorded versus net income of $10.2 million for the quarter ended March 31,
2000. In addition, cash collections on accounts receivable for the three months
ended March 31, 2000 were offset by increases in inventory due to the increase
in revenues and bookings.
Net cash provided by investing activities was approximately $6.9
million for the three months ended March 31, 1999 as compared to $10.7 million
used in investing activities for the three months ended March 31, 2000. The net
cash provided by investing activities during the first three months of 1999
primarily reflects property acquisitions to accommodate business expansion and
focus, offset by the timing of short and long term investments maturing and
being reinvested during the period. For the first three months of 2000, the cash
used primarily reflects the continued investment in property acquisitions to
accommodate the increased business activity, such as the construction of an
additional facility at the San Diego, California location, as well as the
implementation of a new ERP system. In addition, $1.1 million in cash was used
for the acquisition of the minority shareholder interest in Cymer's Taiwan
subsidiary.
Net cash provided by financing activities was approximately $6.9
million and $5.1 million for the three months ended March 31, 1999 and 2000,
respectively. The net cash provided by financing activities for the three months
ended March 31, 1999 was primarily attributable to $4.8 million in bank
borrowings in Japan and the receipt of $2.3 million upon the issuance of common
stock due to the exercising of stock options by Cymer employees. For the period
ended March 31, 2000, the cash provided was primarily attributable to the
receipt of $5.3 million upon issuance of common stock due to employee stock
option exercises.
Cymer requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. Cymer's future capital requirements will depend on many factors,
including the rate of Cymer's manufacturing expansion, the timing and extent of
spending to support product development efforts and expansion of sales and
marketing and field service and support, the timing of introductions of new
products and enhancements to existing products, and overall industry conditions.
Cymer believes that it has sufficient working capital and available bank credit
to sustain operations and provide for the future expansion of its business
during 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
new standard, as amended, will become effective for Cymer for the first quarter
of 2001. Interim reporting for this standard will be required. Cymer has not yet
assessed the effect of this standard on Cymer's current reporting and
disclosures.
13
RISK FACTORS
LIKELY FLUCTUATIONS IN OPERATING RESULTS
CERTAIN FACTORS CAUSING FLUCTUATIONS
Cymer's operating results have in the past fluctuated and are likely in
the future to fluctuate significantly. These fluctuations depend on a variety of
factors which may include:
- the demand for semiconductors in general and, in particular, for
leading edge devices with smaller circuit geometries;
- the rate at which semiconductor manufacturers take delivery of
photolithography tools from Cymer's customers and rate at which
those customers take delivery of lightsources from Cymer;
- cyclicality in the market for semiconductor manufacturing
equipment;
- the timing and size of orders from Cymer's small base of customers;
- the ability of Cymer to manufacture, test and deliver laser systems
in a timely and cost effective manner;
- the mix of laser models, replacement parts and service revenues;
- the ability of Cymer's competitors to obtain orders from Cymer's
customers;
- the entry of new competitors into the market for DUV
photolithography illumination sources;
- the ability of Cymer to manage its costs as it supplies its
products in higher volumes and multiple different models; and
- Cymer's ability to effectively manage its exposure to foreign
currency exchange rate fluctuations, principally with respect to
the Japanese yen (in which sales by Cymer's Japanese subsidiary are
denominated).
In addition, as customers become more efficient at integrating Cymer's lasers
into their photolithography tools, reductions in customer laser inventories may
affect Cymer's operating results.
TIMING OF REVENUE RECOGNITION
Cymer has historically derived a substantial portion of its quarterly
and annual revenues from the sale of a relatively small number of systems. As a
result, the precise timing of the recognition of revenue from an order for a
small number of systems can have a significant impact on Cymer's total revenues
and operating results for a particular period. If customers cancel or reschedule
orders for a small number of systems or if Cymer cannot fill orders in time to
recognize revenue during a particular period, this could adversely affect
Cymer's operating results for that period. For example, unanticipated
manufacturing, testing, shipping or product acceptance delays could cause such
cancellations, rescheduling or inability to fill orders promptly.
FIXED EXPENSES
Cymer's expense levels are based, in large part, on Cymer's
expectations as to future revenues. Therefore, Cymer's expenses are relatively
fixed in the short term. If revenue levels fall below expectations, this would
disproportionately and adversely affect net income. Cymer cannot forecast the
impact of these and other factors on its revenues and operating results in any
future period with any degree of certainty.
