UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2002
OR
o | 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 (State or other jurisdiction of incorporation or organization) |
33-0175463 (I.R.S. Employer 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 ý No o
The number of shares of Common Stock, with $0.001 par value, outstanding on August 8, 2002 was 33,983,295.
CYMER, INC.
FORM 10-Q
For the Quarter Ended June 30, 2002
INDEX
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Page |
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PART I. | FINANCIAL INFORMATION | |||
ITEM 1. |
Consolidated Financial Statements (unaudited) |
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Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002 |
3 |
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Consolidated Statements of Income for the three and six months ended June 30, 2001 and 2002 |
4 |
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Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2002 |
5 |
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Notes to Consolidated Financial Statements |
6 |
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ITEM 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
14 |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
36 |
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PART II. |
OTHER INFORMATION |
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ITEM 1. |
Legal Proceedings |
37 |
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ITEM 2. |
Changes in Securities and Use of Proceeds |
37 |
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ITEM 3. |
Defaults upon Senior Securities |
37 |
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ITEM 4. |
Submission of Matters to a Vote of Security Holders |
37 |
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ITEM 5. |
Other Information |
37 |
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ITEM 6. |
Exhibits and Reports on Form 8-K |
37 |
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SIGNATURE PAGE |
38 |
2
ITEM 1. Financial Statements
CYMER, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
|
December 31, 2001 |
June 30, 2002 |
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---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||
CURRENT ASSETS: | |||||||||
Cash and cash equivalents | $ | 111,195 | $ | 161,715 | |||||
Short-term investments | 82,988 | 118,807 | |||||||
Accounts receivablenet | 50,056 | 63,748 | |||||||
Foreign currency forward exchange contracts | 3,197 | | |||||||
Inventories | 61,784 | 84,800 | |||||||
Deferred income taxescurrent | 16,935 | 16,983 | |||||||
Income taxes receivable | 3,039 | | |||||||
Prepaid expenses and other assets | 3,308 | 4,306 | |||||||
Total current assets | 332,502 | 450,359 | |||||||
PROPERTY AND EQUIPMENTNET | 90,419 | 89,901 | |||||||
LONG-TERM INVESTMENTS | 23,015 | 151,086 | |||||||
DEFERRED INCOME TAXESNON-CURRENT | 12,269 | 14,722 | |||||||
GOODWILLNET | 9,791 | 10,597 | |||||||
INTANGIBLE ASSETSNET | 10,633 | 9,290 | |||||||
OTHER ASSETS | 4,717 | 10,562 | |||||||
TOTAL ASSETS | $ | 483,346 | $ | 736,517 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
CURRENT LIABILITIES: | |||||||||
Accounts payable | $ | 15,729 | $ | 20,502 | |||||
Accrued and other current liabilities | 51,270 | 49,600 | |||||||
Foreign currency forward exchange contracts | | 5,775 | |||||||
Income taxes payable | | 1,927 | |||||||
Revolving loan | 7,652 | 8,377 | |||||||
Total current liabilities | 74,651 | 86,181 | |||||||
CONVERTIBLE SUBORDINATED NOTES | 147,335 | 250,000 | |||||||
OTHER LIABILITIES | 4,437 | 4,844 | |||||||
MINORITY INTEREST | 2,109 | 2,025 | |||||||
COMMITMENTS AND CONTINGENCIES | |||||||||
STOCKHOLDERS' EQUITY: | |||||||||
Preferred stockauthorized 5,000,000 shares; $.001 par value, no shares issued or outstanding | | | |||||||
Common stockauthorized 100,000,000 shares; $.001 par value, issued and outstanding 30,848,000 and 33,978,000 shares at December 31, 2001 and June 30, 2002, respectively | 31 | 34 | |||||||
Additional paid-in capital | 184,794 | 290,876 | |||||||
Treasury stock, at cost (2,000,000 common shares) | (24,871 | ) | | ||||||
Unearned compensation | (3,468 | ) | (2,913 | ) | |||||
Accumulated other comprehensive loss | (3,662 | ) | (7,158 | ) | |||||
Retained earnings | 101,990 | 112,628 | |||||||
Total stockholders' equity | 254,814 | 393,467 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 483,346 | $ | 736,517 | |||||
See Notes to Unaudited Consolidated Financial Statements.
3
CYMER, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
|
For the three months ended June 30, |
For the six months ended June 30, |
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2001 |
2002 |
2001 |
2002 |
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REVENUES: | |||||||||||||||
Product sales | $ | 69,479 | $ | 73,053 | $ | 160,131 | $ | 134,502 | |||||||
Other | 932 | 616 | 1,477 | 1,150 | |||||||||||
Total revenues | 70,411 | 73,669 | 161,608 | 135,652 | |||||||||||
COSTS AND EXPENSES: | |||||||||||||||
Cost of product sales | 38,539 | 37,835 | 86,569 | 70,315 | |||||||||||
Research and development | 15,843 | 18,010 | 30,280 | 32,996 | |||||||||||
Sales and marketing | 4,959 | 4,158 | 11,341 | 7,842 | |||||||||||
General and administrative | 4,763 | 4,361 | 10,485 | 8,047 | |||||||||||
Amortization of goodwill and intangible assets | 894 | 40 | 1,359 | 80 | |||||||||||
Purchased in-process research and development | | | 5,050 | | |||||||||||
Total costs and expenses | 64,998 | 64,404 | 145,084 | 119,280 | |||||||||||
OPERATING INCOME | 5,413 | 9,265 | 16,524 | 16,372 | |||||||||||
OTHER INCOME (EXPENSE): | |||||||||||||||
Foreign currency exchange gain (loss)net | (8 | ) | (37 | ) | 1,597 | 120 | |||||||||
Interest and other income | 2,187 | 2,655 | 4,919 | 4,611 | |||||||||||
Interest and other expense | (2,670 | ) | (2,588 | ) | (5,576 | ) | (5,941 | ) | |||||||
Total other income (expense)net | (491 | ) | 30 | 940 | (1,210 | ) | |||||||||
INCOME BEFORE INCOME TAX PROVISION AND MINORITY INTEREST | 4,922 | 9,295 | 17,464 | 15,162 | |||||||||||
INCOME TAX PROVISION | 603 | 2,509 | 4,366 | 4,093 | |||||||||||
MINORITY INTEREST | (24 | ) | (236 | ) | (134 | ) | (268 | ) | |||||||
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE | 4,295 | 6,550 | 12,964 | 10,801 | |||||||||||
Extraordinary gain (loss) on debt extinguishment | 540 | | 540 | (163 | ) | ||||||||||
Cumulative change in accounting principle | | | (370 | ) | | ||||||||||
NET INCOME | $ | 4,835 | $ | 6,550 | $ | 13,134 | $ | 10,638 | |||||||
EARNINGS PER SHARE: | |||||||||||||||
Basic earnings per share: | |||||||||||||||
Before extraordinary item and cumulative change in accounting principle | $ | 0.14 | $ | 0.19 | $ | 0.43 | $ | 0.33 | |||||||
Extraordinary gain (loss) on debt extinguishment | 0.02 | | 0.01 | | |||||||||||
Cumulative change in accounting principle | | | (0.01 | ) | | ||||||||||
Basic earnings per share | $ | 0.16 | $ | 0.19 | $ | 0.43 | $ | 0.33 | |||||||
Weighted average common shares outstanding | 30,512 | 33,846 | 30,234 | 32,571 | |||||||||||
Diluted earnings per share: | |||||||||||||||
Before extraordinary item and cumulative change in accounting principle | $ | 0.13 | $ | 0.18 | $ | 0.42 | $ | 0.31 | |||||||
Extraordinary gain (loss) on debt extinguishment | 0.02 | | 0.01 | | |||||||||||
Cumulative change in accounting principle | | | (0.01 | ) | | ||||||||||
Diluted earnings per share | $ | 0.15 | $ | 0.18 | $ | 0.42 | $ | 0.31 | |||||||
Weighted average common and common equivalent shares outstanding | 31,357 | 35,934 | 31,043 | 34,554 | |||||||||||
See Notes to Unaudited Consolidated Financial Statements.
4
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
For the six months ended June 30, |
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|
2001 |
2002 |
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OPERATING ACTIVITIES: | |||||||||||
Net income | $ | 13,134 | $ | 10,638 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Cumulative change in accounting principle | 370 | | |||||||||
Extraordinary (gain) loss on debt extinguishment | (540 | ) | 163 | ||||||||
Depreciation and amortization | 12,820 | 12,254 | |||||||||
Amortization of unearned compensation | 416 | 555 | |||||||||
Minority interest | 134 | 268 | |||||||||
Purchased in-process research and development | 5,050 | | |||||||||
Provision for deferred income taxes | (297 | ) | 39 | ||||||||
Loss on disposal and impairment of property and equipment | 445 | 324 | |||||||||
Change in assets and liabilitiesnet of acquisition in 2001: | |||||||||||
Accounts receivable, net | 6,202 | (13,692 | ) | ||||||||
Income taxes receivable | | 3,039 | |||||||||
Foreign currency forward exchange contracts | (2,168 | ) | 3,200 | ||||||||
Inventories | 9,916 | (23,016 | ) | ||||||||
Prepaid expenses and other assets | 1,360 | (1,231 | ) | ||||||||
Accounts payable | (6,498 | ) | 4,773 | ||||||||
Accrued and other liabilities | (9,678 | ) | 5,162 | ||||||||
Income taxes payable | (4,154 | ) | 1,927 | ||||||||
Net cash provided by operating activities | 26,512 | 4,403 | |||||||||
INVESTING ACTIVITIES: | |||||||||||
Acquisition of property and equipment | (10,721 | ) | (10,681 | ) | |||||||
Purchases of investments | (96,995 | ) | (219,233 | ) | |||||||
Proceeds from sold or matured investments | 123,154 | 55,382 | |||||||||
Acquisition of Active Control eXperts, Inc., net of cash acquired | (279 | ) | | ||||||||
Acquisition of patents | (6,000 | ) | | ||||||||
Acquisition of minority interest | | (360 | ) | ||||||||
Net cash provided by (used in) investing activities | 9,159 | (174,892 | ) | ||||||||
FINANCING ACTIVITIES: | |||||||||||
Net borrowings under revolving loan and security agreements | (8,745 | ) | (44 | ) | |||||||
Proceeds from issuance of common stock | 7,825 | 17,958 | |||||||||
Redemption of convertible subordinated notes | (23,441 | ) | (39,598 | ) | |||||||
Issuance of convertible subordinated notes | | 250,000 | |||||||||
Offering costs from issuance of convertible subordinated notes | | (7,870 | ) | ||||||||
Payments on capital lease obligations | (213 | ) | (16 | ) | |||||||
Net cash provided by (used in) financing activities | (24,574 | ) | 220,430 | ||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (3,395 | ) | 579 | ||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 7,702 | 50,520 | |||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 79,678 | 111,195 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 87,380 | $ | 161,715 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
Interest paid | $ | 7,276 | $ | 5,854 | |||||||
Income taxes paid (refunded), net | $ | 8,702 | $ | (903 | ) | ||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||
Warrants issued for acquisition of patents | $ | 4,322 | | ||||||||
Stock and stock options issued in acquisition of Active Control eXperts, Inc. | $ | 20,871 | | ||||||||
Conversion of subordinated notes to equity | | $ | 109,301 | ||||||||
See Notes to Unaudited Consolidated Financial Statements.
