SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

For the Fiscal Year Ended December 31, 2002

 

OR

 

 

Commission File Number 0-21321

 

CYMER, INC

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number including area code: (858) 385-7300

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

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     Noo

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý    Noo

 

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of $35.04 for shares of the registrant’s Common Stock on June 28, 2002 as reported on the Nasdaq National Market, was approximately $1,171,382,750.  In calculating such aggregate market value, shares of Common Stock owned of record or beneficially by officers or directors, and persons known to the registrant to own more than ten percent of the registrant’s voting securities were excluded because such persons may be deemed to be affiliates.  The registrant disclaims the existence of control or any admission thereof for any other purpose.

 

Number of shares of Common Stock outstanding as of  March 14, 2003:  34,351,416.

 

DOCUMENTS INCORPORATED BY REFERENCE

The following document is incorporated by reference in Part III of  this Annual Report on Form

10-K: portions of registrant’s proxy statement for its annual meeting of stockholders to be held on May 22, 2003.

 

 

CYMER, INC.

 

2002 Annual Report on Form 10-K

 

TABLE OF CONTENTS

 

PART I
	Item 1.	Business
	Item 2.	Properties
	Item 3.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
PART II
	Item 5.	Market for Registrant’s Common Stock and Related Stockholder Matters
	Item 6.	Selected Financial Data
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
	Item 8.	Financial Statements and Supplementary Data
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10.	Directors and Executive Officers of the Registrant
	Item 11.	Executive Compensation
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.	Certain Relationships and Related Transactions
	Item 14.	Controls and Procedures
PART IV
	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K
	Signatures
	Certifications

 

CYMER and INSIST ON CYMER are registered trademarks of Cymer, Inc.

 

 

Statements in this Annual Report on Form 10-K that are not strictly historical in nature are forward-looking statements. These statements include, but are not limited to, references to manufacturing activities;  product sales; service and support revenues; research and development plans and expenditures; the adequacy of capital resources; the effects of the continuing downturn in the semiconductor industry; and competitive positioning, and may contain words such as “believes,” “anticipates,” “expects,” “may,” “will,” “could,” “might,” “should,” and words of similar import.  These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties.  Actual events or results may differ materially from those projected in such statements due to various factors, including, but not limited to, those set forth under the caption “Risks and Uncertainties That May Affect Results” and elsewhere in this report.  Cymer assumes no obligation to update any forward-looking statements contained in this report.

 

PART I

 

Item 1.  Business

 

General

 

Cymer is the world’s leading supplier of excimer light sources, the essential light source for deep ultraviolet, (“DUV”), photolithography systems. DUV lithography is a key enabling technology that has allowed the semiconductor industry to meet the exact specifications and manufacturing requirements for volume production of today’s most advanced semiconductor chips. Cymer’s light sources are incorporated into step-and-repeat (“steppers”) and step-and-scan (“scanners”) photolithography systems for use in the manufacture of semiconductors with critical feature sizes below 0.35 microns. Cymer’s excimer light sources constitute a substantial majority of all excimer light sources incorporated in DUV photolithography tools. Cymer’s products consist of photolithography light sources, replacement parts and service. Cymer maintains a worldwide service organization that supports its installed base of light sources.  As of December 31, 2002, this installed base totaled 1,986 light sources. Cymer’s customers include all three manufacturers of DUV photolithography systems: ASM Lithography, Canon and Nikon. Photolithography systems incorporating Cymer’s excimer light sources have been purchased by each of the world’s 20 largest semiconductor manufacturers: Advanced Micro Devices, Fujitsu, Hitachi, Hynix, IBM, Infineon, Intel, Matsushita, Micron, Mitsubishi, Motorola, NEC, Philips, Samsung, Sanyo, Sharp, Sony, ST Microelectronics, Texas Instruments, and Toshiba.

 

Other Information

 

Cymer is a Nevada corporation, incorporated on July 12, 1996. Cymer was originally incorporated in California in 1986 and reincorporated in Nevada in 1996.

 

Cymer’s website address is http://www.cymer.com.  Our filings with the Securities and Exchange Commission (“SEC”) including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available free of charge through our internet website as soon as reasonably practicable after being filed with or furnished to the SEC.