SEMICONDUCTOR MANUFACTURER DEMAND
Cymer believes that semiconductor manufacturers are currently
developing capability for production and pilot production of 0.25um, 0.18um and
below devices. Cymer also believes that the efforts to develop such capability
are driving present demand for its laser systems for DUV photolithography tools.
Once semiconductor manufacturers have acquired such capability, their
14
demand for Cymer's DUV photolithography tools will depend on whether they
want to expand their capacity to manufacture such devices. This will in turn
depend on whether their sales forecasts and manufacturing process yields
justify such an investment. Cymer currently expects that demand for its DUV
laser systems will depend on such demand and process development constraints
of the semiconductor manufacturers.
INDUSTRY CONDITIONS
Cymer has expanded some aspects of its operations in response to
improvements in industry conditions. Should continued improvements not
materialize, the planned increases in spending may negatively impact profitable
operations.
Due to the foregoing, as well as other unanticipated factors, Cymer's
operating results will likely fall below the expectations of public market
analysts or investors in some future quarter or quarters. Such failure to meet
operating result expectations would materially adversely affect the price of
Cymer's Common Stock.
DEPENDENCE ON SEMICONDUCTOR INDUSTRY
Cymer derives substantially all of its revenues from photolithography
tool manufacturers. Photolithography tool manufacturers depend in turn on the
demand for their products from semiconductor manufacturers. Semiconductor
manufacturers depend on the demand from manufacturers of end-products or systems
that use semiconductors. The semiconductor industry is highly cyclical and has
historically experienced periodic and significant downturns. These downturns
have often had a severe effect on the demand for semiconductor manufacturing
equipment, including photolithography tools. Cymer believes that downturns in
the semiconductor manufacturing industry will periodically occur, resulting in
periodic decreases in demand for semiconductor manufacturing equipment. In
addition, Cymer believes that in a future downturn Cymer's need to continue
investment in research and development, and to maintain extensive ongoing
customer service and support capability, will constrain its ability to reduce
expenses. Accordingly, downturns in the semiconductor industry would likely have
a material adverse effect on Cymer's business, financial condition and results
of operations.
DEPENDENCE ON SMALL NUMBER OF CUSTOMERS
A small number of manufacturers of DUV photolithography tools
constitute Cymer's primary customer base. Four large firms, ASM Lithography,
Canon, Nikon and SVG Lithography (a subsidiary of Silicon Valley Group, Inc.),
dominate the photolithography tool business. Collectively, they accounted for
approximately 94%, 79% and 82% of Cymer's total revenues in 1998, 1999, and the
three months ended March 31, 2000, respectively. Individually, sales to ASM
Lithography, Canon, Nikon and SVG Lithography accounted for approximately 33%,
17%, 24% and 5%, respectively, of total revenues in 1999 and 33%, 16%, 32% and
1%, respectively, of total revenues for the three months ended March 31, 2000.
Cymer expects that sales of its systems to these customers will continue to
account for a substantial majority of its revenues in the foreseeable future.
None of Cymer's customers are obligated to purchase a minimum number of Cymer's
products. The loss of any significant business from any one of these customers,
a significant reduction in orders from any one of these customers or production
problems for any one of these customers that cause a slow down in Cymer's
deliveries, would have a material adverse effect on Cymer's business, financial
condition and results of operations. Reductions caused by changes in a
customer's competitive position, a decision to purchase illumination sources
from other suppliers, or economic conditions in the semiconductor and
photolithography tool industries, could all cause such a loss of business or
reduction in orders.
NEED TO MANAGE A CHANGING BUSINESS
In recent years, Cymer has sharply expanded and contracted the scope of
its operations and the number of employees in most of its functional areas. As
of March 31, 2000, Cymer had
15
787 employees. Cymer has substantially expanded its facilities and
manufacturing capacity. For example, since December 31, 1996 Cymer has
occupied three additional buildings covering approximately 187,000 square
feet. In a cyclical environment of dramatic growth or contraction, Cymer will
need:
- to continue close management of these areas, and
- to improve its management, operational and financial systems,
including
- accounting and other internal management systems,
- quality control,
- delivery,
- field service and customer support capabilities and,
- changing sales and marketing channels.
Cymer must also effectively manage its inventory levels, including assessing and
managing excess and obsolete inventories associated with the changing
environment and new product introductions. Cymer will need to attract, train,
retain and manage key technical personnel in order to support Cymer's growth
and/or contraction. Cymer will also need to manage effectively its international
operations, including:
- the operations of its subsidiaries in Japan, Korea, Taiwan,
Singapore and The Netherlands,
- its field service and support presence in Asia and Europe and
- its relationship with Seiko as a manufacturer of its
photolithography lasers.