5
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2002
(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 accounting principles generally accepted in the United States of America.
Principles of ConsolidationThe consolidated financial statements include the accounts of Cymer, Inc., its wholly-owned subsidiariesCymer Japan, Inc. ("Cymer Japan"), Cymer Singapore Pte Ltd. ("Cymer Singapore"), Cymer B.V. in the Netherlands ("Cymer B.V."), Cymer Southeast Asia, Inc., in Taiwan ("Cymer SEA"), Active Control eXperts, Inc. ("ACX" but now known as "Cymer Cambridge"), and its majority-owned subsidiary, Cymer Korea, Inc. ("Cymer Korea"). Cymer, Inc. owns 75% of Cymer Korea. Cymer sells its excimer laser light sources in Japan primarily through Cymer Japan. Cymer Korea, Cymer SEA, Cymer Singapore and Cymer B.V. are field service offices for customers in those respective regions. All significant intercompany balances have been eliminated in consolidation.
Accounting EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 DataIn the opinion of management, the unaudited consolidated financial statements for the interim periods presented reflect all adjustments, consisting only of 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, 2001. 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.
ReclassificationsCertain amounts in the prior year consolidated financial statements have been reclassified to conform to current period presentation.
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
6
converted into common stock. Potential common shares in the diluted EPS computation are excluded in loss periods as their effect would be anti-dilutive.
|
Three months ended June 30, |
Six months ended June 30, |
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---|---|---|---|---|---|---|---|---|---|
|
2001 |
2002 |
2001 |
2002 |
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|
(In thousands) |
||||||||
Basic weighted average common shares outstanding | 30,512 | 33,846 | 30,234 | 32,571 | |||||
Effect of dilutive securities: | |||||||||
Warrants | 15 | 60 | 16 | 51 | |||||
Options | 830 | 2,028 | 793 | 1,932 | |||||
Diluted weighted average common and potential common shares outstanding | 31,357 | 35,934 | 31,043 | 34,554 | |||||
For the three months ended June 30, 2001 and 2002, weighted average options and warrants to purchase 3,023,000 and 453,000 shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per share as their effect was anti-dilutive. In addition, for the three months ended June 30, 2001 and 2002, weighted average common shares attributable to convertible subordinated notes of 3,611,757 and 5,000,000, respectively, were not included in the calculation of diluted earnings per share as their effect was also anti-dilutive.
For the six months ended June 30, 2001 and 2002, weighted average options and warrants to purchase 2,983,000 and 450,000 shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per share as their effect was anti-dilutive. In addition, for the six months ended June 30, 2001 and 2002, weighted average common shares attributable to convertible subordinated notes of 3,639,078 and 5,155,860, respectively, were not included in the calculation of diluted earnings per share as their effect was anti-dilutive.
3. ACQUISITION
On February 13, 2001, Cymer acquired the Cambridge, Massachusetts based company now known as Cymer Cambridge in an all-stock transaction that totaled approximately $24.8 million. Had this
7
company been acquired on January 1, 2001, net income would have been as follows (in thousands, except per share data):
|
Six months ended June 30, |
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|
2001 |
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Reported net income | $ | 13,134 | |||
Adjustments: | |||||
Amortization of goodwill and intangible assets | (429 | ) | |||
Incremental net loss | (475 | ) | |||
Tax effect | 226 | ||||
(678 | ) | ||||
Adjusted net income | $ | 12,456 | |||
Basic earnings per share: | |||||
As reported | $ | 0.43 | |||
As adjusted | $ | 0.41 | |||
Diluted earnings per share: | |||||
As reported | $ | 0.42 | |||
As adjusted | $ | 0.40 |
8
4. BALANCE SHEET DETAILS
|
December 31, 2001 |
June 30, 2002 |
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(in thousands) |
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INVENTORIES: | ||||||||
Raw materials | $ | 26,294 | $ | 28,595 | ||||
Work-in-progress | 22,211 | 35,713 | ||||||
Finished goods | 26,807 | 35,115 | ||||||
Allowance for excess and obsolete inventory | (13,528 | ) | (14,623 | ) | ||||
Total | $ | 61,784 | $ | 84,800 | ||||
ACCRUED AND OTHER LIABILITIES: | ||||||||
Warranty and installation | $ | 27,908 | $ | 30,244 | ||||
Payroll and payroll related | 6,628 | 7,665 | ||||||
Interest | 10,397 | 3,265 | ||||||
Other | 6,337 | 8,426 | ||||||
Total | $ | 51,270 | $ | 49,600 | ||||
5. REPORTING COMPREHENSIVE INCOME
Comprehensive income includes net income, effective unrealized gains and losses on foreign currency forward exchange contracts, foreign currency translation adjustments, and unrealized gains and losses on available-for-sale securities, which are recorded as short-term and long-term investments in the accompanying consolidated balance sheet.
The following table summarizes the change in each component of accumulated other comprehensive loss for the six months ended June 30, 2002 (in thousands):
|
|
Translation adjustment, net of tax |
Total unrealized gains on available-for-sale investments, net of tax |
Total unrealized gains (losses) on foreign currency forward exchange contracts, net of tax |
Accumulated other comprehensive loss |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2001 | Balance Period net change |
$ |
(5,407 (112 |
) ) |
$ |
376 22 |
$ |
1,369 (3,406 |
) |
$ |
(3,662 (3,496 |
) ) |
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June 30, 2002 | Balance | $ | (5,519 | ) | $ | 398 | $ | (2,037 | ) | $ | (7,158 | ) | |||
6. ADOPTION OF SFAS NO. 142
Cymer adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", on January 1, 2002. SFAS 142 supercedes Accounting Principles Board Opinion No. 17, "Intangible Assets", and discontinues the amortization of goodwill and intangible assets with indefinite useful lives associated with previous purchase business combinations. In addition,
9
SFAS 142 includes provisions regarding the reclassification between goodwill and identifiable intangible assets in accordance with the new definition of intangible assets set forth in Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", the reassessment of the useful lives of existing intangible assets, and the annual testing for impairment of existing goodwill and other intangible assets with indefinite lives.
In accordance with SFAS 142, beginning January 1, 2002, Cymer no longer amortizes goodwill and intangible assets with indefinite lives. Instead, Cymer will review these assets periodically for impairment in accordance with the provisions of SFAS 142. As of June 30, 2002, Cymer completed its implementation of SFAS 142 and conducted the required transitional impairment tests. Cymer determined that it has one reporting unit and that this single reporting unit is the entire company, or Cymer, Inc. This conclusion was reached due to the integrated nature of the operations of Cymer, Inc. and its subsidiaries and the lack of differing economic characteristics between them. Cymer conducted the first step of the transitional impairment test using this one reporting unit and concluded that no impairment of goodwill existed as of January 1, 2002.
Cymer did not identify any amounts that were required to be reclassified out of previously reported goodwill in accordance with the new definition of intangible assets under SFAS 141. In accordance with the provisions of SFAS 142, the assembled workforce intangible asset was reclassified to goodwill as of January 1, 2002. Existing technology associated with Cymer's acquisition of ACX continues to be amortized over its estimated useful life of four years using the straight-line method. Cymer made no changes to its estimates of the useful lives of its amortizable intangible assets in connection with the adoption of SFAS 142.
Components of intangible assets acquired in prior purchase business combinations were as follows (in thousands):
|
December 31, 2001 |
June 30, 2002 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||
Amortized intangible assets: | |||||||||||||
Existing technology-ACX acquisition | $ | 640 | $ | 140 | $ | 640 | $ | 220 | |||||
Unamortized intangible assets: | |||||||||||||
Goodwill | $ | 12,734 | $ | 2,943 | $ | 13,713 | $ | 3,116 | |||||
Assembled workforce-ACX acquisition | 790 | 173 | | | |||||||||
$ | 13,524 | $ | 3,116 | $ | 13,713 | $ | 3,116 | ||||||
The above table only includes intangible assets associated with prior purchase business combinations. Also included in intangible assetsnet on the accompanying balance sheets are amounts associated with patents which were acquired in 2001. As of December 31, 2001 and June 30, 2002, the net carrying amount of these patents was $9.5 million and $8.9 million, respectively.
