UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
- ----- ACT OF 1934
For the transition period from __________ to ____________
Commission file number 0-21321
CYMER, INC.
(Exact name of registrant as specified in its charter)
Nevada 33-0175463
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) No.)
16750 Via Del Campo Court, San Diego, CA 92127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 385-7300
Former name, former address and former fiscal year, if changed since last
report. N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares of Common Stock, with $0.001 par value, outstanding on
November 5, 1999 was 28,277,461.
CYMER, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 3
1998 and September 30, 1999
Consolidated Statements of Operations for the 4
three and nine months ended September 30, 1998
and 1999
Consolidated Statements of Cash Flows for the 5
three and nine months ended September 30, 1998
and 1999
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About 28
Market Risk
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 30
SIGNATURE PAGE 31
2
PART I. FINANCIAL INFORMATION
CYMER, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------
December 31, September 30,
ASSETS 1998 1999
CURRENT ASSETS:
Cash and cash equivalents $ 53,130 $ 61,024
Short-term investments 85,558 91,744
Accounts receivable - net 50,909 60,835
Foreign exchange contracts receivable 22,145 16,459
Inventories 50,786 55,348
Deferred income taxes 12,824 12,837
Prepaid expenses and other 3,706 4,440
-------------- ------------
Total current assets 279,058 302,687
PROPERTY - net 51,937 54,352
LONG-TERM INVESTMENTS 23,480 17,118
DEFERRED TAXES - NON-CURRENT 2,533 3,655
OTHER ASSETS 7,310 6,756
-------------- ------------
TOTAL ASSETS $364,318 $384,568
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,581 $ 14,245
Accrued and other liabilities 33,204 45,166
Foreign exchange contracts payable 24,873 18,215
Income taxes payable 2,146 1,405
Revolving loan 11,609 17,670
-------------- ------------
Total current liabilities 80,413 96,701
-------------- ------------
LONG-TERM LIABILITIES:
Convertible subordinated notes 172,500 172,500
Other liabilities 3,424 3,406
MINORITY INTEREST 1,450 1,859
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred Stock - authorized 5,000,000 shares; $.001 par value,
no shares issued or outstanding
Common stock - authorized 50,000,000 shares; $.001 par value,
issued and outstanding 27,174,000 and 28,135,000 shares 27 28
Paid-in capital 111,842 117,352
Treasury stock at cost (2,000,000 common shares) (24,871) (24,871)
Accumulated other comprehensive loss (1,627) (3,230)
Retained earnings 21,160 20,823
-------------- ------------
Total stockholders' equity 106,531 110,102
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $364,318 $384,568
-------------- ------------
-------------- ------------
See notes to consolidated financial statements.
3
CYMER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1998 1999 1998 1999
REVENUES:
Product sales $44,368 $58,834 $146,942 $142,036
Other 80 100 207 399
------- ------- -------- --------
Total revenues 44,448 58,934 147,149 142,435
------- ------- -------- --------
COSTS AND EXPENSES:
Cost of product sales 28,811 36,803 93,595 93,314
Research and development 7,580 9,616 23,689 24,931
Sales and marketing 3,014 4,379 10,894 11,375
General and administrative 1,953 3,422 7,036 9,388
------- ------- -------- --------
Total costs and expenses 41,358 54,220 135,214 139,008
------- ------- -------- --------
OPERATING INCOME 3,090 4,714 11,935 3,427
------- ------- -------- --------
OTHER INCOME (EXPENSE):
Foreign currency exchange gain (loss) - net 111 246 (641) 172
Interest and other income 1,766 1,809 5,621 5,226
Interest and other expense (2,856) (3,183) (8,439) (8,753)
------- ------- -------- --------
Total other income (expense) - net (979) (1,128) (3,459) (3,355)
------- ------- -------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND MINORITY INTEREST 2,111 3,586 8,476 72
------- ------- -------- --------
PROVISION FOR INCOME TAXES (640) -- (2,522) --
MINORITY INTEREST (18) (136) (109) (409)
------- ------- -------- --------
NET INCOME (LOSS) $1,453 $3,450 $5,845 ($337)
------- ------- -------- --------
------- ------- -------- --------
EARNINGS (LOSS) PER SHARE:
Basic:
Earnings (loss) per share $ 0.05 $ 0.12 $ 0.20 ($0.01)
------- ------- -------- --------
------- ------- -------- --------
Weighted average common shares outstanding 28,280 28,046 28,591 27,748
------- ------- -------- --------
------- ------- -------- --------
Diluted:
Earnings (loss) per share $ 0.05 $ 0.12 $ 0.19 ($0.01)
------- ------- -------- --------
------- ------- -------- --------
Weighted average common and potential
common shares outstanding 29,472 29,145 30,060 27,748
------- ------- -------- --------
------- ------- -------- --------
See notes to consolidated financial statements.
4
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- -------------------------------------------------------------------------------
For the nine months ended
September 30,
-------------------------
1998 1999
OPERATING ACTIVITIES:
Net income (loss) $ 5,845 ($337)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 10,966 13,092
Minority interest 109 409
Deferred income taxes (1,114)
Loss on disposal of property 307
Change in assets and liabilities:
Accounts receivable 14,967 (8,168)
Foreign exchange contracts receivable 11,868 6,530
Inventories (9,930) (3,904)
Prepaid expenses and other assets (161) (885)
Accounts payable (9,214) 5,492
Accrued and other liabilities 3,124 13,277
Foreign exchange contracts payable (9,019) (7,582)
Income taxes payable (556) 156
--------- --------
Net cash provided by operating activities 17,999 17,273
--------- --------
INVESTING ACTIVITIES:
Acquisition of property (15,677) (15,004)
Purchases of investments (70,843) (98,114)
Proceeds from sold or matured investments 92,872 97,829
--------- --------
Net cash provided by (used for) investing activities 6,352 (15,289)
--------- --------
FINANCING ACTIVITIES:
Net borrowings under revolving loan and security agreements 9,782 4,808
Proceeds from issuance of common stock 1,055 5,501
Purchase of treasury stock (23,742) --
Payments on capital lease obligations (361) (433)
--------- --------
Net cash provided by (used for) financing activities (13,266) 9,876
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 2,042 (3,966)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,127 7,894
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 51,903 53,130
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $65,030 $61,024
--------- --------
--------- --------
5
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 6,750 $ 6,455
--------- --------
--------- --------
Income taxes paid $ 3,112 $ 2,286
--------- --------
--------- --------
See notes to consolidated financial statements.