 

In 2003, Cymer intends to adopt a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  Cymer intends to post the text of the code of ethics on its website which can be accessed at http://www.cymer.com in connection with “Investor” materials.  In addition, Cymer intends to promptly disclose (1) the nature of any amendment to the code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of the code of ethics that is granted to one of these specified officers, and the name of such person who is granted the waiver on Cymer’s website in the future.

 

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Products and Services

 

Cymer’s products primarily consist of photolithography light sources, replacement parts and service.

 

Photolithography Light Sources

 

Cymer’s photolithography light sources produce narrow bandwidth pulses of short wavelength light within the DUV spectrum. The three DUV wavelengths are measured in fractions of a micron or in nanometers (“nm”) One nanometer equals one billionth of a meter.  The light sources are referred to according to the gases mixed to produce the light or by the wavelength.  Krypton fluoride (“KrF”) gases produce 248 nm light, argon fluoride (“ArF”) gases 193 nm light, and Fluorine (“F2”) gas 157 nm light. The light sources permit very fine feature resolution for imaging the circuitry on the wafer and high throughput in wafer processing.  Cymer has designed its light sources to be highly reliable, easy to install and compatible with existing semiconductor manufacturing processes.  Cymer’s light sources are used to pattern the integrated circuits, or “chips”, that power many of today’s advanced consumer and business electronics.  In 2002, Cymer sold 282 light source systems at an average selling price (“ASP”) of $720,000.

 

248 nm KrF Light Sources

 

ELS-7000™ - Cymer’s latest KrF production light source designed for next-generation lithography applications at the 248 nm wavelength, the ELS-7000, is expected to be a key enabler in the production of devices with sub-.13 micron design rules.  The ELS-7000, which operates at a repetition rate of 4 kilohertz (“kHz”), provides the highest spectral power of any of Cymer’s KrF light sources, and provides customers with the flexibility to “mix and match” the KrF and ArF products to accommodate multiple DUV wavelengths –248 nm and 193 nm – in the same manufacturing environment.

 

6000 Series - The 6000 Series consists of two light source models that are within Cymer’s cutting-edge 248 nm KrF portfolio and are designed for the production of semiconductor devices down to 130 nm (0.13 micron) design rules:

 

•                  ELS-6010 - The ELS-6010 is a 20 watt (“W”) KrF production light source that offers a 2.5 kHz repetition rate and is designed for lithography steppers and scanners with >0.70 numerical aperture (“NA”) lens designs. The ELS-6010 is a key enabler in the production of devices with 130 nm and below design rules. The ELS-6010 delivers advanced line-narrowed spectral bandwidth of 0.5 pm full width half maximum (“FWHM”) and 1.4 pm (95% energy integral). The ELS-6010, which is based on the production proven ELS-6000^™, also incorporates power and chamber module advances for superior dose stability improving critical dimension (“CD”) control and process yield.

 

•                  ELS-6000™ - The ELS-6000 is a 2 kHz light source designed for advanced steppers and scanners for the production of devices with 180 nm and below geometries. The 20 W ELS-6000 is designed for the most advanced optical systems with up to 0.70 NA lens designs. Incorporating advances in the light source chamber, pulse power and optics modules, the ELS-6000 enables significant improvements in throughput rates and CD control through its ±0.4% energy dose stability, 0.6 pm bandwidth FWHM, and 2.0 pm bandwidth at 95% energy integral.

 

5000 Series - With a repetition rate of 1 kHz, this solid-state pulse power light source series is engineered using modular construction. Enabling higher device yields by delivering improved energy stability, this series is designed specifically for use in the manufacture of semiconductors with 250 nm and smaller design rules.  The 5000 series consists of the following models: ELS-5010, ELS-5005 upgrade, ELS-5000 and EX-5000.

 

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193 nm ArF Light Sources

 

XLA 100 - The XLA 100 is Cymer’s new, ultra line-narrowed, high power 4 kHz ArF production light source for next generation lithography tools. Featuring a dual chamber design called Master Oscillator Power Amplifier (“MOPA”), the XLA 100 provides outstanding optical and power performance. MOPA enables the XLA 100 to produce 40 W of output power, which is twice the output power of Cymer’s earlier and previously most powerful, single chamber-based ArF models.