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Aggregate amortization expense was $1,359,000 for the six months ended June 30, 2001 and $80,000 for the six months ended June 30, 2002. As of June 30, 2002, future estimated amortization expense is expected to be as follows (in thousands):
|
Future Amortization |
||
---|---|---|---|
Six months ended December 31, 2002 | $ | 80 | |
Year ended December 31, 2003 | $ | 160 | |
Year ended December 31, 2004 | $ | 160 | |
Year ended December 31, 2005 | $ | 20 |
Income before extraordinary item and cumulative change in accounting principle, net income and earnings per share on a pro forma basis, excluding goodwill and intangible asset amortization expense
11
related to intangibles no longer amortized, is as follows if SFAS 142 had been adopted on January 1, 2001 (in thousands, except per share data):
|
Three months ended June 30, |
Six months ended June 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2001 |
2002 |
2001 |
2002 |
|||||||||
Reported income before extraordinary item and cumulative change in accounting principle | $ | 4,295 | $ | 6,550 | $ | 12,964 | $ | 10,801 | |||||
Reported net income | $ | 4,835 | $ | 6,550 | $ | 13,134 | $ | 10,638 | |||||
Adjustments: | |||||||||||||
Amortization of goodwill and intangible assets | 854 | | 1,279 | | |||||||||
Tax effect | (231 | ) | | (345 | ) | | |||||||
623 | | 934 | | ||||||||||
Adjusted income before extraordinary item and cumulative change in accounting principle | $ | 4,918 | $ | 6,550 | $ | 13,898 | $ | 10,801 | |||||
Adjusted net income | $ | 5,458 | $ | 6,550 | $ | 14,068 | $ | 10,638 | |||||
Basic earnings per share: | |||||||||||||
As reportedbefore extraordinary item and cumulative change in accounting principle | $ | 0.14 | $ | 0.19 | $ | 0.43 | $ | 0.33 | |||||
As adjustedbefore extraordinary item and cumulative change in accounting principle | $ | 0.16 | $ | 0.19 | $ | 0.46 | $ | 0.33 | |||||
As reported | $ | 0.16 | $ | 0.19 | $ | 0.43 | $ | 0.33 | |||||
As adjusted | $ | 0.18 | $ | 0.19 | $ | 0.47 | $ | 0.33 | |||||
Diluted earnings per share: | |||||||||||||
As reportedbefore extraordinary item and cumulative change in accounting principle | $ | 0.13 | $ | 0.18 | $ | 0.42 | $ | 0.31 | |||||
As adjustedbefore extraordinary item and cumulative change in accounting principle | $ | 0.16 | $ | 0.18 | $ | 0.45 | $ | 0.31 | |||||
As reported | $ | 0.15 | $ | 0.18 | $ | 0.42 | $ | 0.31 | |||||
As adjusted | $ | 0.17 | $ | 0.18 | $ | 0.45 | $ | 0.31 |
7. CONVERTIBLE SUBORDINATED NOTES
In August 1997, Cymer issued $172.5 million aggregate principal amount in a private placement of notes. These 31/2% / 71/4% Step-Up Convertible Subordinated Notes were due August 6, 2004 and were 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 maturity or earlier redemption. The conversion rate on the notes was 21.2766 shares per $1,000 principal amount, subject to adjustment under certain conditions.
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These 1997 notes were called for redemption on March 25, 2002. Immediately prior to the March 25, 2002 redemption date, holders of $109.3 million of the outstanding principal amount converted their notes into shares of Cymer common stock. As a result of these conversions, 2,325,542 shares of Cymer's common stock were issued to the note holders. Cymer used its 2,000,000 shares of treasury stock as part of the total 2,325,542 shares issued in the conversion. The remaining $38 million of the outstanding principal amount of the notes was redeemed. The redemption price was 104.111% of the principal amount of the notes, plus accrued and unpaid interest to the redemption date. The redemption resulted in an extraordinary loss on debt extinguishment of $163,000, net of tax.
In February 2002, Cymer issued $250 million principal amount of unsecured 31/2% Convertible Subordinated Notes due February 15, 2009. Interest on the notes is payable on February 15 and August 15 of each year, commencing August 15, 2002. The notes are convertible into shares of Cymer's stock at a conversion rate of 20 shares per $1,000 principal amount of notes. Cymer may redeem the notes on or after February 20, 2005, or earlier if the price of its common stock reaches certain levels. The notes are subordinated to Cymer's existing and future senior indebtedness and effectively subordinated to all indebtedness and other liabilities of Cymer's subsidiaries. A portion of the net proceeds of this private placement were used to redeem the Company's outstanding 1997 notes.
8. CONTINGENCIES
Cymer's Japanese manufacturing partner and at least one of Cymer's Japanese customers have been notified that Cymer's light source systems in Japan may infringe certain Japanese patents held by another Japanese company. Cymer has agreed to indemnify its Japanese manufacturing partner and its customers against patent infringement claims under certain circumstances. Cymer believes, based upon the advice of qualified Japanese counsel, that Cymer's products do not infringe any valid claim of the asserted patents or that it is entitled to prior user rights in Japan.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Statements in this quarterly report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements include, but are not limited to, references to manufacturing activities; expected product sales and development; service and support; research and development expenditures; expected product development; expected international product sales, development and revenue; adequacy of capital resources and investments; effects of business cycles in the semiconductor business; competitive positioning; and continuing relationships with third-party manufacturers for product manufacturing. These statements include, without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. The underlying information and expectations are likely to change over time. Actual events or results may differ materially from those projected in the forward-looking statements due to various factors, including, but not limited to, those set forth under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors," and elsewhere contained in this quarterly report on Form 10-Q. Cymer assumes no obligation to update any forward-looking statements contained in this quarterly report on Form 10-Q.
The following discussion of the financial condition and results of operations of Cymer should be read in conjunction with Cymer's consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q and its consolidated financial statements and notes thereto included in Cymer's annual report on Form 10-K for the year ended December 31, 2001.
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RESULTS OF OPERATIONS
The following table sets forth certain items in Cymer's consolidated statements of income as a percentage of total revenues for the periods indicated:
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Three months ended June 30, |
Six months ended June 30, |
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2001 |
2002 |
2001 |
2002 |
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Revenues: | |||||||||||
Product sales | 98.7 | % | 99.2 | % | 99.1 | % | 99.1 | % | |||
Other | 1.3 | .8 | .9 | .9 | |||||||
Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost and expenses: | |||||||||||
Cost of product sales | 54.7 | 51.4 | 53.6 | 51.8 | |||||||
Research and development | 22.5 | 24.5 | 18.8 | 24.3 | |||||||
Sales and marketing | 7.0 | 5.6 | 7.0 | 5.8 | |||||||
General and administrative | 6.8 | 5.9 | 6.5 | 5.9 | |||||||
Amortization of goodwill and intangible assets | 1.3 | | .8 | .1 | |||||||
Purchased in-process research and development | | | 3.1 | | |||||||
Total costs and expenses | 92.3 | 87.4 | 89.8 | 87.9 | |||||||
Operating income | 7.7 | 12.6 | 10.2 | 12.1 | |||||||
Other income (expense)net | (.7 | ) | | .6 | (.9 | ) | |||||
Income before income tax provision and minority interest | 7.0 | 12.6 | 10.8 | 11.2 | |||||||
Income tax provision | .9 | 3.4 | 2.7 | 3.0 | |||||||
Minority interest | | (.3 | ) | (.1 | ) | (.2 | ) | ||||
Income before extraordinary item and cumulative change in accounting principle | 6.1 | 8.9 | 8.0 | 8.0 | |||||||
Extraordinary gain (loss) on debt extinguishment | .8 | | .3 | (.1 | ) | ||||||
Cumulative change in accounting principle | | | (.2 | ) | | ||||||
Net income | 6.9 | % | 8.9 | % | 8.1 | % | 7.9 | % | |||
Gross margin on product sales | 44.5 | % | 48.2 | % | 45.9 | % | 47.7 | % | |||
THREE MONTHS ENDED JUNE 30, 2001 AND 2002
Revenues. Cymer's revenues consist of product sales, which include sales of laser light source systems, consumable and spare parts, upgrades, service, training, and software. Other revenues include revenue from funded development activities performed for customers and government contracts. Revenue from product sales is generally recognized at the time of shipment, unless customer agreements contain inspection, acceptance 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. If milestones on funded development contracts require that specific results be achieved or reported by Cymer, revenue is not recognized until that milestone is completed.
Product sales increased 5% from $69.5 million for the three months ended June 30, 2001 to $73.1 million for the three months ended June 30, 2002, primarily due to increased sales of Cymer's consumable and spares parts and service products. Sales of consumable and spare parts and service
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products increased 23% from $17.1 million to $21.1 million for the three months ended June 30, 2001 and 2002, respectively. The increase in this type of product sales was due to increased utilization of Cymer's DUV laser light sources by chip makers. A total of 90 laser light source systems were sold in the three months ended June 30, 2001 at an average selling price ("ASP") of $562,000 as compared to 70 systems sold in the three months ended June 30, 2002 at an ASP of $729,000. On a currency adjusted basis, the ASP for the three months ended June 30, 2001 was $575,000 as compared to $732,000 for the three months ended June 30, 2002. Although the total number of laser light source systems sold during the three months ended June 30, 2002 was significantly lower, the total revenue generated from such systems sales during the second quarter of 2002 were slightly higher. This is due to increased sales by Cymer of its newer model laser light sources in 2002, particularly its argon fluoride Nanolith 7000 product, which command higher prices. Revenues from funded development projects were $932,000 and $616,000 for the three months ended June 30, 2001 and 2002, respectively.