6
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial information has been prepared by
Cymer, Inc., its wholly-owned and majority-owned subsidiaries,
(collectively, "Cymer"), without audit, in accordance with the instructions
to Form 10-Q and therefore does not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Cymer, Inc., its wholly-owned subsidiaries, Cymer
Japan, Inc. (Cymer Japan), Cymer Singapore Pte Ltd. (Cymer Singapore) and
Cymer B.V. in the Netherlands (Cymer B.V.), and its majority-owned
subsidiaries, Cymer Korea, Inc. (Cymer Korea) and Cymer Southeast Asia, Inc.
(Cymer SEA). Cymer, Inc. owns 70% of Cymer Korea and 75% of Cymer SEA.
Cymer sells its laser systems in Japan primarily through Cymer Japan. Cymer
Korea, Cymer SEA, Cymer Singapore and Cymer B.V. are field service offices
for customers in those regions. All significant intercompany balances have
been eliminated in consolidation.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
UNAUDITED INTERIM FINANCIAL DATA - In the opinion of management, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the financial position and results of
operations as of and for such periods indicated. These consolidated
financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in Cymer's
Annual Report on Form 10-K (including items incorporated by reference
therein) for the year ended December 31, 1998 and the Quarterly Report on
Form 10-Q for the fiscal quarters ended March 31, 1999 and June 30, 1999.
Results for the interim periods presented herein are not necessarily
indicative of results which may be reported for any other interim period or
for the entire fiscal year.
2. EARNINGS PER SHARE
EARNINGS PER SHARE - In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share ("EPS"), effective for financial
statements issued after December 15, 1997. SFAS No. 128 requires dual
presentation of "Basic" and "Diluted" EPS by entities with complex capital
structures, replacing "Primary" and "Fully Diluted" EPS under Accounting
Principals Board ("APB") Opinion No. 15. Basic EPS excludes dilution and is
computed by dividing net income or loss attributable to common stockholders
by the weighted-average of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants to
purchase common stock and common 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
7
effect would be antidilutive. EPS for all periods have been computed
in accordance with SFAS No. 128. Cymer adopted the new method of reporting
EPS for the year ended December 31, 1997. Reconciliation of the basic and
diluted EPS is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1999 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) $1,453 $3,450 $5,845 ($337)
-------- ------ ------- ------
-------- ------ ------- ------
Basic earnings (loss) per share $ 0.05 $ 0.12 $ 0.20 ($0.01)
-------- ------ ------- ------
-------- ------ ------- ------
Basic weighted average common shares
outstanding 28,280 28,046 28,591 27,748
Effect of dilutive securities:
Warrants 114 67 117
Options 1,078 1,032 1,352
-------- ------ ------- ------
Diluted weighted average common and potential
common shares outstanding 29,472 29,145 30,060 27,748
-------- ------ ------- ------
-------- ------ ------- ------
Diluted earnings (loss) per share $ 0.05 $ 0.12 $ 0.19 ($0.01)
-------- ------ ------- ------
-------- ------ ------- ------
3. BALANCE SHEET DETAILS
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------- ------------
(IN THOUSANDS)
INVENTORIES:
Raw Materials $29,324 $ 9,857
Work-in-progress 12,946 21,530
Finished goods 8,516 23,961
----------- ------------
Total $50,786 $55,348
----------- ------------
----------- ------------
ACCRUED AND OTHER LIABILITIES:
Warranty and installation reserves $19,000 $23,400
Payroll and payroll related 3,622 5,043
Interest 7,651 9,014
Other 2,931 7,709
----------- ------------
Total $33,204 $45,166
----------- ------------
----------- ------------
4. REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, Cymer adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 requires reporting and displaying
comprehensive income and its components, which, for Cymer, include foreign
currency translation adjustments and unrealized holding gains and losses on
available-for-sale securities that are currently being presented by Cymer as
a separate component of stockholders' equity. The adoption of SFAS No. 130
had no impact on Cymer's results of operations or financial position. In
accordance with SFAS No. 130, the accumulated balance of other comprehensive
income (loss) is disclosed as a separate
8
component of stockholders' equity. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
The following table summarizes the change in each component of
accumulated other comprehensive loss for the periods ended December 31, 1998
and September 30, 1999:
Total unrealized
gains (losses) on Accumulated
Translation available-for-sale other
adjustment, investments, comprehensive
net of tax net of tax income (loss)
----------- ------------------ -------------
January 1, 1998 Balance ($2,303) $49 ($2,254)
Period net change 441 186 627
----------- ------------------ -------------
December 31, 1998 Balance (1,862) 235 (1,627)
Period net change (1,332) (271) (1,603)
----------- ------------------ -------------
September 30, 1999 Balance ($3,194) ($36) ($3,230)
----------- ------------------ -------------
----------- ------------------ -------------
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. No ruling on the motion has yet been made by the court.
Discovery has not yet commenced. Cymer believes that it has good defenses to
the claims alleged in the lawsuits and will defend itself vigorously against
these actions. The defense of these actions may cause some disruption in
Cymer's operations and may from time to time distract management from
day-to-day operations. The ultimate outcome of these actions cannot be
presently determined. Accordingly, no provision for any liability or loss
that may result from adjudication or settlement thereof has been made in the
accompanying consolidated financial statements.
6. CONTINGENCIES
Cymer's Japanese manufacturing partner has been notified that its
manufacture of Cymer's laser systems in Japan may infringe certain Japanese
patents held by Komatsu, Ltd., one of Cymer's competitors. Cymer has agreed
to indemnify its Japanese manufacturing partner against patent infringement
claims under certain circumstances. Cymer has engaged in discussions with
Komatsu to attempt to resolve these patent issues. In the course of those
discussions, Komatsu has identified additional patents that Komatsu asserts
may be infringed by Cymer and Seiko. Cymer believes, based upon the advice
of Japanese counsel, that Cymer's products do not infringe any valid claim of
the asserted patents. However, Cymer and Seiko might not ultimately prevail
in any such litigation.
Komatsu also holds several United States patents and other foreign
patents, which are counterparts to some of Komatsu's Japanese patents, that
it might attempt to assert against Cymer in the event that litigation did
ensue. While Cymer believes that its products do not infringe
9
any valid claim of the Komatsu patents, any such patent litigation would, at
a minimum, be costly and could divert the efforts and attention of Cymer's
management and technical personnel. Such litigation might also involve some
product redesign by Cymer in order to resolve.