Cymer must also effect timely deliveries of its products and maintain the
product quality and reliability required by its customers. Any failure to
effectively manage Cymer's growth or contraction would materially adversely
affect Cymer's financial condition and results of operations.
RISKS ASSOCIATED WITH IMPLEMENTING A NEW ENTERPRISE RESOURCE PLANNING SYSTEM
Cymer is in the process of of implementing a new corporate wide
enterprise resource planning ("ERP") system to replace its current ERP system.
Cymer has scheduled implementation of the new ERP system and training of
personnel to use the system to be completed during the year 2000.* The
implementation of a new ERP system requires full commitment of management and
the dedication and utilization of significant internal as well as external
resources in managing the project, process redesigns, system integration and
employee training. Historically, many companies have experienced difficulties in
implementing ERP systems. These difficulties range from cost overruns, push-outs
of implementation deadlines, process and operations gridlock, failure to execute
operating plans, including inability to ship products for revenue, and
abandonment of the effort altogether. Cymer must effectively manage its planning
and execution of the implementation of the system and the training of personnel
throughout the Company. Any failure to effectively manage Cymer's efforts or
process and operations designs would materially adversely affect Cymer's
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS
Semiconductor manufacturing equipment and processes are subject to
rapid technological change. Cymer believes that its future success will depend
in part upon its ability to:
- continue to enhance its excimer laser products and their process
capabilities, and
- develop and manufacture new products with improved capabilities.
In order to enhance and improve its products and develop new products, among
other things, Cymer must work closely with its customers, particularly in the
product development stage, to integrate its lasers with its customers'
photolithography tools. Future technologies, such as EUV and scalpel processes,
might render Cymer's excimer laser products obsolete. Further, Cymer
16
might not be able to develop and introduce new products or enhancements to
its existing products and processes in a timely or cost effective manner that
satisfy customer needs or achieve market acceptance. The failure to do so
could materially adversely affect Cymer's business, financial condition and
results of operations.
COMPETITION
LAMBDA-PHYSIK, KOMATSU AND USHIO
Cymer currently has three significant competitors in the market for
excimer laser systems for photolithography applications:
- Lambda-Physik,
- Komatsu, Ltd. and
- Ushio.
All of these companies:
- are larger than Cymer,
- have access to greater financial, technical and other resources
than does Cymer, and
- are located in closer proximity to Cymer's customers than is Cymer.
Cymer believes that Lambda-Physik and Komatsu are aggressively seeking to gain
larger positions in this market. Cymer believes that its customers have each
purchased products offered by these competitors and that its customers have
qualified competitors' lasers for use with their products. Cymer believes that
Komatsu in particular has been qualified for production use by chipmakers in
Japan and elsewhere. Cymer also believes that Lambda-Physik has been qualified
for production use by chipmakers in the U.S. Cymer could lose market share and
its growth could slow or even decline as competitors gain market acceptance.
OTHER TECHNOLOGIES
In the future, Cymer will likely experience competition from other
technologies, such as EUV and scalpel processes. To remain competitive, Cymer
believes that it will need to:
- manufacture and deliver products to customers on a timely basis and
without significant defects, and
- maintain a high level of investment in research and development and
in sales and marketing.
Cymer might not have sufficient resources to continue to make the investments
necessary to maintain its competitive position.
SMALL AND IMMATURE MARKET FOR EXCIMER LASERS
The market for excimer lasers is still small and immature. Larger
competitors with substantially greater financial resources, including other
manufacturers of industrial lasers, might attempt to enter the market.
Cymer might not remain competitive. A failure to remain competitive
would have a material adverse effect on Cymer's business, financial condition
and results of operations.
DEPENDENCE ON SINGLE PRODUCT LINE
Cymer's only product line is excimer lasers ("KrF, ArF and F2 laser
systems"). The primary market for excimer lasers is for use in DUV
photolithography equipment for manufacturing deep-submicron semiconductor
devices. Demand for Cymer's products will depend in part on the
17
rate at which semiconductor manufacturers adopt excimer lasers as the
illumination source for their photolithography tools.
Impediments to such adoption include:
- instability of photoresists used in advanced DUV photolithography
and
- potential shortages of specialized materials used in DUV optics.
There can be no assurance that such impediments can or will be overcome. In any
event, such impediments may materially reduce the demand for Cymer's products.
Further, if Cymer's customers experience reduced demand for DUV photolithography
tools, or if Cymer's competitors are successful in obtaining significant orders
from such customers, Cymer's financial condition and results of operations would
be materially adversely affected.