 

By utilizing the ArF (193 nm) exposure wavelength, the XLA 100 enables chip design rules to shrink, which leads to faster processing speeds and boosts memory capacity per chip. With an ultra line-narrowed spectral bandwidth of £0.25pm FWHM, the tightest spectral bandwidth performance of any DUV production light source, the XLA 100 produces high contrast imaging for lithography tools with an NA up to 0.9.

 

NanoLith™ 7000 - The NanoLith 7000, 4 kHz 20W ArF light source for 193 nm step-and-scan tools provides leading edge optical performance. With highly line-narrowed bandwidth of £0.5 FWHM and £1.3 pm (95% energy integral), the NanoLith 7000 enables high contrast imaging from lithography scanners using lenses with an NA over 0.75. The NanoLith 7000 ArF light source model incorporates new technological solutions in the area of pulsed power design, light source discharge chamber, and wavelength stabilization, to enable tight control of exposure dose (<± 0.3%) and light source wavelength (<± 0.03pm).

 

ELS-6010A - The ELS-6010A is a highly line-narrowed, high power 193 nm light source for lithography tools.  The ELS-6010A has been designed to meet resolution image contrast, and wafer throughput requirements in semiconductor chip production at the <130 nm node.  The shorter wavelength enables chip design to shrink, leading to higher processor speed, more memory per chip, and better yield per wafer.  The ELS-6010A, 2kHz 10 watt ArF production light source for 193 nm step-and-scan tool provides leading edge optical performance.  With a highly line-narrowed bandwidth, the ELS-6010A enables high contrast imaging from lithography scanners using high NA lenses.  The ELS-6010A ArF light source model incorporates new technological solutions in the area of light source discharge chamber and wavelength stabilization, and enables tighter control of exposure dose (<+0.3%).

 

ELX-5000A -  With a repetition rate of 1 kHz, this solid-state pulse power light source series is engineered using modular construction. Enabling higher device yields by delivering improved energy stability, this series is designed specifically for use in the manufacture of semiconductors with 250 nm and smaller design rules.  Designed for steppers and scanners with numerical apertures as high as 0.70, the ELX-5000A provides 5 Watts of output power, controls bandwidth to 2.0 pm 95% energy integral, and delivers an energy dose stability of ±0.6%.

 

Cymer’s light sources incorporate advanced software control and diagnostic systems.  The control system provides users with on-line monitoring of light source operating conditions, with diagnostic readings (including flow rate, temperatures, pressures and light quality), that are automatically monitored by the photolithography tool’s control system. Additionally, configurable parameters can be adjusted to optimize the light source’s performance for each customer’s system.  A portable computer attached to the light source logs this data, automatically providing critical information about performance and reliability. The light sources are also designed for easy serviceability, with most major modules and components articulated for easy swing-out or roll-out motion to facilitate inspection and replacement.

 

Revenues generated from sales of light sources amounted to approximately $255.8 million, $189.5 million, and $203.1 million during 2000, 2001, and 2002, respectively.

 

Replacement Parts

 

Certain components and subassemblies included in Cymer’s light sources require replacement or refurbishment following extended operation.  For example, the discharge chamber of Cymer’s light sources has an expected life of approximately three to ten billion pulses, depending on the model.

 

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Cymer estimates that a light source used in a semiconductor production environment will require one to two replacement chambers per year, depending upon the level of usage.  Similarly, certain optical components of the light source deteriorate with continued exposure to DUV light and require periodic replacement.  Cymer provides these and other spare and replacement parts for its photolithography light sources as needed by its customers.

 

Revenues generated from sales of replacement parts amounted to approximately $101.8 million, $62.5 million, and $66.8 million during 2000, 2001, and 2002, respectively.  Revenues from replacement parts is dependent on both the utilization of Cymer’s light source systems and the size of the installed base of light sources.  Although the size of Cymer’s installed base has increased over the last few years, the utilization of Cymer’s light source systems has decreased.  This decreased utilization is due to the continued downturn in the semiconductor industry.  If this downturn continues, this decreased level of utilization may continue from period to period.