10
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 18 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 Nine months ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
Revenues:
Product sales 99.8% 99.8% 99.9% 99.7%
Other .2 .2 .1 .3
------ ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of product sales 64.8 62.5 63.6 65.5
Research and development 17.1 16.3 16.1 17.5
Sales and marketing 6.8 7.4 7.4 8.0
General and administrative 4.4 5.8 4.8 6.6
------ ----- ----- -----
Total costs and expenses 93.1 92.0 91.9 97.6
------ ----- ----- -----
Operating income 6.9 8.0 8.1 2.4
Other income (expense) - net (2.2) (1.9) (2.3) (2.3)
------ ----- ----- -----
Income before provision for
income taxes and minority interest 4.7 6.1 5.8 .1
Provision for income taxes (1.4) -- (1.7) --
------ ----- ----- -----
Minority interest -- (.2) (0.1) (.3)
------ ----- ----- -----
Net income (loss) 3.3% 5.9% 4.0% (.2%)
------ ----- ----- -----
Gross margin on product sales 35.1% 37.4% 36.3% 34.3%
------ ----- ----- -----
11
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. Cymer's total revenues consist of product sales, which
include sales of laser systems, system upgrades, 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 33% from $44.4 million for the three months
ended September 30, 1998 to $58.8 million for the three months ended
September 30, 1999, primarily due to increased sales of DUV photolithography
laser systems, system upgrades and spare parts. In addition to the increase
in sales volume, product sales reflect an increase in the average selling
price of a photolithography laser system. The average selling price of a
lithography laser system was $442,000 for the three month period ended
September 30, 1998 as compared to $480,000 for the three month period ended
September 30, 1999. With the increase in Cymer's installed base of lasers,
Cymer's revenues from spares, system upgrades, replacement parts and services
has increased and is a larger component of product sales. Product sales for
three months ended September 30, 1999 reflects a change in the spares and
service distribution channel. One of Cymer's customers has requested that
Cymer take over the support services of the laser systems at their end users.
As a result, Cymer purchased a portion of the customer's inventory and sold
it to the end users in the current period. The buying and reselling of the
customer's inventory is expected to continue over the next few quarters.*
Funded development revenues increased from $80,000 for the three months ended
September 30, 1998 to $100,000 in the three months ended September 30, 1999.
Cymer's sales are generated primarily by shipments to customers in
Japan, the Netherlands, and the United States. Approximately 89%, 88% and
84% of Cymer's sales in 1997, 1998 and the first nine months of 1999,
respectively, were derived from customers outside the United States. Cymer
maintains a wholly-owned Japanese subsidiary which sells to Cymer's Japanese
customers. Revenues from Japanese customers, generated primarily by this
subsidiary, accounted for 65%, 48% and 33% of revenues for 1997, 1998 and the
first nine months of 1999, respectively. The activities of Cymer's Japanese
subsidiary are limited to sales and service of products purchased by the
subsidiary from the parent corporation. All costs of development and
production of Cymer's products, including costs of shipment to Japan, are
recorded as costs of the parent company. Cymer anticipates that
international sales will continue to account for a significant portion of its
net sales.*
COST OF PRODUCT SALES. Cost of product sales includes direct material
and labor, warranty expenses, license fees, manufacturing and service
overhead, and foreign exchange gains and losses on foreign currency exchange
contracts associated with purchases of Cymer's products by the Japanese
subsidiary for resale under firm third-party sales commitments.
Cost of product sales rose 28% from $28.8 million for the three months
ended September 30, 1998 to $36.8 million for the three months ended
September 30, 1999 due primarily to the increase in sales volume. The gross
margin on these sales increased from 35.1% for the three months ended
September 30, 1998 to 37.4% for the same three month period in 1999. This
improvement in gross margin, which was primarily due to the increase in
product sales and the 1999 product mix, was offset by increased inventory
reserves for the three months ended September 30, 1999. Additional inventory
reserves in the amount of $2.6 million were taken during the current period
due to the accelerated demand for the 6000 series lasers over the 5010 series
lasers. In addition, the gross margin for the three month period ended
September 30, 1999 includes the impact of buying customers inventory to
support the change in the spares and service distribution channel.
12
Net gains or losses from foreign currency exchange contracts are
included in cost of product sales in the consolidated statements of
operations as the related sales are recognized. Cymer recognized net gains
on such contracts of $2.0 million for the three months ended September 30,
1998 and a $187,000 net loss for the three months ended September 30, 1999.
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 27% from $7.6 million in
the three months ended September 30, 1998 to $9.6 million for the three
months ended September 30, 1999, due primarily to the number of research
projects underway and the effort required to meet various milestone
completion dates. Development expenses during 1998 consisted of the
completion of major milestones on Cymer's ELS-5010 laser system, and
development efforts on Cymer's ELS-6000 laser system. For the three months
ended September 30, 1999, increased development efforts were expended on the
ELS-6000 product as well as the ArF and F2 products. As a percentage of
total revenues, such expenses decreased from 17.1% to 16.3% in the respective
periods due to higher 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 45% from $3.0 million for
the three months ended September 30, 1998 to $4.4 million for the three
months ended September 30, 1999 due primarily to continuing development costs
associated with Cymer's sales support and foreign field service locations in
Europe, Singapore, Korea and Taiwan. As a percentage of total revenues, such
expenses increased from 6.8% to 7.4% in the respective periods.
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 75% from $2.0 million for the three months ended September
30, 1998 to $3.4 million for the three months ended September 30, 1999, due
to continuing business process quality development efforts and other required
general and administrative support activities. This increase from period to
period also includes the impact from increased headcount and employee
benefits. As a percentage of total revenues, such expenses increased from
4.4% to 5.8% from period to period.
OTHER INCOME (EXPENSE) - NET. Net other income (expense) consists
primarily of interest income and expense and foreign currency exchange gains
and losses associated with fluctuations in the value of the Japanese yen
against the United States dollar. Net other expense increased from $979,000
for the three months ended September 30, 1998 to $1.1 million for the three
months ended September 30, 1999, primarily due to a loss on disposal of
various obsolete computer and manufacturing equipment which was written off
in the amount of $317,000 during the current period. Net foreign currency
exchange gains totaled $111,000, interest and other income totaled $1.8
million and interest and other expense totaled $2.9 million for the three
months ended September 30, 1998, compared to an exchange gain of $246,000,
interest and other income of $1.8 million and $3.2 million in interest and
other expense for the three months ended September 30, 1999.