Cymer's sales are generated primarily by shipments to customers in Japan, the Netherlands, and the United States. Approximately 79% and 92% of Cymer's sales for the three months ended June 30, 2001 and the three months ended June 30, 2002, 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 40% and 50% of revenues for the three months ended June 30, 2001 and the three months ended June 30, 2002, respectively. The activities of Cymer's Japanese subsidiary are limited to sales and service of products purchased by the subsidiary from the parent corporation. 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, and manufacturing and service overhead, and foreign exchange gains and losses on foreign currency forward exchange contracts associated with purchases of Cymer's products by its Japanese subsidiary for resale under firm third-party sales commitments. In accordance with the provisions of Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," for those derivative instruments that do not qualify for hedge accounting, deferral of the gains or losses is not allowed and the gains and losses are recorded in other income (expense). Cymer adopted SFAS 133 on January 1, 2001, but did not qualify for hedge accounting until July 1, 2001. Accordingly, for contracts entered into prior to July 1, 2001, Cymer recorded changes in the fair value of its foreign currency forward exchange contracts directly through earnings in other income (expense) in the period such changes occur. For contracts entered into on or after July 1, 2001, Cymer defers effective changes in the fair value of its foreign currency forward exchange contracts into other comprehensive income (loss) and subsequently reclassifies the effective changes to cost of product sales in the same period that the related sale is made to the third party.
Cost of product sales decreased 2% from $38.5 million for the three months ended June 30, 2001 to $37.8 million for the three months ended June 30, 2002 due primarily to reduced expenses. The gross margin on these sales was 45% and 48% for the three months ended June 30, 2001 and June 30, 2002, respectively. This improvement in gross margin is the result of increased production levels associated with increased product sales and inventory builds on a relatively flat level of manufacturing expenses from period to period.
For the three months ended June 30, 2002, only those contracts meeting the transition period requirements under SFAS 133 were included in cost of product sales in the consolidated statements of income. For the three months ended June 30, 2002, Cymer qualified for hedge accounting treatment under SFAS 133 and was able to record the net effective gains or losses from foreign currency forward exchange contracts in cost of product sales in the consolidated statements of income as the related sale to the third party was recognized. Cymer recognized net gains in cost of sales on such contracts of $200,000 and $197,000 for the three months ended June 30, 2001 and 2002, respectively.
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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 14% from $15.8 million for the three months ended June 30, 2001 to $18.0 million for the three months ended June 30, 2002, due primarily to Cymer's increased investment in the development of higher value-added next generation products. During the second quarter of 2002, Cymer continued its investment in its newest product development effort, the master oscillator power amplifier ("MOPA") platform which extends across krypton fluoride ("KrF"), argon fluoride ("ArF") and fluorine ("F2") product lines. Cymer also continued to invest during the quarter in extreme ultraviolet ("EUV") technology and the continuing engineering of the ELS-7000 and Nanolith 7000 products. As a percentage of total revenues, such expenses increased from 22.5% to 24.5%.
Sales and Marketing. Sales and marketing expenses include the expenses of the sales, marketing and customer support staffs and other marketing expenses. Sales and marketing expenses decreased 16% from $5.0 million for the three months ended June 30, 2001 to $4.2 million for the three months ended June 30, 2002 due primarily to increased operational efficiencies as well as heightened cost controls as Cymer continues to manage the downturn in the semiconductor industry which began in 2001 and has continued into 2002. As a percentage of total revenues, such expenses decreased from 7.0% to 5.6% due to decreased spending.
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 decreased 8% from $4.8 million for the three months ended June 30, 2001 to $4.4 million for the three months ended June 30, 2002. This was due primarily to ongoing improvements in operational efficiencies and increased cost controls due to industry conditions. As a percentage of total revenues, such expenses decreased from 6.8% to 5.9%.
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 and gains and losses on foreign currency forward exchange contracts. Net other expense totaled $491,000 for the three months ended June 30, 2001 as compared to net other income of $30,000 for the three month period ended June 30, 2002. The change from net other expense to net other income was primarily due to Cymer's higher cash and investment balances and the associated interest income earned on each during the second quarter of 2002. These increased cash and investment balances during the three months ended June 30, 2002 are due to the additional cash resulting from the bond transactions which Cymer completed during the first quarter of 2002. These transactions included the issuance of $250 million of convertible subordinated notes in February 2002 and the conversion and redemption of Cymer's 1997 convertible subordinated notes in March 2002. Interest expense was also lower due to the 3.5% interest rate on these new convertible subordinated notes as compared to the blended 5.47% interest rate on the 1997 notes. Foreign currency exchange losses totaled $8,000, interest income totaled $2.2 million and interest expense totaled $2.7 million for the three months ended June 30, 2001, compared to an exchange loss of $37,000, interest income of $2.7 million and interest expense of $2.6 million for the three months ended June 30, 2002.
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 forward exchange contracts to hedge its cash flow exposure to Cymer. From January 1, 2001 through June 30, 2001, gains or losses resulting from the change in the value of contracts entered into prior to July 1, 2001 were recorded as
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other income (expense) in the consolidated statements of income. Subsequent to June 30, 2001, gains or losses resulting from contracts entered into after July 1, 2001 are initially recorded in other comprehensive income (loss). The net amount of unrealized effective gain or loss on the date the laser light source system is received by Cymer's Japanese subsidiary is reclassified to cost of sales on the date that the laser light source is sold to the third party. Gains and losses resulting from foreign currency translation are accumulated as a separate component of consolidated stockholders' equity.
Income Tax Provision. The tax provision of $603,000 and $2.5 million for the three months ended June 30, 2001 and 2002, respectively, reflect an annual effective rate of 25% and 27%, respectively. The effective annual tax rate was adjusted during the three months ended June 30, 2001 from 30% to 25% in response to lower profit projections associated with the downturn in the semiconductor industry during 2001. This resulted in a 12% tax rate for the three months ended June 30, 2001. 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.
SIX MONTHS ENDED JUNE 30, 2001 AND 2002
Revenues. Product sales decreased 16% from $160.1 million for the six months ended June 30, 2001 to $134.5 million for the six months ended June 30, 2002, primarily due to decreased sales of all of Cymer's products. This decrease in sales was due to the overall condition of the semiconductor industry. For the first half of 2001, Cymer's revenues significantly declined from 2000 levels as the semiconductor industry entered a downturn. Although the semiconductor industry has continued in this downturn through the first half of 2002, there have been some indications of improvements in the industry and increased utilization of Cymer's DUV light sources at chip makers. Thus, Cymer experienced increased revenues in the first half of 2002 as compared to those posted in late 2001, but still not at levels indicative of an upturn. A total of 218 laser light source systems were sold in the six months ended June 30, 2001 at an ASP of $535,000 as compared to 132 systems sold in the six months ended June 30, 2002 at an ASP of $722,000. On a currency adjusted basis, the ASP for the six months ended June 30, 2001 was $550,000 as compared to $737,000 for the six months ended June 30, 2002. Although the total number of laser light source systems sold during the six months ended June 30, 2002 was significantly lower than those sold during the same six month period in 2001, the total revenue generated from such systems sales during the second half of 2001 were only slightly higher than those in the second half of 2002. This is due to increased sales by Cymer of its newer model laser light sources in 2002, particularly its ArF Nanolith 7000 product. Revenues from funded development projects were $1.5 million and $1.2 million for the six months ended June 30, 2001 and 2002, respectively.
Approximately 82% and 88% of Cymer's sales for the six months ended June 30, 2001 and the six months ended June 30, 2002, respectively, were derived from customers outside the United States. Revenues from Japanese customers, generated primarily by this subsidiary, accounted for 44% and 42% of revenues for the six months ended June 30, 2001 and the six months ended June 30, 2002, respectively.
Cost of Product Sales. Cost of product sales decreased 19% from $86.6 million for the six months ended June 30, 2001 to $70.3 million for the six months ended June 30, 2002 due primarily to a decrease in product sales. The gross margin on these sales was 46% and 48% for the six months ended June 30, 2001 and June 30, 2002, respectively. This increased gross margin in 2002 is primarily due to increased production levels associated with inventory builds and decreased manufacturing expenses.
For the six months ended June 30, 2001, only those contracts meeting the transition period requirements under SFAS 133 were included in cost of product sales in the consolidated statements of income. For the six months ended June 30, 2002, Cymer qualified for hedge accounting treatment under SFAS 133 and was able to record the net effective gains or losses from foreign currency forward
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exchange contracts in cost of product sales in the consolidated statements of income as the related sale to the third party was recognized. Cymer recognized net gains in cost of sales on such contracts of $2.4 million and $1.6 million for the six months ended June 30, 2001 and 2002, respectively.
Research and Development. Research and development expenses increased 9% from $30.3 million for the six months ended June 30, 2001 to $33.0 million for the six months ended June 30, 2002, due primarily to Cymer's increased investment in higher value-added next generation products. During the six months ended June 30, 2002, these development efforts included Cymer's continued investment in the MOPA platform as well as continued investments in EUV and continuing engineering of the ELS-7000 and Nanolith 7000 products. As a percentage of total revenues, June 30, 2001 and 2002 expenses increased from 18.8% to 24.3%, respectively, due to decreased revenues.
Sales and Marketing. Sales and marketing expenses decreased 31% from $11.3 million for the six months ended June 30, 2001 to $7.8 million for the six months ended June 30, 2002 due primarily to increased operational efficiencies as well as heightened cost controls as a result of the downturn in the semiconductor industry. As a percentage of total revenues, such expenses decreased from 7.0% to 5.8% due to decreased spending.
General and Administrative. General and administrative expenses decreased 24% from $10.5 million for the six months ended June 30, 2001 to $8.0 million for the six months ended June 30, 2002. This was due primarily to ongoing improvements in operational efficiencies and increased cost controls for the period due to overall industry conditions. As a percentage of total revenues, such expenses decreased from 6.5% to 5.9%.
Purchased In-Process Research and Development. Purchased in-process research and development expenses consist of costs associated with the acquisition of ACX and its in-process research and development projects. The total amount of such expenses for the six months ended June 30, 2001 was $5.1 million. These expenses represented the fair value of ACX's development projects associated with the application of its technology to the semiconductor market. As of the date of the acquisition, this purchased in-process research and development was expensed because the application of this technology to the semiconductor market was at a stage of development that required further research and development before reaching technological feasibility and commercial viability. There were no such expenses for the six months ended June 30, 2002.