 

Service

 

As the life and usage of Cymer’s installed base of light sources in production at chipmakers exceeds the original warranty periods (generally 17 to 26 months from date of shipment), some chipmakers request service contracts from Cymer.  Additionally, Cymer provides service contracts directly to the three semiconductor DUV photolithography equipment manufacturers. These contracts require Cymer to maintain and/or service these light sources either on an on-call or regular interval basis or both.  Some of these contracts include replacement of consumable parts.

 

Revenues generated from service and service contracts amounted to approximately $7.4 million, $11.7 million, and $15.8 million during 2000, 2001, and 2002, respectively.  We expect service and service contract revenues to continue this upward trend in the future as Cymer’s installed base grows and the warranty period of those light source systems expire.

 

Customers and End Users

 

Cymer sells its photolithography light source products to each of the three manufacturers of DUV photolithography tools:

 

ASM Lithography

Canon

Nikon

 

Cymer believes that maintaining and strengthening customer relationships will play an important role in maintaining its leading position in the photolithography market.  Cymer works closely with its customers to integrate Cymer’s products into their photolithography tools.  Sales to ASM Lithography, Canon, and Nikon accounted for 32%, 21% and  24%, respectively, of total revenue in 2002.

 

 Revenues generated from customers within the United States amounted to $69.2 million, $41.3 million and $29.1 million during 2000, 2001 and 2002, respectively.  Revenues generated from customers outside of the United States amounted to $298.2 million, $228.1 million and $261.1 million during 2000, 2001, and 2002, respectively.

 

Revenues generated from customers located in Japan amounted to $156.1 million, $111.6 million and $123.4 million during 2000, 2001 and 2002, respectively.  Revenues generated from customers located in the Netherlands amounted to $89.7 million, $93.2 million and $91.4 million during 2000, 2001, and 2002, respectively.

 

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End users of Cymer’s light sources include the world’s 20 largest semiconductor manufacturers. The following semiconductor manufacturers have purchased one or more DUV photolithography tools incorporating Cymer’s light sources:

 

United States		Japan		Singapore		Taiwan/China		Korea
Agere Systems		Denso		1st Silicon		ERSO		ANAM F1
Agilent Technologies		Elpida Memory Inc.		Chartered Silicon Partners		Mosel		Dongbu
AMD		Fuji Film		Silterra		MXIC		Hynix Semiconductor Inc.
Applied Materials		Fujitsu		SSMC		Nan-ya		Samsung
Atmel		Hitachi				Promos
Clariant Corp.		JSR				PSC
Conexant Systems		Kawasaki Seitetsu				SIS		Europe
Cypress		Matsushita				SMIC
Headway Technologies		Mitsubishi				TSMC		Altis Semiconductor
HP		NEC				UMC Group		C-NET
IBM		OKI				Winbond Group		Ericsson Microelectronics AB
Integrated Device Technology		Rohm						IMEC v.z.w †
Intel		Sanyo						Infineon Technologies AG
LSI Logic Corp.		Seiko						Micronas GmbH
Maxim Integrated Products		SELETE †						Philips
Microchip Technology Inc.		Sharp						ST Microelectronics
Micron Technology		Sony
Motorola		Tokyo Electron Ltd.
National Semiconductor		Tokyo Ohka Kougyo Co.
SEMATECH †		Toshiba
Shipley		Trecenti Technologies
Texas Instruments
VLSI
Wafertech

†  A semiconductor industry consortium.

 

Backlog

 

Cymer schedules production of light sources based upon order backlog and informal customer forecasts.  Cymer includes in backlog only those orders to which a purchase order number has been assigned by the customer and for which delivery has been specified within 12 months.  Because customers may cancel or delay orders with little or no penalty, Cymer’s backlog as of any particular date may not be a reliable indicator of actual sales for any succeeding period.  At December 31, 2002, Cymer had a backlog of approximately $100.1 million compared with a backlog of $97.1 million at December 31, 2001.