Cymer's results of operations are subject to fluctuations in the value
of the Japanese yen against the United States dollar. Sales by Cymer to its
Japanese subsidiary are denominated in dollars, and sales by the subsidiary
to customers in Japan are denominated in yen. Cymer's Japanese subsidiary
manages its exposure to such fluctuations by entering into foreign currency
exchange contracts to hedge its purchase commitments to Cymer. The gains or
losses from these contracts are recorded as a component of cost of product
sales, while the remaining foreign currency exposure is recorded as other
income (expense) in the consolidated statements of
13
operations. Gains and losses resulting from foreign currency translation are
accumulated as a separate component of consolidated stockholders' equity.
INCOME TAX PROVISION. The provision for income taxes for the three
months ended September 30, 1998 of $640,000 reflects an annual effective tax
rate of 30% as Cymer had no additional loss or valuation allowance carryovers
from previous periods to be applied in 1998. The tax provision for the three
months ended September 30, 1999 reflects an annual effective rate of 0% at
September 30, 1999. The lower 1999 rate reflects the expected tax benefit
from foreign sales and from federal and state tax credits.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES. Product sales decreased 3% from $146.9 million for the nine
months ended September 30, 1998 to $142.0 million for the nine months ended
September 30, 1999, primarily due to decreased sales of DUV photolithography
laser systems. The decrease in laser system sales was partially offset by an
increase in the average selling price from period to period. The average
selling price of a lithography laser system for the nine month periods ended
September 30, 1998 and 1999 were $407,000 and $475,000, respectively. Due
to the increase in Cymer's installed base of lasers, Cymer's revenues from
spares, system upgrades, replacement parts and services has increased and is
a larger component of product sales. Product sales for the nine months ended
September 30, 1999 reflect a change in the spares and service distribution
channel. One of Cymer's customers has requested that Cymer take over the
support services of the laser systems at their end users. As a result, Cymer
purchased a portion of the customer's inventory and sold it to the end users
in the current period. The buying and reselling of the customer's inventory
is expected to continue over the next few quarters.* Funded development
revenues increased from $207,000 for the nine months ended September 30, 1998
to $399,000 in the nine months ended September 30, 1999, primarily due to the
addition of various laser research projects in 1999 compared to the
completion of various projects in 1998.
COST OF PRODUCT SALES. Cost of product sales declined less than 1% from
$93.6 million for the nine months ended September 30, 1998 to $93.3 million
for the nine months ended September 30, 1999 due to the decrease in sales
volume. The gross margin on these sales decreased from 36.3% for the nine
months ended September 30, 1998 to 34.3% for the same nine month period in
1999. This reduction was primarily due to lower product sales on higher
relative fixed manufacturing facility costs, continued development of
worldwide field support infrastructure, and increased inventory reserves.
Additional inventory reserves were taken in the amount of $2.6 million during
September 1999 due to the accelerated demand for 6000 series lasers over the
5010 series lasers. In addition, the gross margin for the nine month period
ended September 30, 1999 includes the impact of buying customers inventory to
support the change in the spares and service distribution channel.
Net gains or losses from foreign currency exchange contracts are
included in cost of product sales in the consolidated statements of
operations as the related sales are recognized. Cymer recognized net gains
on such contracts of $5.2 million for the nine months ended September 30,
1998 and a $1.0 million net loss for the nine months ended September 30,
1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
5% from $23.7 million for the nine months ended September 30, 1998 to $24.9
million for the nine months ended September 30, 1999, due primarily to the
timing of various research programs' initiation, development and milestone
completions. Development expenses during 1998 consisted of the completion of
major milestones on Cymer's ELS-5010 laser system, and development efforts on
Cymer's ELS-6000 laser system. 1999 development efforts reflect the
continued development of the ELS-6000 as well as increased development
efforts on the ArF and F2 research programs. As a percentage of total
revenues, such expenses increased from 16.1% to 17.5% in the respective
periods due to lower revenues.
14
SALES AND MARKETING. Sales and marketing expenses increased 4% from
$10.9 million for the nine months ended September 30, 1998 to $11.4 million
for the nine months ended September 30, 1999 due primarily to the continuing
development of Cymer's foreign field service locations in Europe, Singapore,
Korea and Taiwan, as well as the overall infrastructure to support Cymer's
increasing service demands. As a percentage of total revenues, such expenses
increased from 7.4% to 8.0% in the respective periods due to lower sales
volumes.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 33% from $7.0 million for the nine months ended September 30, 1998
to $9.4 million for the nine months ended September 30, 1999, due to the
continuing business process quality development efforts and other required
general and administrative support activities. This increase from period to
period also includes the impact from increased headcount and employee
benefits. As a percentage of total revenues, such expenses increased from
4.8% to 6.6% from period to period.
OTHER INCOME (EXPENSE) - NET. Net other expense decreased from $3.5
million for the nine months ended September 30, 1998 to $3.4 million for the
nine months ended September 30, 1999, primarily due to foreign exchange
losses in 1998 versus a foreign exchange gain in 1999, offset by a decrease
in interest income due to lower average cash balances for 1999. Foreign
currency exchange losses totaled $641,000, interest and other income totaled
$5.6 million and interest and other expense totaled $8.4 million for the nine
months ended September 30, 1998, compared to an exchange gain of $172,000,
interest and other income of $5.2 million and $8.8 million in interest and
other expense for the nine months ended September 30, 1999. Interest and
other expense for the nine month period ended September 30, 1999 includes the
impact of a $317,000 write off of various obsolete computer and manufacturing
equipment.
INCOME TAX PROVISION. The provision for income taxes for the nine
months ended September 30, 1998 of $2.5 million reflects an annual effective
tax rate of 30% as Cymer had no additional loss or valuation allowance
carryovers from previous periods to be applied in 1998. There is no tax
provision estimated for 1999 primarily due to tax benefits expected from
foreign sales and from federal and state tax credits.*
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Cymer has funded its operations primarily through the
private sale of equity securities totaling approximately $27.1 million,
borrowings from certain of its investors for bridge financing, bank
borrowings, its September 18, 1996 initial public offering, which resulted in
net proceeds to Cymer of approximately $29.7 million, the public offering on
December 12, 1996, which resulted in net proceeds of approximately $50.0
million, and raising a net $167.3 million in a convertible subordinated note
offering on August 6, 1997. As of September 30, 1999, Cymer had
approximately $61.0 million in cash and cash equivalents, $91.8 million in
short-term investments, $17.1 million in long-term investments, $206.0
million in working capital and $17.7 million in bank debt.