RISK OF EXCESSIVE INVENTORY BUILDUPS BY PHOTOLITHOGRAPHY TOOL MANUFACTURERS
Photolithography tool manufacturers constitute substantially all of
Cymer's customers. Photolithography tool manufacturers sell their systems in
turn to semiconductor manufacturers. Market conditions in the industry can cause
Cymer's customers to expand or reduce their orders for new laser systems as they
try to manage their inventories to appropriate levels which better reflect their
expected sales forecasts. Cymer is working with its customers to better
understand end user demand for DUV photolithography tools. However, there can be
no assurance that Cymer will be successful in this regard, or that its customers
will not build excessive laser inventories. Excessive customer laser inventories
could result in a material decline in Cymer's revenues and operating results in
future periods as such inventories are brought into balance.
DEPENDENCE ON KEY SUPPLIERS
Cymer obtains certain of the components and subassemblies included in
its products from a single supplier or a limited group of suppliers. In
particular, there are no alternative sources for certain of such components and
subassemblies, including certain optical components used in Cymer's lasers. In
addition, Cymer is increasingly outsourcing the manufacture of various
subassemblies. To date Cymer has been able to obtain adequate supplies of the
components and subassemblies in a timely manner from existing sources. However,
due to the nature of Cymer's product development requirements, key suppliers
often need to rapidly advance their own technologies in order to support Cymer's
new product introduction schedule. These suppliers may or may not be able to
satisfy Cymer's schedule requirements in providing new modules and subassemblies
to Cymer. If Cymer cannot obtain sufficient quantities of such materials,
components or subassemblies, or if such items do not meet Cymer's quality
standards, delays or reductions in product shipments could have a material
adverse effect on Cymer's business, financial condition and results of
operations.
PRODUCTION USE OF EXCIMER LASERS
Cymer's products might not meet production specifications or cost of
operation requirements over time when subjected to prolonged and intense use in
volume production in semiconductor manufacturing processes. If any semiconductor
manufacturer cannot successfully achieve or sustain volume production using
Cymer's lasers, Cymer's reputation with semiconductor manufacturers or the
limited number of photolithography tool manufacturers could be damaged. This
would have a material adverse effect on Cymer's business, financial condition
and results of operations.
DEVELOPMENT OF FIELD SERVICE AND SUPPORT ORGANIZATION
Cymer believes that the need to provide fast and responsive service to
the semiconductor manufacturers using its lasers is critical. Cymer cannot
depend solely on its direct customers to provide this specialized service.
Therefore, Cymer believes it is essential to establish through its
18
own personnel, a rapid response capability to service its lasers throughout
the world. Accordingly, Cymer has an ongoing effort to develop its direct
support infrastructure in the United States, Japan, Europe, Korea, Singapore,
Taiwan and Southeast Asia. This development entails recruiting and training
qualified field service personnel and building effective and highly trained
organizations that can provide service to customers in various countries in
their assigned regions. Cymer has historically experienced difficulties in
effectively training field service personnel. Cymer might not be able to
attract and train qualified personnel to establish these operations
successfully. Further, the costs of such operations might be excessive. A
failure to implement this plan effectively could have a material adverse
effect on Cymer's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
Cymer is highly dependent on the services of a number of key employees
in various areas, including:
- engineering,
- research and development,
- sales and marketing, and
- manufacturing.
In particular, there are a limited number of experts in excimer laser
technology. There is intense competition for such personnel, as well as for the
highly-skilled hardware and software engineers Cymer requires. Cymer has in the
past experienced, and continues to experience, difficulty in hiring personnel,
including experts in excimer laser technology. Cymer believes that, to a large
extent, its future success will depend upon:
- the continued services of its engineering, research and
development, sales and marketing and manufacturing and service
personnel, and
- its ability to attract, train and retain highly skilled personnel
in each of these areas.
Cymer does not have employment agreements with most of its employees, and Cymer
might not be able to retain its key employees. The failure of Cymer to hire,
train and retain such personnel could have a material adverse effect on Cymer's
business, financial condition and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
CYMER PATENTS
Cymer believes that the success of its business depends more on such
factors as the technical expertise of its employees, as well as their innovative
skills and marketing and customer relations ability, than on patents,
copyrights, trade secrets and other intellectual property rights. Nevertheless,
the success of Cymer may depend in part on patents. As of March 31, 2000, Cymer
owned 73 United States patents covering certain aspects of technology associated
with excimer lasers. Such patents will expire at various times during the period
from January 2008 to May 2019. As of March 31, 2000, Cymer had also applied for
68 additional patents in the United States, 1 of which has been allowed. As of
March 31, 2000, Cymer owned 45 foreign patents and had filed 215 patent
applications pending in various foreign countries.