 

Manufacturing

 

Cymer’s manufacturing activities consist of material management, assembly, integration and testing.  These activities are performed in a 124,000 square foot facility in San Diego, California that includes approximately 31,000 square feet of Class 10,000 cleanroom manufacturing and test space.  In order to focus its own resources, capitalize on the expertise of its key suppliers and respond more efficiently to customer demand, Cymer has outsourced the manufacture of many of its subassemblies. Cymer’s outsourcing strategy is exemplified by the modular design of Cymer’s products.  Substantially all  manufacturing of the nonproprietary subassemblies have been outsourced. As a result, Cymer is increasingly dependent upon these outsourced suppliers to meet Cymer’s manufacturing schedules.  The failure by one or more of these suppliers to supply Cymer on a timely basis with sufficient quantities of components or subassemblies that perform to Cymer’s specifications could affect Cymer’s ability to deliver completed light sources to its customers on schedule. Cymer believes that the highly outsourced content and manufacturable design of its products allows for reduced manufacturing cycle times and increased output per employee. To improve current production efficiencies, control costs, and manage overall manufacturing capacity, Cymer intends to continue to provide additional training to manufacturing

 

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personnel, improve its assembly and test processes in order to reduce cycle time, invest in additional manufacturing tooling and further develop its supplier management and engineering capabilities.

 

In addition to the manufacturing capacity at its facilities in San Diego, California, Cymer completed the construction of a manufacturing facility in Korea in late 2002.  This facility will be used as a refurbishment facility and will refurbish one of Cymer’s core modules, its chamber, initially for light sources in Korea, and ultimately for the Asia-Pacific region.  This new refurbishment facility in Korea includes 6,550 square feet of Class 10,000 cleanroom manufacturing space.  All of the final qualification phases for this facility were completed during the fourth quarter of 2002 and the first chamber was shipped to a customer from this facility in January 2003.

 

During the period from 1997 through March 2003, Cymer also had additional manufacturing capacity as a result of its contract manufacturing agreement with Seiko Instruments, Inc.  (“Seiko”).  Seiko was qualified as a contract manufacturer of Cymer’s light source systems and began production of its light sources in 1997.  Although the original agreement, which was set to expire in 2003, could have been renewed for an additional two years, Cymer and Seiko have mutually consented to the termination of this contract.  As a result, Seiko will no longer manufacture light source systems for Cymer effective March 31, 2003.  The termination of this agreement is not expected to impact Cymer’s production of light source systems in the future.

 

Certain of the components and subassemblies included in Cymer’s products are obtained from a single supplier or a limited group of suppliers.  For certain optical components used in its light source systems, Cymer currently utilizes a single supplier.  Although Cymer has not aggressively pursued other vendors for these optical components, it has attempted to qualify one other vendor.  To date, this vendor has been unsuccessful in producing these optical components and has not been qualified by Cymer.  To reduce the risk associated with this single supplier, Cymer carries a two-year supply of these optical components.  This two year supply is based upon current business activities, so any significant increase in production would likely result in a quicker consumption of these optical components. To date Cymer has been able to obtain adequate supplies of the components and subassemblies used in the production of Cymer’s light source systems in a timely manner from existing sources.  If in the future Cymer is unable to obtain sufficient quantities of required materials, components or subassemblies, or if such items do not meet Cymer’s quality standards, delays or reductions in product shipments could occur which could have a material adverse effect on Cymer’s business, financial condition and results of operations.

 

Sales and Marketing

 

Cymer’s sales and marketing efforts have been predominately focused on DUV photolithography tool manufacturers.  Cymer markets and sells its products through its own worldwide direct sales force. Cymer has developed product and applications engineering teams to support the account managers and Cymer’s customers.  Cymer believes that to facilitate the sales process it must work closely with and understand the requirements of semiconductor manufacturers, the end users of Cymer’s products.

 

Service and Support

 

Cymer believes its success in the semiconductor photolithography market is highly dependent upon after-sales support of both the direct customer and the end user.  Cymer supports its customers with field service, technical service engineers and training programs, and in some cases provides ongoing on-site technical support at the customer’s manufacturing facility.  Prior to shipment, Cymer’s support personnel typically assist the customer in site preparation and inspection and provide customers with training at Cymer’s facilities or at the customer’s location. Direct customers and end users are also provided with a comprehensive set of manuals, including operations, maintenance, service, diagnostic and safety manuals.