Other Income (Expense)Net. Net other income totaled $940,000 for the six months ended June 30, 2001 as compared to net other expense of $1.2 million for the six months ended June 30, 2002. The change from net other income to net other expense was primarily due to the classification of gains associated with the change in value of foreign currency forward exchange contracts per SFAS 133 in 2001. Since Cymer did not qualify for hedge accounting treatment under SFAS 133 until July 1, 2001, all such gains, except those meeting the transitional period requirements, were recorded in the other income (expense) section of the consolidated statements of income. Cymer qualified for hedge accounting treatment during all of 2002 and thus recorded gains associated with its foreign currency forward exchange contracts to cost of product sales in the same period that the related sale was made to the third party. This was offset by lower yields on cash and investment balances and additional interest expense incurred during the six months ended June 30, 2002 in connection with Cymer's private placement of convertible notes in February 2002 and the redemption of its 1997 notes in March 2002. Foreign currency exchange gains totaled $1.6 million, interest income totaled $4.9 million and interest expense totaled $5.6 million for the six months ended June 30, 2001, compared to an exchange gain of $120,000, interest income of $4.6 million and interest expense of $5.9 million for the six months ended June 30, 2002.
Income Tax Provision. The tax provision of $4.4 million and $4.1 million for the six months ended June 30, 2001 and 2002, respectively, reflect an annual effective rate of 25% and 27%, respectively. The
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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 from the proceeds of convertible subordinated note offerings in August 1997 and February 2002, bank borrowings, cash flow from operations and the proceeds from employee stock option exercises.
In August 1997, Cymer issued $172.5 million in aggregate principal amount in a private placement of notes. The 31/2% / 71/4% Step-Up Convertible Subordinated Notes were due on August 6, 2004 and were convertible at the option of the holder into shares of common stock of Cymer at any time after November 5, 1997 and prior to maturity or earlier redemption. The conversion rate on these 1997 notes was 21.2766 shares per $1,000 principal amount of notes, subject to adjustment under certain conditions. These 1997 notes were called for redemption on March 25, 2002. Immediately prior to the March 25, 2002 redemption date, holders of $109.3 million of the outstanding principal amount converted their notes into shares of Cymer's common stock. As a result of these conversions, 2,325,542 shares of Cymer common stock were issued to the note holders and the remaining $38.0 million of the outstanding principal amount of the 1997 notes was redeemed.
In February 2002, Cymer issued $250 million in aggregate principal amount in a second private placement of notes. These notes are due on February 15, 2009 with interest payable semi-annually on February 15 and August 15 of each year at 31/2% per annum. The notes are convertible into shares of Cymer common stock at a conversion rate of 20 shares per $1,000 principal amount. Cymer used a portion of the net proceeds from this private placement to redeem the 1997 notes. The remaining proceeds will be used to fund Cymer's future operations.
As of June 30, 2002, Cymer had approximately $161.7 million in cash and cash equivalents, $118.8 million in short-term investments, $151.1 million in long-term investments, and had $364.2 million in working capital.
Net cash provided by operating activities was approximately $26.5 million and $4.4 million for the six months ended June 30, 2001 and 2002, respectively. The decrease in cash provided by operating activities from period to period was primarily due to large increases in inventories and accounts receivable during 2002 which were partially offset by lower net income and increases in accounts payable, accrued and other liabilities and income taxes payable. The changes in accounts receivable and inventories were due to the start of the industry downturn and decreased sales and bookings during the six month period ending June 30, 2001, as compared to increased bookings and overall business activities during the six months ended June 30, 2002.
Net cash provided by investing activities was approximately $9.2 million for the six months ended June 30, 2001 as compared to net cash used in investing activities of approximately $174.9 million for six months ended June 30, 2002. For the six months ended June 30, 2001, the cash provided by investing activities was primarily due to the timing of short-term and long-term investments maturing and being reinvested during the period, offset by a $6.0 million payment made to acquire patents and the purchase of $10.7 million in capital equipment in support of normal business activities during the period. The cash used in investing activities of $174.9 million during the six month period ended June 30, 2002 primarily reflects short-term and long-term investments being made from the net proceeds resulting from the convertible subordinated note transactions in February and March 2002, and $10.7 million in capital equipment purchases. Included in these capital purchases are construction in process costs associated with Cymer's new spare parts refurbishment factory in Korea which is expected to begin operations in the first quarter of 2003.
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Net cash used in financing activities was approximately $24.6 million for the six months ended June 30, 2001 as compared to net cash provided by financing activities of approximately $220.4 million for the six months ended June 30, 2002. The net cash used in financing activities for the six months ended June 30, 2001 was attributable to the repurchase of $23.4 million in outstanding 1997 notes and an $8.7 million payment on Cymer's revolving loan during the period, offset by the receipt of $7.8 million upon issuance of common stock due to employee stock option exercises. For the six month period ended June 30, 2002, the $220.4 million provided by financing activities was primarily due to the activity during the first quarter of 2002 on Cymer's convertible subordinated notes. The private placement of notes that Cymer completed in February 2002 resulted in net proceeds to the company of approximately $242.1 million. Of these net proceeds, Cymer used $39.6 million to redeem a portion of its outstanding 1997 notes and to pay accrued interest and premiums due on those notes. In addition, Cymer received additional proceeds from employee stock option exercises during the six month period ended June 30, 2002 as compared to June 30, 2001 due to higher market valuations of Cymer's stock from period to period. The total proceeds from such employee stock option exercises during the six months ended June 30, 2002 were $18.0 million.
Cymer requires substantial working capital to fund its business, particularly to finance inventories and accounts receivable and for capital expenditures. Cymer's future capital requirements depend on many factors, including Cymer's manufacturing activity, the timing and extent of spending to support product development efforts, expansion of sales and marketing and field service and support, competitive labor market compensation requirements, the timing of introductions of new products and enhancements to existing products, and the market acceptance of Cymer's products. Cymer believes that it has sufficient working capital and available banking arrangements to sustain operations and provide for the future expansion of its business for at least the next 12 months.
At June 30, 2001 and 2002, Cymer did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, Cymer did not engage in trading activities involving non-exchange traded contracts. As a result, Cymer is not exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships. Cymer does not have any relationships or transactions with persons or entities that derive benefits from their non-independent relationship with the Company or its related parties except as disclosed herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Cymer's discussion and analysis of its financial condition and results of operations are based upon Cymer's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Cymer to make estimates and use judgment that may impact the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. As a part of its on-going internal processes, Cymer evaluates its estimates, including those related to inventory reserves, warranty obligations, installation obligations, revenue recognition, allowances for bad debt, impaired assets, intangible assets, income taxes, investments, and contingencies and litigation. Cymer bases these estimates upon both historical information and other assumptions that it believes valid and reasonable under the circumstances. These assumptions form the basis for making judgments and determining the carrying values of assets and liabilities that are not apparent from other sources. Actual results could vary from those estimates under different assumptions and conditions.
Cymer believes that inventory allowances and warranty accruals require more significant judgments and estimates in the preparation of its consolidated financial statements than other accounting policies.
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Cymer maintains an inventory allowance to record inventory at net realizable value. The value of this allowance is determined by taking into consideration certain assumptions related to market conditions and future demands for its products which may result in excess or obsolete inventory. If actual market conditions are more or less favorable than projected by management, adjustments to this inventory allowance may be required to more accurately value inventory.
Cymer provides for the estimated cost of product warranties at the time the related revenue is recognized. The amount of this provision is determined by using a financial model which takes into consideration actual historical expenses and potential risks associated with Cymer's different product models. This financial model is then used to calculate the future probable expenses related to warranty and the required level of the warranty provision. Although Cymer engages in product improvement programs and processes, its warranty obligation is affected by product failure rates and costs incurred to correct those product failures at customer sites. Should actual product failure rates or estimated costs to repair those product failures differ from Cymer's estimates, revisions to its estimated warranty provision would be required.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS 143 applies to tangible long-lived assets that have a legal obligation associated with their retirement that results from the acquisition, construction or development or normal use of the asset. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the remaining life of the asset. The liability is accreted at the end of each period through charges to operating expense. Cymer is required to adopt the provisions of SFAS 143 during the quarter ending March 31, 2003. It is not anticipated that the impact of this statement will have a material effect on Cymer's consolidated financial statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145") was issued. SFAS 145 provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. This statement is effective for fiscal years beginning after May 15, 2002. It is not anticipated that the impact of this statement will have a material effect on Cymer's consolidated financial statements.
In July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146") was issued. SFAS 146 provides guidance on the recognition and measurement of liabilities associated with exit and disposal activities. Under SFAS 146, liabilities for costs associated with exit or disposal activities should be recognized when the liabilities are incurred and measured at fair value. This statement is effective prospectively for exit or disposal activities initiated after December 31, 2002. It is not anticipated that the impact of this statement will have a material effect on Cymer's consolidated financial statements.
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In this section, references to "we", "us" or "our" are references to Cymer. Our business faces significant risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline.
Our revenues and operating results may fluctuate due to a variety of factors.
Our revenues and operating results from quarter-to-quarter may fluctuate significantly due to many factors including those listed in this section and throughout this Quarterly Report on Form 10-Q for the period ending June 30, 2002. These factors include:
Also, we have historically derived a large portion of our quarterly and annual revenues from selling a small number of light sources. Because we sell a small number of products, the precise time that we recognize revenue from an order may have a significant impact on our total revenue for a particular period. Our customers may cancel or reschedule orders with little or no penalty. Orders expected in one quarter could shift to another period due to changes in the anticipated timing of customers' purchase decisions or rescheduled delivery dates requested by our customers. Our operating results for a particular quarter or year may be adversely affected if our customers cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in manufacturing, testing, shipping, and product acceptance.