Net cash provided by operating activities was approximately $18.0
million for the nine months ended September 30, 1998 and net cash provided by
operating activities was $17.3 million for the nine months ended September
30, 1999. The decrease in net cash provided by operating activities for the
nine months ended September 30, 1998 as compared to 1999 was primarily
attributable to an increase in accounts payable and other accrued
liabilities, offset by a smaller increase in inventory and an increase in
accounts receivable during the period.
Net cash provided by investing activities was approximately $6.4 million
for the nine months ended September 30, 1998 as compared to net cash used for
investing activities of $15.3 million for the nine months ended September 30,
1999. The net cash provided by investing activities during the first nine
months of 1998 primarily reflects continued property acquisitions to
accommodate the business development and focus, offset by the timing of short
and long term investments maturing and being reinvested during the period.
The net cash used for investing
15
activities during the first nine months of 1999 primarily reflects continued
property acquisitions, offset by the timing of short term and long term
investments maturing and being reinvested during the period and an increase
in short term investments.
Net cash used for financing activities was approximately $13.3 million
for the nine months ended September 30, 1998, compared to cash provided by
financing activities of $9.9 million for the nine months ended September 30,
1999. For the nine months ended September 30, 1998, Cymer borrowed $9.8
million on its line of credit in Japan, received a net $1.1 million through
the issuance of common stock. These sources of cash were offset by treasury
stock repurchases of $23.7 million. The net cash provided by financing
activities for the nine months ended September 30, 1999 was primarily
attributable to $4.8 million in bank borrowings in Japan and the receipt of
$5.5 million upon the issuance of common stock due to the exercise of stock
options by Cymer employees.
Cymer requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. Cymer's future capital requirements will depend on many
factors, including the rate of Cymer's manufacturing expansion, the timing
and extent of spending to support product development efforts and the
continued development 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 and development of its business over the
next 12 months.*
RECENT ACCOUNTING PRONOUNCEMENTS
During June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement 133." The Statement defers the effective date of SFAS No.
133 to the year ending December 31, 2001. Interim reporting for this
standard will be required. Management has not yet assessed the effect of
this standard on Cymer's current reporting and disclosures.
YEAR 2000 READINESS ISSUE
The Year 2000 issue is primarily the result of computer systems using a
two-digit format rather than four-digits to indicate the year. Such computer
systems will be unable to differentiate between the year 1900 and the year
2000, causing errors and system failures which may disrupt the operations of
such systems. Cymer has been addressing this issue and has been focusing its
efforts through a five step approach: (1) identification of the systems which
may be vulnerable to Year 2000 issues; (2) assessment of the impact on the
systems identified; (3) remediation of non-compliant systems and components
and determination of solutions for non-compliant suppliers; (4) testing of
systems and components following remediation; and (5) documentation.
Cymer is 100% complete with the identification of internal systems which
may be vulnerable to the Year 2000 issues, and is 100% complete with the
assessment of the impact on these systems. The assessment includes factory
systems, desktop PC's, fax machines, printers, and common software packages
in use at Cymer. In addition, all suppliers have been contacted for their
Year 2000 issues and plans, and all new software licenses include Year 2000
statements.
Cymer has addressed and done all that is reasonably possible in regards
to remediation and testing of systems identified as having Year 2000 related
issues. In conducting the remediation, testing, and documentation phases of
this five step approach, Cymer focused most of its efforts on the Year 2000
issues related to its most business-critical systems, such as its Enterprise
Resource Planning (ERP) system, Infoflo, and all Microsoft related software
applications. As a result, a significant amount of time was spent on these
applications in the remediation, testing, and documentation phases.
Remediation and testing of Cymer's ERP
16
system, Infoflo, required a three step approach: (1) base system
modifications; (2) custom modifications; and (3) user validation/approval of
both base system and custom modifications. Base system and custom
modifications were completed in the second half of 1998 and all user testing
and overall documentation of the process was completed by March 31, 1999.
Since there are many custom modifications within Infoflo which required
custom Year 2000 modifications, Cymer requested that the Infoflo supplier
audit the overall modification and testing process which was followed by
Cymer. As a result of these audits, the Infoflo supplier concluded that to
the best of their knowledge, the Infoflo system is Year 2000 compliant.*
In regards to Microsoft related software applications, Cymer must rely
on statements made by the supplier as to Year 2000 issues and overall
compliance. Based upon the Year 2000 statements made by Microsoft, Cymer has
no reason to believe that there will be any business-critical issues with the
performance of the Microsoft applications as a result of Year 2000 issues.*
Based upon two surveys of Cymer's supplier base separated in time by six
months during 1999, there is not evidence at this time that any suppliers
have any Year 2000 issues that could cause Cymer a disruption in supply of
any of its critical components.* In keeping with industry practice, Cymer
has relied upon supplier representations and has not systematically audited
its supplier base on the matter to ensure that the various suppliers'
representations are indeed accurate.
Cymer's Year 2000 internal contingency plan consists of the following:
(1) offsite backup of all critical data and software; (2) multiple redundant
suppliers for all critical data communication and telecommunications
services; (3) readiness planning for support personnel; (4) outside
consultants identified for rapid availability; and (5) ongoing evaluation and
planning for contingencies.
Cymer's current laser systems are not Year 2000 compliant per accepted
industry standards. The laser systems currently require manual intervention
to reset the internal clock to account for leap year in the year 2000.
Cymer's customers have been informed of the non-compliance and have been
provided with instructions for the manual correction of the date between
January 1 and February 28, 2000. Not resetting the internal clock would have
no material impact on the operation of the laser system.* Although there is
no material impact to the operation of the laser system due to Year 2000
issues*, Cymer has decided to develop the software fix to bring all laser
systems to fully accepted industry standards for Year 2000 compliance. These
software fixes are in various stages of development and are currently being
made available to customers as part of other non-Year 2000 software upgrades.
Based on the assessment efforts to date, Cymer does not believe that the
year 2000 will have a material adverse effect on Cymer's consolidated
financial condition and results of operations.* The aggregate cost of Year
2000 compliance is estimated at approximately $250,000 of which approximately
$150,000 has been incurred to date with the remainder to be incurred between
now and several months into the year 2000.* However, Cymer's beliefs and
expectations are based on certain assumptions that ultimately may prove to be
inaccurate. Aside from global infrastructure Year 2000 requirements, Cymer's
reasonably likely worst case scenario may include: supplier and customer
purchase, delivery and payment delays; server and desktop computer failures,
including Cymer's ERP system, Infoflo, or software supplied by Microsoft; one
or more critical software systems failures, including embedded control
systems; and failure of one or more internal and/or external communications
systems such as telephones, networks, voice mail and paging systems.