 

Cymer’s field engineers and technical support specialists are based at its San Diego headquarters, and at its field service offices located throughout the United States. Support in Europe,

 

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Japan, Korea, Singapore, the People’s Republic of China, and Southeast Asia are provided by Cymer’s subsidiaries located within those regions.  As part of its customer service, Cymer maintains an inventory of spare parts at each of its service facilities.  As Cymer’s installed base grows, replacement parts required to satisfy worldwide support requirements, as well as Cymer’s own logistics support organization, will be subject to the fluctuating demands of the semiconductor industry. In order to meet these demands, Cymer must continue to effectively manage its production of component modules which are required for new systems, as well as for support and warranty requirements for installed systems.

 

Cymer believes that the need to provide fast and responsive service to the semiconductor manufacturers using its light sources is critical and that it cannot depend solely on its customers to provide this specialized service.  Therefore, Cymer believes it is essential to maintain, through its own personnel and trained third-party sources, a rapid response capability to service its customers throughout the world.  Accordingly, Cymer has an ongoing effort to continuously develop its direct support infrastructure in Japan, Korea, Taiwan and Southeast Asia, Singapore, the People’s Republic of China, Europe and the United States.  This task entails recruiting and training qualified field service personnel or identifying qualified independent firms and maintaining effective and highly trained organizations that can provide service to customers in various countries in their assigned regions.

 

Cymer generally warrants its new light source products against defects in design, materials, and workmanship.  The warranty coverage period and terms vary by light source model.  In general, the warranty coverage period ranges from 17 to 26 months after shipment.

 

Research and Development

 

The semiconductor industry is subject to rapid technological change and new product introductions and enhancements.  Cymer believes that continued and timely development and introduction of new and enhanced light source products are essential for Cymer to maintain its competitive position.  Cymer intends to continue to develop its technology and innovative products to meet customer demands. Current projects include enhancements to Cymer’s KrF and ArF light sources and the new MOPA platform. Other research and development efforts of the next generation of photolithography light sources are currently focused on F2 and extreme ultra violet (“EUV”) technology and product development. In addition there are ongoing efforts to improve ongoing products, reduce manufacturing costs, lower the cost of light source operation, enhance light source performance, develop new features for existing light sources, and conduct research and development of non-light source products.  In March 2002, Cymer announced an agreement with a major U.S. chipmaker to provide funding for Cymer’s research and development efforts on EUV technology.

 

Cymer has historically devoted a significant portion of its financial resources to research and development programs and expects to continue to allocate significant resources to these efforts. Research and development expenses for 2000, 2001, and 2002 were approximately $45.4 million, $58.4 million, and $73.7 million, respectively.

 

In addition to funding its own research and development projects, Cymer has pursued a strategy of securing research and development contracts from customers, government agencies and SEMATECH, a semiconductor industry consortium, in order to develop advanced technology for current and future light source systems based on Cymer’s core technology.  Revenues generated from research and development contracts amounted to approximately $1.2 million, $2.4 million, and $2.2 million during 2000, 2001, and 2002, respectively.

 

Cymer plans to expand its product portfolio within the lithography sector of the semiconductor capital equipment industry by enhancing existing products, offering new products and developing new semiconductor applications.  Cymer Boston, which was known as Active Control eXperts (“ACX”) prior to its acquisition by Cymer in February  2001, provides Cymer with opportunities to enhance and develop new products using the ACX active structural control technology that can diagnose, design and implement a motion control solution for unwanted nano-motions.  This technology may be applied to many types of equipment and enhance the platforms of tools.

 

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Intellectual Property Rights

 

Cymer believes that the success of its business depends more on such factors as the technical expertise of its employees, as well as their innovative skills and marketing and customer relations ability, than on patents, copyrights, trade secrets and other intellectual property rights. Nevertheless, the success of Cymer may depend in part on patents.  As of December 31, 2002, Cymer owned 165 United States patents covering certain aspects of technology associated with light sources and piezo techniques.  Such patents will expire at various times during the period from January 2008 through April 2021.  As of December 31, 2002, Cymer had also applied for 88 additional patents in the United States. As of December 31, 2002, Cymer owned 149 foreign patents and had filed 328 patent applications pending in various foreign countries.