We manage our expense levels based, in large part, on expected future revenues. As a result, our expenses are relatively fixed for the short term, and if our actual revenue decreases below the level we expect, our operating results will be adversely affected. As a result of these or other factors, we could fail to achieve our expectations as to future revenue, gross profit and operating income. Our failure to meet the performance expectations set and published by external sources could result in a sudden and significant drop in the price of our stock, particularly on a short-term basis, and could negatively affect the value of any investment in our stock.
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Our business depends on the semiconductor equipment industry, which is volatile.
The semiconductor equipment industry is highly cyclical. We derive a substantial percentage of our revenues from photolithography tool manufacturers (our customers). Our customers depend in turn on the demand for their photolithography tool products from their customers, the semiconductor device manufacturers. The capital equipment expenditures of semiconductor manufacturers depend on the current and anticipated market demand for semiconductors and products using semiconductors.
The semiconductor industry is cyclical in nature and historically has experienced periodic ups and downs and is currently in a significant downturn. This cyclical nature of the industry in which we operate affects our ability to accurately predict future revenue and, thus future expense levels. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle, we must be in a position to adjust our cost and expense structure to prevailing market conditions and to continue to motivate and retain our key employees. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles.
The current downturn has had a severe effect on the demand for semiconductor manufacturing equipment, including photolithography tools that our customers produce. We are not able to predict when the semiconductor industry will recover. If overall market conditions continue to deteriorate in the near term, our current operating levels may negatively impact our profitability. We believe that downturns in the semiconductor manufacturing industry will periodically occur, and result in periodic decreases in demand for all semiconductor manufacturing equipment, including photolithography tools our customers manufacture. As a result, fluctuating levels of investment by semiconductor device manufacturers and pricing volatility will continue to materially affect our aggregate bookings, revenues and operating results. Also, even during periods of reduced revenues we believe we must continue to invest in research and development and to maintain extensive ongoing worldwide customer service and support capabilities to remain competitive, which may temporarily harm our financial results. Accordingly, these downturns are likely to continue to adversely affect our business, financial condition and operating results and our operating results may 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 our common stock.
Our customers try to manage their inventories and production requirements to appropriate levels that best reflect their expected sales to semiconductor device manufacturers. Market conditions in the industry and production efficiency of the photolithography tool manufacturers can cause our customers to expand or reduce their orders for new light source systems as they try to manage their inventories and production requirements to these levels. We continue to work with our customers to better understand these issues. However, we cannot guarantee that we will be successful in understanding our customers' inventory management and production requirements or that our customers will not build up an excess inventory of light source products. If our customers retain an excess inventory of light source products, our revenue could be reduced in future periods as the excess inventory is utilized, which would adversely affect our operating results, financial condition and cash flows.
We depend on the introduction of new products for our success, and we are subject to risks associated with rapid technological change.
Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances enabling such processes. We believe that our future success depends in part upon our ability to develop, manufacture and timely introduce new light source products with improved capabilities and to continue to enhance our existing light source systems and
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process capabilities. Due to the risks inherent in transitioning to new products, we must forecast accurate demand for new products while managing the transition from older products.
Our newest product introduction project consists of a technology change from a single- discharge-chamber designed excimer laser to a dual-discharge-chamber design called MOPA, which is an acronym for Master Oscillator Power Amplifier. This MOPA design represents a paradigm shift from current lithography technology and is projected to enable higher power, tighter bandwidth and lower cost of operation for future optical lithography applications across all three deep ultraviolet (DUV) wavelengths248nm, 193nm and 157nm. There are risks inherent in transitioning to this new technology. These risks include timely and cost effective execution of the product development plan, adoption of the product by photolithography tool manufacturers and semiconductor manufacturers, and the development of a comparable product by our competitors.
We believe that semiconductor device manufacturers are currently developing a capability to produce devices that are measured at 0.13 micron or less, and these efforts are driving the current demand for our light source products for DUV photolithography systems. After semiconductor device manufacturers have this capability, their demand for our light source products will depend on whether they want to expand their capacity to manufacture these devices. This will in turn depend on whether their sales forecasts and projected manufacturing process yields justify the necessary investments.
Future technologies, such as EUV and scalpel processes, may render our excimer light source products obsolete. We must manage product transitions, as introduction of new products could adversely affect our sales of existing products. If new products are not introduced on time, or have reliability or quality problems, our performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses. We may not be able to develop and introduce new products or enhancements to our existing products and processes in a timely or cost effective manner that satisfies customer needs or achieves market acceptance. Failure to develop and introduce these new products and enhancements could materially adversely affect our operating results, financial condition and cash flows.
We expect to face significant competition from multiple current and future competitors. We believe that other companies are developing systems and products that are competitive to ours and are planning to introduce new products to this market, which may affect our ability to sell our new products. Furthermore, new products represent significant investments of our resources and their success, or lack thereof, could have a material effect on our financial results.
A significant percentage of our revenue is derived from sales to a few large customers, and if we are not able to retain these customers, or they reschedule, reduce or cancel orders, our revenues would be reduced and our financial results would suffer.
Three large firms, ASM Lithography, Canon and Nikon dominate the photolithography tool business. Collectively, these three firms accounted for the following percentage of our total revenue during the periods indicated:
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Six months ended June 30, |
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2001 |
2002 |
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ASM Lithography | 26 | % | 31 | % | |
Canon | 20 | 22 | |||
Nikon | 21 | 23 | |||
Total | 67 | % | 76 | % | |
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We expect that sales of our light source products to these three customers will continue to account for a substantial majority of our revenue in the foreseeable future. None of our customers are obligated to purchase a minimum number of our products. The loss of any significant business from or production problems for any one of these three customers will have a material adverse effect on our business and financial condition. Sales to these customers may be affected by many factors, some of which are beyond our control. These factors include:
A substantial percentage of our revenue is derived from the sale of a limited number of primary products.
Our only product line is excimer laser light source systems, which include krypton fluoride, argon fluoride and fluorine systems, and we expect these primary products to continue to account for a large percentage of our revenues in the near term. Continued market acceptance of our primary products is, therefore, critical to our future success. The primary market for excimer laser light sources is in the use of deep ultraviolet photolithography equipment for manufacturing deep-submicron semiconductor devices using smaller circuit geometries. The demand for our products depends in part on the rate at which semiconductor device manufacturers further adopt excimer lasers as the chosen light source for their photolithography tools. Semiconductor manufacturers may choose not to adopt excimer lasers for a variety of reasons, including:
We cannot guarantee that these factors can or will be overcome or that the demand for our excimer laser light source products will not be materially reduced. The demand for our light source products, and therefore our operating results, financial condition and cash flows, could be adversely affected by a number of factors, including:
We must effectively manage changes in our business.
In order to respond to the business cycles of the semiconductor industry, in the past few years we have sharply expanded and contracted the scope of our operations and the number of employees in many of our departments. As the semiconductor industry grows and contracts we will need to:
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If we fail to effectively manage changes in our business, our operating results, financial condition and cash flows would be adversely affected.
We depend on a few key suppliers for purchasing components and subassemblies that are included in our products.
We purchase some of the components and subassemblies included in our light source products from a single supplier or a limited group of suppliers. For some of these components and subassemblies, including specific optical components used in our light sources, there are no alternative sources of supply. In addition, we outsource the manufacture of various subassemblies more often than in the past. Further, some of our suppliers have specialized in supplying equipment or manufacturing services to semiconductor equipment manufacturers and therefore have been adversely affected by the current industry downturn. If the current downturn continues for an extended period of time, these suppliers may not be able to continue to meet our requirements or respond quickly enough when the recovery begins. Due to the nature of our product development requirements, these key suppliers must rapidly advance their own technologies and production capabilities in order to support the introduction schedule of our new products. These suppliers may not be able to provide new modules and subassemblies when they are needed to satisfy our product schedule requirements. If we cannot purchase enough of these materials, components or subassemblies, or if these items do not meet our quality standards, there could be delays or reductions in our product shipments, which would have a material adverse effect on our operating results, financial condition and cash flows.
We face competition from two companies that have more resources available to them and may face competition from additional competitors who enter the market.
We are currently aware of two significant competitors that sell laser light source systems for DUV photolithography applications. These competitors are:
Both of these companies:
We believe that Gigaphoton and Lambda-Physik are aggressively trying to gain a larger market share in the excimer laser light source industry. We believe that our customers have purchased products from these two competitors and that our customers have approved these competitors' laser light sources for use with their products. We believe that Gigaphoton, in particular, has been approved by chipmakers in Japan and elsewhere for producing excimer laser light sources. Also, we believe that Lambda-Physik has been approved by chipmakers in the U.S. and Europe for producing excimer laser light source products.
The market for excimer laser light sources is still small and immature. Larger competitors with substantially greater resources, such as other manufacturers of industrial light sources for advanced lithography, may attempt to sell competitive products to our customers. Potential competitors may also be attracted to our growing installed base of laser light sources and may attempt to supply consumable products and refurbished parts to that installed base. If any existing or future competitors gain market
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acceptance we could lose market share and our growth could slow or decline, which could have a material adverse effect on our operating results, financial condition and cash flows.
We depend on key personnel, especially management and technical personnel, who may be difficult to attract and retain in an expanding market.
We are highly dependent on the services of many key employees in various areas, including:
In particular, there are a limited number of experts in excimer laser technology, and we require highly-skilled hardware and software engineers. Competition for qualified personnel is intense and we cannot guarantee that we will be able to continue to attract and retain qualified personnel as needed. We have in the past experienced, and continue to experience, difficulty in hiring personnel, including experts in excimer laser technology. We do not have employment agreements with most of our employees. We believe that our future growth and operating results will depend on:
If we are unable to hire, train and retain key personnel as required, our operating results, financial condition and cash flows could be adversely affected.