Cymer's pending patent applications and any future applications might
not be approved. Cymer's patents might not provide Cymer with competitive
advantages. Third parties might challenge Cymer's patents. In addition, third
parties' patents might have an adverse effect on Cymer's ability to do business.
In this regard, due to cost constraints, Cymer did not begin filing for patents
in Japan or other countries with respect to inventions covered by its United
States patents and patent applications until 1993. Therefore, Cymer lost the
right to seek foreign patent protection for certain of its inventions.
Additionally, because foreign patents may afford less
19
protection under foreign law than is available under United States patent
law, any such patents issued to Cymer might not adequately protect Cymer's
technology in a given foreign jurisdiction. Furthermore, third parties might
independently develop similar products, duplicate Cymer's products or, to the
extent patents are issued to Cymer, design around the patents issued to Cymer.
COMPETITIVE PATENTS
Others may have filed and in the future may file patent applications
that are similar or identical to those of Cymer. To determine the priority of
inventions, Cymer may have to participate in interference proceedings declared
by the United States Patent and Trademark Office. Such interference proceedings
could result in substantial cost to Cymer. Such third party patent applications
might have priority over patent applications filed by Cymer.
OTHER FORMS OF PROTECTION
Cymer also relies upon:
- trade secret protection,
- employee nondisclosure agreements,
- third-party nondisclosure agreements, and
- other intellectual property protection methods
to protect its confidential and proprietary information. Despite these efforts,
third parties might:
- independently develop substantially equivalent proprietary
information and techniques,
- otherwise gain access to Cymer's trade secrets, or
- disclose such technology.
Cymer might not be able to meaningfully protect its trade secrets.
POSSIBLE CLAIMS TO OWNERSHIP OF CYMER'S INTELLECTUAL PROPERTY
Cymer has in the past funded a significant portion of its research and
development expenses from outside research and development revenues. Cymer has
received such revenues from photolithography tool manufacturers and from
SEMATECH, a semiconductor industry consortium, in connection with the design and
development of specific products. Cymer currently funds a small portion of its
development expenses through SEMATECH. Although Cymer's arrangements with
photolithography tool manufacturers and SEMATECH seek to clarify the ownership
of the intellectual property arising from research and development services
performed by Cymer, disputes over the ownership or rights to use or market such
intellectual property might arise between Cymer and such parties. Any such
dispute could result in restrictions on Cymer's ability to market its products
and could have a material adverse effect on Cymer's business, financial
condition and results of operations.
PATENT INFRINGEMENT
Third parties have in the past notified, and may in the future notify,
Cymer that it may be infringing their intellectual property rights. Conversely,
Cymer has in the past notified, and may in the future notify, third parties that
they may be infringing Cymer's intellectual property rights.
Specifically, Cymer has engaged in discussions with one of its
competitors, Komatsu, with respect to certain of Komatsu's Japanese patents, in
the course of which Komatsu has also identified to Cymer a number of additional
Japanese patents that Komatsu asserts may be infringed by Cymer and Cymer's
Japanese manufacturing partner, Seiko. Cymer, in consultation with Japanese
patent counsel, has initiated oppositions to certain Komatsu Japanese patents
and
20
patent applications in the Japanese Patent Office. Some of these oppositions
have been dismissed by the Japanese Patent Office. Litigation might ensue with
respect to the Komatsu Japanese patents. Also, Komatsu might assert infringement
claims under additional patents. Komatsu has notified Seiko that Komatsu intends
to enforce its rights under the Komatsu Japanese patents against Seiko if Seiko
engages in manufacturing activities for Cymer. In connection with its
manufacturing agreement with Seiko, Cymer has agreed to indemnify Seiko against
such claims under certain circumstances. Cymer and Seiko might not ultimately
prevail in any such litigation.
Cymer has notified its competitors and others of Cymer's United States
patent portfolio. Cymer has specifically asserted certain of its U.S. patents
against Komatsu when informed that Komatsu lasers might be integrated into
steppers intended for shipment into the U.S. Cymer and Komatsu are currently
engaged in discussions with regard to each party's claims. Those discussions
might not be successful and litigation could result. Attorneys representing
Komatsu are currently challenging one of Cymer's U.S. patents in the U.S. Patent
Office.