Additional potential sources of risk include (a) the inability of key
suppliers and customers to be Year 2000 compliant, (b) the disruption of
global transportation channels as a result of general system failures, and
(c) an overall failure of necessary infrastructure such as electricity and
telecommunications. If any of these were to occur, there could be a material
adverse effect on Cymer's consolidated financial condition and results of
operations.
17
RISK FACTORS
LIKELY FLUCTUATIONS IN OPERATING RESULTS
CERTAIN FACTORS CAUSING FLUCTUATIONS
Cymer's operating results have in the past fluctuated and are likely in
the future to fluctuate significantly. These fluctuations depend on a variety
of factors which may include:
- the demand for semiconductors in general and, in particular, for leading
edge devices with smaller circuit geometries;
- the rate at which semiconductor manufacturers take delivery of
photolithography tools from Cymer's customers;
- cyclicality in the market for semiconductor manufacturing equipment;
- the timing and size of orders from Cymer's small base of customers;
- the ability of Cymer to manufacture, test and deliver laser systems in
a timely and cost effective manner;
- the mix of laser models, replacement parts and service revenues;
- the ability of Cymer's competitors to obtain orders from Cymer's
customers;
- the entry of new competitors into the market for DUV photolithography
illumination sources;
- the ability of Cymer to manage its costs as it supplies its products in
higher volumes; and
- Cymer's ability to effectively manage its exposure to foreign currency
exchange rate fluctuations, principally with respect to the Japanese yen
(in which sales by Cymer's Japanese subsidiary are denominated).
In addition, as customers become more efficient at integrating Cymer's lasers
into their photolithography tools, reductions in customer laser inventories
may affect Cymer's operating results.
TIMING OF REVENUE RECOGNITION
Cymer has historically derived a substantial portion of its quarterly
and annual revenues from the sale of a relatively small number of systems.
As a result, the precise timing of the recognition of revenue from an order
for a small number of systems can have a significant impact on Cymer's total
revenues and operating results for a particular period. If customers cancel
or reschedule orders for a small number of systems or if Cymer cannot fill
orders in time to recognize revenue during a particular period, this could
adversely affect Cymer's operating results for that period. For example,
unanticipated manufacturing, testing, shipping or product acceptance delays
could cause such cancellations, rescheduling or inability to fill orders
promptly.
FIXED EXPENSES
Cymer's expense levels are based, in large part, on Cymer's expectations
as to future revenues. Therefore, Cymer's expenses are relatively fixed in
the short term. If revenue levels fall below expectations, this would
disproportionately and adversely affect net income. Cymer cannot forecast
the impact of these and other factors on its revenues and operating results
in any future period with any degree of certainty.
18
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 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 increased 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 could have a material adverse effect
on Cymer's business, financial condition and results of operations.
DEPENDENCE ON SMALL NUMBER OF CUSTOMERS
A small number of manufacturers of DUV photolithography tools constitute
Cymer's primary customer base. Four large firms, ASM Lithography, Canon,
Nikon and SVG Lithography (a subsidiary of Silicon Valley Group, Inc.),
dominate the photolithography tool business. Collectively, they accounted for
approximately 94%, 94% and 80% of Cymer's total revenues in 1997, 1998, and
the nine months ended September 30, 1999, respectively. Individually, sales
to ASM Lithography, Canon, Nikon and SVG Lithography accounted for
approximately 37%, 20%, 31% and 6%, respectively, of total revenues in 1998
and 36%, 16%, 21%, 7%, respectively, of total revenues for the nine months
ended September 30, 1999. Cymer expects that sales of its systems to these
customers will continue to account for substantially all of its revenues in
the foreseeable future. None of Cymer's customers are obligated to purchase
a minimum number of Cymer's products. The loss of any significant business
from any one of these customers or a significant reduction in orders from any
one of these customers, would have a material adverse effect on Cymer's
business, financial condition and results of operations. Reductions caused
by changes in a customer's competitive position, a decision to purchase
illumination sources from
19
other suppliers, or economic conditions in the semiconductor and
photolithography tool industries, could all cause such a loss of business or
reduction in orders.
NEED TO MANAGE A CHANGING BUSINESS
Cymer has recently dramatically expanded and contracted the scope of its
operations and the number of employees in most of its functional areas. For
example, Cymer increased the number of its employees from 136 at December 31,
1995 to 336 at December 31, 1996 to 809 at December 31, 1997 and then
decreased that number to 703 at December 31, 1998. As of September 30, 1999,
Cymer had 769 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 and
- field service and customer support capabilities.
Cymer must also effectively manage its inventory levels, including assessing
and managing excess and obsolete inventories associated with the changing
environment and new product introductions. Cymer will need to attract, train,
retain and manage key technical personnel in order to support Cymer's growth
and/or contraction. Cymer will also need to manage effectively its
international operations, including:
- the operations of its subsidiaries in Japan, Korea, Taiwan, Singapore
and the Netherlands,
- its field service and support presence in Asia and Europe and
- its relationship with Seiko as a manufacturer of its
photolithography lasers.
Cymer must also effect timely deliveries of its products and maintain the
product quality and reliability required by its customers. Any failure to
effectively manage Cymer's growth or contraction would materially adversely
affect Cymer's financial condition and results of operations.
RISKS ASSOCIATED WITH IMPLEMENTING A NEW ENTERPRISE RESOURCE PLANNING SYSTEM
Cymer is in the initial stages of selecting and 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.
20
DEPENDENCE ON SINGLE PRODUCT LINE
Cymer's only product line is excimer lasers ("KrF, ArF and F2 laser
systems"). The primary market for excimer lasers is for use in DUV
photolithography equipment for manufacturing deep-submicron semiconductor
devices. Demand for Cymer's products will depend in part on the rate at
which semiconductor manufacturers adopt excimer lasers as the illumination
source for their photolithography tools. Impediments to such adoption
include:
- instability of photoresists used in advanced DUV photolithography and
- potential shortages of specialized materials used in DUV optics.