Failure to maintain effectively our direct field service and support organization could have a material adverse effect on our business.
We believe it is critical for us to provide quick and responsive service directly to the semiconductor device manufacturers throughout the world that use our light source products in their photolithography systems, and that it is essential to maintain our own personnel or trained third party resources to provide these services. Accordingly, we have an ongoing effort to develop our direct support system with locations in the United States, Japan, Europe, Korea, Singapore, Taiwan and Southeast Asia. This requires us to do the following:
We might not be able to attract and train qualified personnel to maintain our direct support operations successfully. Further, we may incur significant costs in providing these support services. Failure to implement our direct support operation effectively could have a material adverse effect on our operating results, financial condition and cash flows.
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Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights. These types of claims could seriously harm our business or require us to incur significant costs.
We believe our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary rights.
As of June 30, 2002, we owned 152 United States patents covering certain aspects of technology related to excimer lasers and piezo techniques. These patents will expire at various times during the period from January 2008 to June 2020. As of June 30, 2002, we also had applied for 95 additional patents in the United States. As of June 30, 2002, we owned 129 foreign patents and had filed 325 patent applications pending in various foreign countries.
Our pending patent applications and any future applications might not be approved. Our patents might not provide us with a competitive advantage and may be challenged by third parties. In addition, third parties' patents might have an adverse effect on our ability to do business. As a result of cost constraints, we did not begin filing in Japan and other countries our patents for inventions covered by United States patents and patent applications until 1993. As a result we lost the right to seek foreign patent protection for some of our early inventions. Additionally, laws of some foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the United States. Thus, the possibility of piracy of our technology and products are more likely in these countries. Further, third parties might independently develop similar products, duplicate our products or, design around patents that are granted to us.
Other companies or persons may have filed or may file in the future patent applications that are similar or identical to ours. We may have to participate in interference proceedings declared by the United States Patent and Trademark Office ("USPTO") in order for the patent office to determine the priority of inventions. The patent office may determine that these third party patent applications have priority over our patent applications. Loss of priority in these interference proceedings could result in substantial cost to us.
We also rely on the following to protect our confidential information and our other intellectual property:
However, we may not be successful in protecting our confidential information and intellectual property, particularly our trade secrets, because third parties may:
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The parties to whom we provide research and development services may dispute the ownership of the intellectual property that we develop performing these services.
In the past, revenues from research and development arrangements with third parties have been used to pay for a portion of our own research and development expenses. We receive these revenues from government sponsored programs, customers and from SEMATECH, a research consortium, in connection with our designing and developing specific products. Currently, revenues from SEMATECH, photolithography tool manufacturers and semiconductor manufacturers are used to fund a small portion of our development expenses. In providing these research and development services to these manufacturers and SEMATECH, we try to make clear who owns the intellectual property that results from the research and development services we perform. However, disputes over the ownership or rights to use or market this intellectual property may arise between us and the photolithography tool manufacturers and SEMATECH. Any dispute over ownership of the intellectual property we develop could restrict our ability to market our products and have a material adverse effect on our business.
In the future, we may be subject to patent litigation to enforce patents issued to us and defend ourselves against claimed infringement by our competitors or any other third party.
Third parties have notified us in the past, and may notify us in the future, that we are infringing their intellectual property rights. Also, we have notified third parties in the past, and may notify them in the future, that they may be infringing our intellectual property rights.
Specifically, Komatsu has notified us that we may be infringing some of its Japanese patents. During our discussions with Komatsu, they also asserted that we or our Japanese manufacturing partner, Seiko, may be infringing on some of Komatsu's United States patents and a number of its additional Japanese patents. Komatsu has also notified one of our customers, Nikon, of its belief that our laser light sources infringe several of Komatsu's Japanese and U.S. patents. As a result, we started proceedings in the Japanese Patent Office to oppose certain patents and patent applications of Komatsu. The Japanese Patent Office has dismissed some of our opposition claims. Thus, litigation may result in connection with Komatsu's Japanese patents or U.S. patents. Also, Komatsu might claim that we infringe other or additional patents. Komatsu notified Seiko, our manufacturing partner, that it intends to enforce its rights against Seiko with respect to its Japanese patents if Seiko continues to engage in manufacturing activities for us. In connection with our manufacturing agreement with Seiko, we agree to pay Seiko under certain conditions for damages associated with these types of claims. Seiko may not prevail in any litigation against Komatsu, and therefore, we may be required to pay Seiko for such damages.
We have notified our competitors and others of our United States patent portfolio. Specifically, we have notified Komatsu that they may be infringing on some of our U.S. patents. We have discussed with Komatsu our claims against each other. Komatsu challenged one of our U.S. patents in the USPTO. Also, Komatsu transferred its lithography laser business to one of our competitors, Gigaphoton. We also have had discussions with Lambda-Physik, another competitor, regarding allegations by each party against the other for possible patent infringement. Any of these discussions with our competitors may not be successful and litigation could result.
In the future, patent litigation may result due to a claim of infringement by our competitors or any other third party or may be necessary to enforce patents issued to us. Any such litigation could result in substantial cost and diversion of effort by us, which would have an adverse effect on our business, financial condition and operating results. Furthermore, our customers and the end users of our products might assert other claims for indemnification that arise from infringement claims against them. If these assertions are successful, our business, financial condition and operating results may be materially affected. Instead of litigation, we may seek a license from third parties to use their intellectual property. However, we may not be able to obtain a license on reasonable terms. In the
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alternative, we may design around the third party's intellectual property right or we may challenge these claims in legal proceedings. Any adverse determination in a legal proceeding could result in one or more of the following, any of which could have a substantial adverse effect on our business, financial condition and operating results:
Any of these 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 infringement claims against our registered and unregistered trademarks would be expensive and we may have to stop using such trademarks and pay damages.
We registered the trademark "CYMER" in the United States and in some other countries. We are also trying to register additional trademarks in the United States in other countries, including the trademark "Insist on Cymer." We use these trademarks and many other marks in our advertisements and other business materials, which are distributed throughout the world. We may be subject to trademark infringement actions for using these marks and other marks on a worldwide basis and this would be costly to defend. If a trademark infringement action was successful, we would have to stop using the mark and possibly pay damages.
If Seiko discontinues producing our laser light sources in Japan due to patent infringement claims made by Komatsu, our ability to meet the demand for our product in Japan could be materially adversely affected.
We have approved Seiko as a qualified manufacturer of our excimer laser light sources. Komatsu has told Seiko that certain aspects of our laser light sources may infringe Komatsu's Japanese patents. Further, Komatsu advised Seiko that it intends to enforce its rights under such Japanese patents against Seiko if Seiko continues to manufacture excimer laser light source products for us. In connection with our manufacturing agreement with Seiko, we have agreed to indemnify Seiko against any such claims under certain circumstances. To date, Komatsu has not initiated any such legal action. If Seiko stops manufacturing our laser light source products in Japan because of Komatsu's claims, our ability to manufacturer laser light sources that are in demand in such area could be materially and adversely affected.
Economic, political, regulatory and other events in geographic areas where we have significant sales or operations could interfere with our business.
A large portion of our total revenues is derived from customers located outside of the United States, particularly in Asian countries. Our foreign customers accounted for 81% or more of our total revenue in each of the last three fiscal years.
Because a significant majority of our principal customers are located in Asian countries, we expect our international sales to continue to account for a very large portion of our total revenues. In order to support our foreign customers, we must:
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We may not be able to manage our operations to address and support our foreign customers effectively. Further, our investments in these types of activities may not make us competitive in the international market or we may not be able to meet the service and support levels required by our foreign customers.
Additionally, we are subject to the risks inherent in doing business internationally, including:
Many of our major customers and many of the semiconductor device manufacturers who use our laser light source products in their photolithography systems are located in Asia. Economic problems and currency fluctuations affecting these regions in Asia could create a larger risk for us. Further, even though it has not been difficult for us to comply with United States export controls, these export rules could change in the future and make it more difficult or impossible for us to export our products to many countries. Any of these vulnerabilities could have a material adverse effect on our business, financial condition and results of operations.
We are dependent on air transport to conduct our business and disruption of domestic and international air transport systems could adversely affect our business.
We depend on regular and reliable air transportation on a worldwide basis for many of our routine business functions. If civil aviation in the United States or abroad is disrupted by terrorist activities or security responses to the threat of terrorism or for any other reason, our business could be adversely affected in the following ways:
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We are exposed to risks related to the fluctuations in the currency exchange rates for the Japanese yen.
If we sell products to our Japanese subsidiary, the sale is denominated in U.S. dollars. If our Japanese subsidiary sells our products directly to customers in Japan, the sale is denominated in Japanese yen. Thus, our results of operations may fluctuate based on the changing value of the Japanese yen to the U.S. dollar. Our Japanese subsidiary manages its exposure to these fluctuations through foreign currency forward exchange contracts to hedge its purchase commitments. We will continue to monitor our exposure to these currency fluctuations, and, when appropriate, use hedging transactions to minimize the effect of these currency fluctuations. However, exchange rate fluctuations may still have a material adverse effect on our operating results. In the future, we may need to sell our products in other foreign currencies other than the Japanese yen and the management of more currency fluctuations will be more difficult and expose us to greater risks in this area.
We are subject to many standards and regulations of foreign governments and, even though we intend to comply, we may not always be in compliance with these rules, or we may be unable to design or redesign our products to comply with these rules.
Many foreign government standards and regulations apply to our products. These standards and regulations are always being amended. Although we intend to meet all foreign standards and regulations, our products may not comply with these foreign government standards and regulations. Further, it might not be cost effective for us to redesign our products to comply with these foreign government standards and regulations. Our inability to design or redesign products to comply with foreign standards therefore could have a material adverse effect on our business.