Any patent litigation initiated by Cymer, or initiated by Cymer's
competitors against Cymer, would, at a minimum, be costly. Litigation could also
divert the efforts and attention of Cymer's management and technical personnel.
Both could have a material adverse effect on Cymer's business, financial
condition and results of operations. Furthermore, in the future other third
parties might assert other infringement claims, and customers and end users of
Cymer's products might assert other claims for indemnification resulting from
infringement claims. Such assertions, if proven to be true, might materially
adversely affect Cymer's business, financial condition and results of
operations. If any such claims are asserted against Cymer, Cymer may seek to
obtain a license under the third party's intellectual property rights. However,
such a license might not be available on reasonable terms or at all. Cymer could
decide, in the alternative, to resort to litigation to challenge such claims or
to design around the patented technology. Such actions could be costly and would
divert the efforts and attention of Cymer's management and technical personnel,
which would materially adversely affect Cymer's business, financial condition
and results of operations.
TRADEMARK
Cymer has registered the trademark CYMER in the United States and
certain other countries and is seeking additional registrations of other
trademarks including "Insist on Cymer" in the United States and in certain other
countries. Cymer uses these and a variety of other marks in its advertisements
and other business activities around the world. Based on the use of these marks,
Cymer might be subjected to actions for trademark infringement, which could be
costly to defend. If a challenge to a mark were to be successful, Cymer might be
required to cease use of the mark and, potentially, to pay damages.
RISKS ASSOCIATED WITH MANUFACTURING IN JAPAN
Cymer has qualified Seiko of Japan as a contract manufacturer of its
photolithography lasers. Komatsu, a competitor of Cymer, has advised Seiko that
certain aspects of Cymer's lasers might infringe certain patents that have been
issued to Komatsu in Japan. Komatsu has advised Seiko it intends to enforce its
rights under such patents against Seiko if Seiko engages in manufacturing
activities for Cymer. In the event that, notwithstanding its manufacturing
agreement with Cymer, Seiko should determine not to continue manufacturing
Cymer's products until resolution of the matter with Komatsu, Cymer's ability to
meet any heavy demand for its products could be materially adversely affected.
See -- "Uncertainty Regarding Patents and Protection of Proprietary Technology."
21
RISKS OF INTERNATIONAL SALES AND OPERATIONS
SIGNIFICANT INTERNATIONAL TRADE
Cymer derived approximately 88%, 85% and 91% of its revenues in 1998,
1999 and the three months ended March 31, 2000, respectively, from customers
located outside the United States. Because a significant majority of Cymer's
principal customers are located in other countries, particularly Asia, Cymer
anticipates that international sales will continue to account for a significant
portion of its revenues.* In order to support its overseas customers, Cymer:
- maintains subsidiaries in Japan, Korea, Taiwan, Singapore and the
Netherlands,
- is further developing its field service and support operations
worldwide, and
- will continue to work with Seiko as a manufacturer of its products
in Japan.*
Cymer might not be able to manage these operations effectively. Cymer's
investment in these activities might not enable it to compete successfully in
international markets or to meet the service and support needs of its customers.
Additionally, a significant portion of Cymer's sales and operations could be
subject to certain risks, including:
- tariffs and other barriers,
- difficulties in staffing and managing foreign subsidiary and branch
operations,
- currency exchange risks and exchange controls,
- potentially adverse tax consequences, and
- the possibility of difficulty in accounts receivable collection.
Because many of Cymer's principal customers, as well as many of the end-users of
Cymer's laser systems, are located in Asia, the recent economic problems and
currency fluctuations affecting that region could intensify Cymer's
international risk. Further, while Cymer has experienced no difficulty to date
in complying with United States export controls, these rules could change in the
future and make it more difficult or impossible for Cymer to export its products
to various countries. These factors could have a material adverse effect on
Cymer's business, financial condition and results of operations.
CURRENCY FLUCTUATIONS
Sales by Cymer to its Japanese subsidiary are denominated in dollars,
while sales by the subsidiary to customers in Japan are denominated in yen. This
means that Cymer's results of operations show some fluctuation based on the
value of the Japanese yen against the U.S. dollar. Cymer's Japanese subsidiary
manages its exposure to such fluctuations by entering into foreign currency
exchange contracts to hedge its purchase commitments. Management will continue
to monitor Cymer's exposure to currency fluctuations, and, when appropriate, use
financial hedging techniques to minimize the effect of these fluctuations.