There can be no assurance that such impediments can or will be overcome. In
any event, such impediments may materially reduce the demand for Cymer's
products. Further, if Cymer's customers experience reduced demand for DUV
photolithography tools, or if Cymer's competitors are successful in obtaining
significant orders from such customers, Cymer's financial condition and
results of operations would be materially adversely affected.
COMPETITION
LAMBDA-PHYSIK, KOMATSU AND USHIO
Cymer currently has three significant competitors in the market for
excimer laser systems for photolithography applications:
- Lambda-Physik,
- Komatsu, Ltd. ("Komatsu") and
- Ushio.
All of these companies:
- are larger than Cymer,
- have access to greater financial, technical and other resources than
does Cymer, and
- are located in closer proximity to Cymer's customers than is Cymer.
Cymer believes that Lambda-Physik and Komatsu are aggressively seeking to
gain larger positions in this market. Cymer believes that its customers have
each purchased 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.
21
SMALL AND IMMATURE MARKET FOR EXCIMER LASERS
In addition, the market for excimer lasers is still small and immature.
Larger competitors with substantially greater financial resources, including
other manufacturers of industrial lasers, might attempt to enter the market.
Cymer might not remain competitive. A failure to remain competitive
would have a material adverse effect on Cymer's business, financial condition
and results of operations.
RISK OF EXCESSIVE INVENTORY BUILDUPS BY PHOTOLITHOGRAPHY TOOL MANUFACTURERS
Photolithography tool manufacturers constitute substantially all of
Cymer's customers. Photolithography tool manufacturers sell their systems in
turn to semiconductor manufacturers. Market conditions in the industry can
cause Cymer's customers to 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 trained
third-party sources or through its own personnel, a rapid response capability
to service its lasers throughout the world. Accordingly, Cymer has an
ongoing effort to develop its direct support infrastructure in the United
States, Japan, Europe, Korea, Singapore, Taiwan and Southeast Asia. This
development entails recruiting and training qualified field service personnel
22
and building effective and highly trained organizations that can provide
service to customers in various countries in their assigned regions. Cymer
has historically experienced difficulties in effectively training field
service personnel. Cymer might not be able to attract and train qualified
personnel to establish these operations successfully. Further, the costs of
such operations might be excessive. A failure to implement this plan
effectively could have a material adverse effect on Cymer's business,
financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS
Semiconductor manufacturing equipment and processes are subject to rapid
technological change. Cymer believes that its future success will depend in
part upon its ability to:
- continue to enhance its excimer laser products and their process
capabilities, and
- develop and manufacture new products with improved capabilities.
In order to enhance and improve its products and develop new products, among
other things, Cymer must work closely with its customers, particularly in the
product development stage, to integrate its lasers with its customers'
photolithography tools. Future technologies, such as EUV and scalpel
processes, might render Cymer's excimer laser products obsolete. Further,
Cymer might not be able to develop and introduce new products or enhancements
to its existing products and processes in a timely manner that satisfy
customer needs or achieve market acceptance. The failure to do so could
materially adversely affect Cymer's business, financial condition and results
of operations.
DEPENDENCE ON KEY PERSONNEL
Cymer is highly dependent on the services of a number of key employees
in various areas, including:
- engineering,
- research and development,
- sales and marketing, and
- manufacturing.
In particular, there are a limited number of experts in excimer laser
technology. There is intense competition for such personnel, as well as for
the highly-skilled hardware and software engineers Cymer requires. Cymer has
in the past experienced, and continues to experience, difficulty in hiring
personnel, including experts in excimer laser technology. Cymer believes
that, to a large extent, its future success will depend upon:
- the continued services of its engineering, research and development,
sales and marketing and manufacturing and service personnel, and
- its ability to attract, train and retain highly skilled personnel in
each of these areas.
Cymer does not have employment agreements with most of its employees, and
Cymer might not be able to retain its key employees. The failure of Cymer to
hire, train and retain such personnel could have a material adverse effect on
Cymer's business, financial condition and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
CYMER PATENTS
Cymer believes that the success of its business depends more on such
factors as the technical expertise of its employees, as well as their
innovative skills and marketing and customer relations ability, than on
patents, copyrights, trade secrets and other intellectual property rights.
23
Nevertheless, the success of Cymer may depend in part on patents. As of
September 30, 1999, Cymer owned 50 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 June 2018.
As of September 30, 1999, Cymer had also applied for 66 additional patents in
the United States, 7 of which have been allowed. As of September 30, 1999,
Cymer owned 26 foreign patents and had filed 206 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 has lost the right to seek patent protection in those countries for
certain of its inventions. Additionally, because foreign patents may afford
less protection under foreign law than is available under United States
patent law, any such patents issued to Cymer might not adequately protect
Cymer's technology 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
24
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 on 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 Instruments, Inc.
("Seiko"). Cymer, in consultation with Japanese patent counsel, has
initiated oppositions to certain Komatsu Japanese patents and patent
applications in the Japanese Patent Office. To date, one of these
oppositions has been dismissed. 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 also 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, by or 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 in certain
countries. Although Cymer has recently received a positive "Decision for
Registration" on its CYMER trademark in Japan, Cymer might be subjected to an
action for trademark infringement in other countries, which could be costly
to defend. If successful, such an action would require Cymer to cease use of
the mark and, potentially, to pay damages.
25
RISKS ASSOCIATED WITH MANUFACTURING IN JAPAN
Cymer has qualified Seiko of Japan as a contract manufacturer of its
photolithography lasers. Komatsu, a competitor of Cymer, has advised Seiko
that certain aspects of Cymer's lasers might infringe certain patents that
have been issued to Komatsu in Japan. Komatsu has advised Seiko it intends
to enforce its rights under such patents against Seiko if Seiko engages in
manufacturing activities for Cymer. In the event that, notwithstanding its
manufacturing agreement with Cymer, Seiko should determine not to continue
manufacturing Cymer's products until resolution of the matter with Komatsu,
Cymer's ability to meet any heavy demand for its products could be materially
adversely affected. See -- "Uncertainty Regarding Patents and Protection of
Proprietary Technology."
RISKS OF INTERNATIONAL SALES AND OPERATIONS
SIGNIFICANT INTERNATIONAL TRADE
Cymer derived approximately 89%, 88% and 84% of its revenues in 1997,
1998 and the nine months ended September 30, 1999, respectively, from
customers located outside the United States. Because a significant majority
of Cymer's principal customers are located in other countries, particularly
Asia, Cymer anticipates that international sales will continue to account for
a significant portion of its revenues.* In order to support its overseas
customers, Cymer:
- 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.*
26
FOREIGN REGULATIONS
Numerous foreign government standards and regulations apply to Cymer's
products. These standards and regulations are continually being amended.