 

Cymer’s pending patent applications and any future applications might not be approved. Cymer’s patents might not provide Cymer with competitive advantages.  Third parties might challenge Cymer’s patents.  In addition, patents held by third parties might have an adverse effect on Cymer’s ability to do business. In this regard, due to cost constraints, Cymer did not begin filing for patents in Japan or other countries with respect to inventions covered by its United States patents and patent applications until 1993. Therefore, Cymer lost the right to seek foreign patent protection for certain of its early inventions. Additionally, because foreign patents may afford less protection under applicable foreign law than may be available under corresponding United States patent law, any such patents issued to Cymer might not adequately protect Cymer’s technology in a given foreign jurisdiction. Furthermore, third parties might independently develop similar products, duplicate Cymer’s products or, to the extent patents are issued to Cymer, design around those patents.

 

Others may have filed and in the future may file patent applications that are similar or identical to those of Cymer. To determine the priority of inventions, Cymer may have to participate in interference proceedings declared by the United States Patent and Trademark Office. Such interference proceedings could result in substantial cost to Cymer.  Such third-party patent applications might have priority over patent applications filed by Cymer.

 

Cymer also relies upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect its confidential and proprietary information.  Despite these efforts, third parties might independently develop substantially equivalent proprietary information and techniques or otherwise gain access to Cymer’s trade secrets or disclose such technology.  Cymer might not be able to meaningfully protect its trade secrets.

 

Cymer has in the past funded a portion of its research and development expenses from outside research and development revenues.  Cymer has received such revenues from government sponsored programs, photolithography tool manufacturers and from SEMATECH, a research consortium, in connection with the design and development of specific products. Cymer currently funds a small portion of its development expenses through SEMATECH, tool manufacturers and semiconductor manufacturers. Although Cymer’s arrangements with these manufacturers and SEMATECH seek to clarify the ownership of the intellectual property arising from research and development services performed by Cymer, disputes over the ownership or rights to use or market such intellectual property might arise between Cymer and such parties.

 

Third parties have in the past notified, and may in the future notify, Cymer that it may be infringing intellectual property rights of others.  Conversely, Cymer has in the past notified, and may in the future notify, third parties that they may be infringing Cymer’s intellectual property rights.

 

Specifically, Cymer has engaged in discussions with Gigaphoton, a joint venture between Ushio and Komatsu, with respect to certain of Komatsu’s Japanese patents, in the course of which Komatsu has also identified to Cymer a number of additional Japanese and U.S. patents that Komatsu asserts may be infringed by Cymer or by Cymer’s former Japanese manufacturing partner, Seiko.  Komatsu has also notified one of Cymer’s integrator customers, Nikon, of its belief that Cymer’s light sources infringe several of Komatsu’s Japanese and U.S. patents.  Cymer, in consultation with Japanese patent counsel,

 

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has initiated oppositions to certain Komatsu Japanese patents and patent applications in the Japanese Patent Office. Some of these oppositions have been dismissed by the Japanese Patent Office. Litigation might ensue with respect to the Komatsu Japanese patents or Komatsu U.S. patents.  Also, Komatsu might assert infringement claims under other or additional patents.  Komatsu has notified Seiko that Komatsu intends to enforce its rights under the Komatsu Japanese patents against Seiko if Seiko engages in manufacturing activities for Cymer.  In connection with its former manufacturing agreement with Seiko, Cymer has agreed to indemnify Seiko against such claims under certain circumstances. Cymer and Seiko might not ultimately prevail in any such litigation.

 

Cymer has notified its competitors and others of Cymer’s United States patent portfolio.  Cymer has specifically asserted certain of its U.S. patents against Komatsu when informed that Komatsu light sources might be integrated into steppers intended for shipment into the U.S.  Cymer and Komatsu have engaged in discussions with regard to each party’s claims.  Those discussions might not be successful and litigation could result.  Attorneys representing Komatsu challenged one of Cymer’s U.S. patents in the U.S. Patent Office, but it was subsequently re-issued by the USPTO.  During 2000, Komatsu’s lithography light source business was transferred to Gigaphoton, Inc.  Subsequently, Cymer and Gigaphoton have engaged in discussions with regard to each party’s patents.  Those discussions might not be successful and litigation could result.  Cymer has also been engaged in patent discussions with another competitor, Lambda-Physik, concerning allegations by each party against the other of possible patent infringement.  These discussions also might not be successful and litigation could result.