However, exchange rate fluctuations might have a material adverse effect on
Cymer's results of operations or financial condition. In the future, Cymer might
need to sell its products in other currencies, which would make the management
of currency fluctuations more difficult and expose Cymer to greater risks in
this regard.
FOREIGN REGULATIONS
Numerous foreign government standards and regulations apply to Cymer's
products. These standards and regulations are continually being amended.
Although Cymer endeavors to meet foreign technical and regulatory standards,
Cymer's products might not continue to comply with foreign government standards
and regulations, or changes thereto. It might not be cost effective for Cymer to
redesign its products to comply with such standards and regulations. The
inability of Cymer to design or redesign products to comply with foreign
standards could have a material adverse effect on Cymer's business, financial
condition and results of operations.
22
ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of substances used in Cymer's
manufacturing process and on the facility leased by Cymer. Cymer believes that
its activities conform to present governmental regulations applicable to its
operations and its current facilities. These regulations include those related
to environmental, land use, public utility utilization and fire code matters.
Such governmental regulations might in the future impose the need for additional
capital equipment or other process requirements upon Cymer. They might also
restrict Cymer's ability to expand its operations. The adoption of such
measures, or the failure by Cymer to comply with applicable environmental and
land use regulations or to restrict the discharge of hazardous substances, could
subject Cymer to future liability or could cause its manufacturing operations to
be curtailed or suspended.
RISKS OF PRODUCT LIABILITY CLAIMS
Cymer faces a significant risk of exposure to product liability claims
in the event that the use of its products results in personal injury or death.
Cymer might experience material product liability losses in the future. Cymer
maintains insurance against product liability claims. However, such coverage
might not continue to be available on terms acceptable to Cymer. Such coverage
also might not be adequate for liabilities actually incurred. Further, in the
event that any of Cymer's products prove to be defective, Cymer may need to
recall or redesign such products. A successful claim brought against Cymer in
excess of available insurance coverage, or any claim or product recall that
results in significant adverse publicity against Cymer, could have a material
adverse effect on Cymer's business, financial condition and results of
operations.
POSSIBLE PRICE VOLATILITY OF COMMON STOCK
The following factors may significantly affect the market price of
Cymer's Common Stock:
- actual or anticipated fluctuations in Cymer's operating results,
- announcements of technological innovations,
- new products or new contracts by Cymer or its competitors,
- developments with respect to patents or proprietary rights,
- conditions and trends in the laser device and other technology
industries,
- changes in financial estimates by securities analysts,
- general market conditions, and
- other factors.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market price for many high
technology companies. Such fluctuations have in some cases been unrelated to the
operating performance of these companies. Severe price fluctuations in a
company's stock have frequently been followed by securities litigation. Cymer is
currently in the process of defending such an action (see - "Legal Matters").
Such litigation can result in substantial costs and a diversion of management's
attention and resources.
LEGAL MATTERS
Cymer has been named as a defendant in several putative shareholder
class action lawsuits which were filed in September and October, 1998 in the
U.S. District Court for the Southern District of California. Certain executive
officers and directors of Cymer are also named as defendants. The plaintiffs
purport to represent a class of all persons who purchased Cymer's Common Stock
between April 24, 1997 and September 26, 1997 (the "Class Period"). The
complaints allege claims under the federal securities laws. The plaintiffs
allege that Cymer and the other defendants made various material
misrepresentations and omissions during the Class Period. The complaints do
not specify the amount of damages sought. The complaints have been
consolidated into a single action and a class representative has been
appointed by the court. A consolidated amended complaint was filed in early
August, 1999. On November 5, 1999
23
Cymer and the other defendants filed a motion to dismiss the consolidated
amended claim for failure to state a cause of action. On April 1, 2000 the
court granted defendant's motion to dismiss with leave to amend the
complaint by the plaintiffs. Accordingly, no provision for any liability or
loss that may result from adjudication or settlement thereof has been made
in the accompanying consolidated financial statements.
ANTI-TAKEOVER EFFECT OF NEVADA LAW AND CHARTER AND BYLAW PROVISIONS;
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE
Nevada law as well as Cymer's charter and other documents contain
provisions that could discourage a proxy contest or make more difficult the
acquisition of a substantial block of Cymer's Common Stock, including Cymer's
Articles of Incorporation and Bylaws and Cymer's Preferred Shares Rights
Agreement ("poison pill") dated February 13, 1998. In addition, the Board of
Directors is authorized to issue, without shareholder approval, up to 5,000,000
shares of Preferred Stock. Such shares of Preferred Stock may have voting,
conversion and other rights and preferences that may be superior to those of the
Common Stock and that could adversely affect the voting power or other rights of
the holders of Common Stock. The Board of Directors could use the issuance of
Preferred Stock or of rights to purchase Preferred Stock to discourage an
unsolicited acquisition proposal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
Cymer conducts business in several international currencies through its
worldwide operations. Due to the large volume of business Cymer manages in
Japan, the Japanese operation poses the greatest foreign currency risk. Cymer
uses financial instruments, principally forward exchange contracts, in Japan to
manage its foreign currency exposures. Cymer does not enter into forward
exchange contracts for trading purposes.