Semiconductor device manufacturers' prolonged use of our products in high volume productions may not produce the results they desire and, as a result, our reputation and that of our customers who supply photolithography tools to the semiconductor manufacturers could be damaged in the semiconductor industry.
Over time, our light source products may not meet semiconductor device manufacturers' production specifications or operating cost requirements after the light source is used for a long period in high volume production. If any semiconductor device manufacturer cannot successfully achieve or sustain their volume production using our light sources, our reputation could be damaged with the semiconductor device manufacturers and our customers who are the limited number of photolithography tool manufacturers. This would have a material adverse effect on our business.
We have in the past and may in the future acquire business that will involve numerous risks. We may not be able to address these risks successfully without substantial expense, delay or other operational and financial problems.
The risks involved with acquiring a new company include the following:
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Any of these risks could materially harm our business, financial condition and operating results. Further, any business that we acquire may not achieve anticipated revenues or operating results.
Cymer Cambridge may not achieve the results we anticipate.
Cymer Cambridge's technology addresses stability and motion control challenges that we believe will be important to the future of the photolithography tool industry. We purchased Cymer Cambridge (formerly ACX) with the expectation that the ACX technology would produce benefits to us, including:
We cannot guarantee that we can effectively develop or market the ACX technology, that Cymer Cambridge can achieve anticipated results, or that the ACX technology will solve stability and motion control challenges which are important to the future semiconductor market. Any of these risks could materially harm our business and condition and results of operations.
We must develop and manufacture enhancements to our existing products and introduce new products in order to continue to grow our business. We may not effectively manage our growth and integrate these new enhancements and products, which could materially harm our business.
To continue to grow our business, our existing light source products and their process capabilities must be enhanced, and we must develop and manufacture new products to serve other semiconductor applications. We cannot guarantee that we will be able to manage our growth effectively. Nor can we guarantee that we will be able to accelerate the development of new enhancements to our existing products and create new products. Further, we may not be able to effectively integrate new products and applications into our current operations. Any of these risks could materially harm our business, financial condition and results of operations.
We are dependent on our manufacturing facilities and subcontractors to assemble and test our products.
Operations at our primary manufacturing facility and our subcontractors are subject to disruption for a variety of reasons, including work stoppages, terrorism, fire, earthquake, energy shortages, flooding or other natural disasters. Such disruptions could cause delays in shipments of our products to our customers. We cannot ensure that alternate production capacity would be available if a major disruption were to occur or that, if it were available, it could be obtained on favorable terms. Such disruption could result in cancellation of orders or loss of customers which have a material adverse effect on our operating results, financial condition and cash flows.
Our operations are subject to environmental and other government regulations that may expose us to liabilities for noncompliance.
We are subject to federal, state and local regulations, such as regulations related to the environment, land use, public utility utilization and the fire code, in connection with the storage, handling, discharge and disposal of substances that we use in our manufacturing process and on our facilities that we lease. We believe that our activities comply with current government regulations that are applicable to our operations and current facilities. We may be required to purchase additional capital equipment or other requirements for our processes to comply with these government regulations in the future if they change. Further, these government regulations may restrict us from expanding our
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operations. Adopting measures to comply with changes in the government regulations, our failure to comply with environmental and land use regulations, or restrictions on our ability to discharge hazardous substances, could subject us to future liability or cause our manufacturing operations to be reduced or stopped.
Our products are subject to potential product liability claims if personal injury or death result.
We are exposed to significant risks for product liability claims if personal injury or death results from the use of our products. We may experience material product liability losses in the future. We maintain insurance against product liability claims. However, our insurance coverage may not continue to be available on terms that we accept. This insurance coverage also may not adequately cover liabilities that we incur. Further, if our products are defective, we may be required to recall or redesign these products. A successful claim against us that exceeds our insurance coverage level, or any claim or product recall that results in adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations.
The price of our common stock has fluctuated and may continue to fluctuate widely.
The price of our common stock has fluctuated in the past. The market price of our common stock will continue to be subject to significant fluctuations in the future in response to a variety of factors, including the risk factors contained in this report.
Various factors may significantly affect the market price of our common stock, including:
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. Any such litigation can result in substantial costs and a diversion of management's attention and resources and therefore could have a material adverse effect on Cymer's business, financial condition and results of operations.
We have implemented steps to protect our company from hostile takeovers.
Nevada law and our articles of incorporation contain provisions that discourage a proxy contest and provisions that make an acquisition of a substantial block of our common stock more difficult. In addition, our board of directors is authorized to issue, without stockholder approval, 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 this could adversely affect the voting power or other rights of holders of common stock. Our board can use the issuance of the
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preferred stock or rights to purchase the preferred stock to discourage any unsolicited acquisition proposal or attempt.
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 Cymer's business that is conducted in Japan, the Japanese operation poses the greatest foreign currency risk. Cymer uses financial instruments, principally foreign currency forward exchange contracts, in Japan to manage its foreign currency exposures. Cymer enters into foreign currency forward exchange contracts in order to reduce the impact of currency fluctuations related to purchases of Cymer's inventories by Cymer Japan in US dollars for resale under firm third-party sales commitments denominated in Japanese Yen. Cymer does not enter into foreign currency forward exchange contracts for trading purposes.
As of June 30, 2002, Cymer had outstanding foreign currency forward exchange contracts to buy US $68.2 million for 8.8 billion yen under foreign currency exchange facilities with contract rates ranging from 119.00 yen to 134.26 yen per U.S. dollar. These contracts expire on various dates through February 2003.
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, Cymer will occasionally sell certain 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 in a private placement of notes. These 31/2% / 71/4% Step-Up Convertible Subordinated Notes were due August 6, 2004 and were convertible at the option of the holder into shares of Cymer common stock at any time on or after November 5, 1997 and prior to maturity or earlier redemption. The conversion rate on these notes was 21.2766 shares per $1,000 principal amount of notes, subject to adjustment under certain conditions. These notes were called for redemption on March 25, 2002. In March 2002, immediately prior to the March 25, 2002 redemption date, holders of $109.3 million of the outstanding principal amount converted their notes into shares of Cymer's common stock. As a result of these conversions, 2,325,542 shares of Cymer's common stock were issued to the note holders and the remaining $38.0 million of the outstanding principal amount of the notes was redeemed. As of June 30, 2002, there was no balance remaining on these 1997 notes.
In February 2002, Cymer issued $250 million in aggregate principal amount in a second private placement of notes. The notes are unsecured and are due on February 15, 2009 with interest payable semi-annually on February 15 and August 15 of each year at 31/2% per annum. The notes are convertible into shares of Cymer common stock at a conversion rate of 20 shares per $1,000 principal amount. Cymer used a portion of the net proceeds from this private placement to redeem the notes issued in August 1997. These notes are recorded at face value on the consolidated balance sheets. The fair value of such debt based on quoted market prices on June 30, 2002 was $246.1 million.
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ITEM 1. | Legal Proceedings | |||||
None. |
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ITEM 2. |
Changes in Securities and Use of Proceeds |
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ITEM 3. |
Defaults upon Senior Securities |
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ITEM 4. |
Submission of Matters to a Vote of Security Holders |
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Cymer held its Annual Meeting of Stockholders on May 23, 2002. Out of 33,696,154 shares of common stock entitled to vote at such meeting, there were present in person or by proxy 31,087,790 shares. At the Annual Meeting, the stockholders of Cymer approved the following matters: |
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(a) |
The election of Robert P. Akins, Richard P. Abraham, Kenneth M. Deemer, Peter J. Simone, Jon D. Tompkins, Michael R. Gaulke, and William G. Oldham as directors of Cymer for the ensuing year and until their successors are elected. The vote for the nominated directors was as follows: |
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Robert P. Akins, 30,943,864 votes cast for and 143,926 votes withheld; Richard P. Abraham, 30,941,988 votes cast for and 145,802 votes withheld; Kenneth M. Deemer, 30,683,644 votes cast for and 404,146 votes withheld; Peter J. Simone, 30,682,394 votes cast for and 405,396 votes withheld; Jon D. Tompkins, 30,942,237 votes cast for and 145,553 votes withheld; Michael R. Gaulke, 30,683,198 votes cast for and 404,592 votes withheld; William G. Oldham, 30,949,648 votes cast for and 138,142 votes withheld. |
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(b) |
Approval of an amendment to Cymer's articles of incorporation to increase the authorized number of shares of Cymer's common stock from 50,000,000 to 100,000,000 shares. 29,391,052 votes were cast for approval, 1,667,753 votes were cast against, 28,984 votes were abstained and there were no broker non-votes. |
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(c) |
Ratification of the appointment of KPMG LLP as the independent auditors of Cymer for the year ending December 31, 2002. 29,616,799 votes were cast for approval, 1,337,512 votes were cast against, 133,478 votes were abstained and there were no broker non-votes. |
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ITEM 5. | Other Information | |||||
Due dates for stockholder proposals for Cymer's 2003 annual meeting |
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We have deferred the deadlines for receiving stockholder proposals which are to be considered for our annual meeting of stockholders to be held in 2003. In order to be considered for inclusion in our proxy materials for next year's annual meeting, stockholder proposals must be received in writing by the Corporate Secretary at Cymer, Inc., 16750 Via Del Campo Court, San Diego, California 92127, no later than December 17, 2002. Stockholders wishing to submit proposals or director nominations that are not to be included in our proxy materials for our 2003 annual meeting of stockholders must do so no later than March 2, 2003. Stockholders are also advised to review our Bylaws, which contain additional requirements about advance notice of stockholder proposals and director nominations. |
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ITEM 6. | (a) | Exhibits |
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3.1 | Certificate of Amendment of Articles of Incorporation of Cymer, Inc. filed June 6, 2002. |
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99.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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99.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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(b) | Reports on Forms 8-K | |||||
None. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
CYMER, INC. (Registrant) |
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Date: August 12, 2002 |
By: |
/s/ NANCY J. BAKER Nancy J. Baker Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) |
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