Although Cymer endeavors to meet foreign technical and regulatory standards,
Cymer's products might not continue to comply with foreign government
standards and regulations, or changes thereto. It might not be cost effective
for Cymer to redesign its products to comply with such standards and
regulations. The inability of Cymer to design or redesign products to comply
with foreign standards could have a material adverse effect on Cymer's
business, financial condition and results of operations.
ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS
Federal, state and local regulations impose various controls on the storage,
handling, discharge and disposal of substances used in Cymer's manufacturing
process and on the facility leased by Cymer. Cymer believes that its
activities conform to present governmental regulations applicable to its
operations and its current facilities. These regulations include those
related to environmental, land use, public utility utilization and fire code
matters. Such governmental regulations might in the future impose the need
for additional capital equipment or other process requirements upon Cymer.
They might also restrict Cymer's ability to expand its operations. The (1)
adoption of such measures, or (2) failure by Cymer to comply with applicable
environmental and land use regulations or to restrict the discharge of
hazardous substances, could subject Cymer to future liability or could cause
its manufacturing operations to be curtailed or suspended.
RISKS OF PRODUCT LIABILITY CLAIMS
Cymer faces a significant risk of exposure to product liability claims
in the event that the use of its products results in personal injury or
death. Cymer might experience material product liability losses in the
future. Cymer maintains insurance against product liability claims. However,
such coverage might not continue to be available on terms acceptable to
Cymer. Such coverage also might not be adequate for liabilities actually
incurred. Further, in the event that any of Cymer's products prove to be
defective, Cymer may need to recall or redesign such products. A successful
claim brought against Cymer in excess of available insurance coverage, or any
claim or product recall that results in significant adverse publicity against
Cymer, could have a material adverse effect on Cymer's business, financial
condition and results of operations.
POSSIBLE PRICE VOLATILITY OF COMMON STOCK
The following factors may significantly affect the market price of
Cymer's Common Stock:
- actual or anticipated fluctuations in Cymer's operating results,
- announcements of technological innovations,
- new products or new contracts by Cymer or its competitors,
- developments with respect to patents or proprietary rights,
- conditions and trends in the laser device and other technology
industries,
- changes in financial estimates by securities analysts,
- general market conditions, and
- other factors.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market price for many high
technology companies. Such fluctuations have in some cases been unrelated to
the operating performance of these companies. Severe price fluctuations in a
company's stock have frequently been followed by securities litigation.
Cymer is currently in the process of defending such an action (see - Legal
Matters). Such litigation can result in substantial costs and a diversion of
management's attention and resources.
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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 Cymer and the other defendants filed a
motion to dismiss the consolidated amended claim for failure to state a cause
of action. No ruling on the motion has yet been made by the court.
Discovery has not yet commenced. Cymer believes that it has good defenses to
the claims alleged in the lawsuits and will defend itself vigorously against
these actions. The defense of these actions may cause some disruption in
Cymer's operations and may from time to time distract management from
day-to-day operations. The ultimate outcome of these actions cannot be
presently determined. Accordingly, no provision for any liability or loss
that may result from adjudication or settlement thereof has been made in the
accompanying consolidated financial statements.
ANTI-TAKEOVER EFFECT OF NEVADA LAW AND CHARTER AND BYLAW PROVISIONS;
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE
Nevada law and Cymer's Articles of Incorporation and Bylaws contain
provisions that could discourage a proxy contest or make more difficult the
acquisition of a substantial block of Cymer's Common Stock. In addition, the
Board of Directors is authorized to issue, without shareholder approval, up
to 5,000,000 shares of Preferred Stock. Such shares of Preferred Stock may
have voting, conversion and other rights and preferences that may be superior
to those of the Common Stock and that could adversely affect the voting power
or other rights of the holders of Common Stock. The Board of Directors could
use the issuance of Preferred Stock or of rights to purchase Preferred Stock
to discourage an unsolicited acquisition proposal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
Cymer conducts business in several international currencies through its
worldwide operations. Due to the large volume of business Cymer manages in
Japan, the Japanese operation poses the greatest foreign currency risk.
Cymer uses financial instruments, principally forward exchange contracts, in
Japan to manage its foreign currency exposures. Cymer does not enter into
forward exchange contracts for trading purposes.
Cymer enters into foreign currency exchange contracts in order to reduce
the impact of currency fluctuations related to purchases of Cymer's
inventories by Cymer Japan for resale under firm third-party sales
commitments. Net gains or losses are recorded on the date the inventories
are received by Cymer Japan (the transaction date) and are included in cost
of product sales in the consolidated statements of income as the related sale
is consummated. Amounts due from/to the bank on contracts not settled as of
the transaction date are recorded as foreign exchange contracts
receivable/payable in the consolidated balance sheets.
At September 30, 1999, Cymer had outstanding forward foreign exchange
contracts to buy US$45.8 million for 5.3 billion yen under foreign currency
exchange facilities with contract rates ranging from 106.69 yen to 122.68 yen
per US$ and various expiration dates through September, 2000.
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INVESTMENT AND DEBT RISK
Cymer maintains an investment portfolio consisting primarily of
government and corporate fixed income securities, certificates of deposit and
commercial paper. While it is Cymer's general intent to hold such securities
until maturity, management will occasionally sell particular securities for
cash flow purposes. Therefore, Cymer's investments are classified as
available-for-sale and are carried on the balance sheet at fair value. Due
to the conservative nature of the investment portfolio, a sudden change in
interest rates would not have a material effect on the value of the portfolio.
In August 1997, Cymer issued $172.5 million aggregate principal amount
of Step-Up Convertible Subordinated Notes due August 6, 2004, with interest
payable semi-annually February 6 and August 6, commencing February 6, 1998.
Interest on the notes is stated at 3 1/2% per annum from August 6, 1997 through
August 5, 2000 and at 7 1/4% per annum from August 6, 2000 to maturity or
earlier redemption, representing a yield to maturity accrued at approximately
5.47%. The Notes are convertible at the option of the holder into shares of
Common Stock of 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 September 30, 1999
was $177.8 million. As of December 31, 1998 and September 30, 1999, $172.5
million in Convertible Subordinated Notes was outstanding.
29
PART II. OTHER INFORMATION
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
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: November 10, 1999 By: /s/ WILLIAM A. ANGUS III
------------------------
William A. Angus, III
Sr. Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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