Cymer enters into foreign currency exchange contracts in order to
reduce the impact of currency fluctuations related to purchases of Cymer's
inventories by Cymer Japan for resale under firm third-party sales commitments.
Net gains or losses are recorded on the date the inventories are received by
Cymer Japan (the transaction date) and are included in cost of product sales in
the consolidated statements of income as the related sale is consummated.
Amounts due from/to the bank on contracts not settled as of the transaction date
are recorded as foreign exchange contracts receivable/payable in the
consolidated balance sheets.
At March 31, 2000, Cymer had outstanding forward foreign exchange
contracts to buy US$61.9 million for 6.5 billion yen under foreign currency
exchange facilities with contract rates ranging from 100.37 yen to 112.95 yen
per US$ and various expiration dates through April 2001.
INVESTMENT AND DEBT RISK
Cymer maintains an investment portfolio consisting primarily of
government and corporate fixed income securities, certificates of deposit and
commercial paper. While it is Cymer's general intent to hold such securities
until maturity, management will occasionally sell particular securities for cash
flow purposes.* Therefore, Cymer's investments are classified as
available-for-sale and are carried on the balance sheet at fair value. Due to
the conservative nature of the investment portfolio, a sudden change in interest
rates would not have a material effect on the value of the portfolio.
In August 1997, Cymer issued $172.5 million aggregate principal amount
of Step-Up Convertible Subordinated Notes due August 6, 2004, with interest
payable semi-annually February 6 and August 6, commencing February 6, 1998.
Interest on the notes is stated at 3 1/2% per annum from August 6, 1997 through
August 5, 2000 and at 7 1/4% per annum from August 6, 2000
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to maturity or earlier redemption, representing a yield to maturity accrued
at approximately 5.47%. The Notes are convertible at the option of the holder
into shares of Common Stock of Cymer at any time on or after November 5, 1997
and prior to redemption or maturity, at a conversion rate of 21.2766 shares
per $1,000 principal amount of Notes, subject to adjustment under certain
conditions. Cymer cannot redeem the Notes prior to August 9, 2000.
Thereafter, Cymer can redeem the Notes from time to time, in whole or in
part, at specified redemption prices. The Notes are unsecured and
subordinated to all existing and future senior indebtedness of Cymer. The
indenture governing the Notes does not restrict the incurrence of senior
indebtedness or other indebtedness by Cymer. These Notes are recorded at face
value on the balance sheets. The fair value of such debt, based on quoted
market prices at March 31, 2000 was $215.4 million. As of December 31, 1999,
$172.5 million in Convertible Subordinated Notes was outstanding, as compared
to $172.3 million outstanding as of March 31, 2000.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Cymer has been named as a defendant in several
putative shareholder class action lawsuits which were filed in
September and October, 1998 in the U.S. District Court for the
Southern District of California. Certain executive officers
and directors of Cymer are also named as defendants. The
plaintiffs purport to represent a class of all persons who
purchased Cymer's Common Stock between April 24, 1997 and
September 26, 1997 (the "Class Period"). The complaints allege
claims under the federal securities laws. The plaintiffs
allege that Cymer and the other defendants made various
material misrepresentations and omissions during the Class
Period. The complaints do not specify the amount of damages
sought. The complaints have been consolidated into a single
action and a class representative has been appointed by the
court. A consolidated amended complaint was filed in early
August, 1999. On November 5, 1999 Cymer and the other
defendants filed a motion to dismiss the consolidated amended
claim for failure to state a cause of action. On April 1, 2000
the court granted defendant's motion to dismiss with leave to
amend the complaints by the plaintiffs. Accordingly, no
provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the
accompanying consolidated financial statements.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
10.1. Cymer Executive Deferred Compensation Plan, as
amended and restated
27.1 Financial Data Schedule (submitted for SEC use only)
(b) Reports on Forms 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYMER, INC.
(Registrant)
Date: May 11, 2000 By: /s/ WILLIAM A. ANGUS, III
-------------------------
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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