 

Any patent litigation initiated by Cymer, or initiated by Cymer’s competitors against Cymer, would, at a minimum, be costly.  Litigation could also divert the efforts and attention of Cymer’s management and technical personnel.  Both could have a material adverse effect on Cymer’s business, financial condition and results of operations.  Furthermore, in the future other third parties might assert other infringement claims, and customers and end users of Cymer’s products might assert other claims for indemnification resulting from infringement claims.  Such assertions, if proven to be true, might materially adversely affect Cymer’s business, financial condition and results of operations. If any such claims are asserted against Cymer, Cymer may seek to obtain a license under the third party’s intellectual property rights.  However, such a license might not be available on reasonable terms or at all. Cymer could decide, in the alternative, to resort to litigation to challenge such claims or to design around the patented technology.  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.

 

Effective August 1, 1989 and lasting until the expiration of the licensed patents, Cymer entered into an agreement for a nonexclusive worldwide license to use or sell certain patented light source technology with Patlex Corp., a patent holding company (“Patlex”).  Under the terms of the agreement, Cymer is required to pay royalties ranging from 0.25% to 5.0% of gross sales and leases of its light sources, subject to an annual cap of $100,000 per year.  During 2000, 2001 and 2002, royalty fees totaled $100,000 per year.

 

Cymer has granted Seiko a right of first refusal to fund Cymer’s development of, and receive a license to, new industrial light source technologies not developed with funding from other parties.  In exchange for these rights, Cymer received up-front license fees of $3.0 million in aggregate during 1992 and 1993. Cymer was also entitled to royalties of 5% on related product sales through September 1999, after which the royalty rate is subject to renegotiation.  Through 1999, Cymer earned no royalties under the agreement. The license agreement also provides that product sales between Cymer and Seiko will be at a 15% discount from the respective companies’ list prices.  The agreement terminates in August 2012.  There has been no Seiko production or sales activity associated with this contract to date and this contract does not apply to Cymer’s current light source system products.

 

Cymer has registered the trademark CYMER in the United States and certain other countries and is seeking additional registrations of other trademarks including “Insist on Cymer” in the United States and in certain other countries.  Cymer uses these and a variety of other marks in its advertisements and other business activities around the world.  Based on the use of these or other

 

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marks, Cymer might be subjected to actions for trademark infringement, which could be costly to defend. If a challenge to a mark were to be successful, Cymer might be required to cease use of the mark and, potentially, to pay damages.

 

Competition

 

Cymer believes that the principal elements of competition in Cymer’s markets are the technical performance characteristics of the excimer light source products and the operating efficiency of the system, which is based on availability, performance efficiency and rate of quality. Cymer believes that it competes favorably with respect to these factors.

 

Cymer currently has two significant competitors in the market for light source systems for DUV photolithography applications.  Gigaphoton is headquartered in Japan, and Lambda-Physik, which is headquartered in Germany.  Cymer believes that Gigaphoton and Lambda-Physik are aggressively seeking to gain larger positions in this market.  Cymer believes that its three DUV photolithography tool manufacturing customers have each purchased products offered by these competitors and that its customers have qualified the competitors’ light sources for use with their products. Both Gigaphoton and Lambda-Physik are located in closer proximity to certain of Cymer’s customers than Cymer. Cymer believes that Gigaphoton in particular has been qualified for production use by chipmakers in Japan and elsewhere.  Cymer also believes that Lambda-Physik has been qualified for production use by chipmakers in the U.S. and Europe.  Cymer could lose market share and its growth could slow or even decline as competitors gain market acceptance.

 

In the future, Cymer will likely experience competition from other technologies, such as EUV and electron projection lithography or (“EPL”).  To remain competitive, Cymer believes that it will need to manufacture and deliver products to customers on a timely basis without significant defects and maintain a high level of investment in research and development and sales and marketing. Cymer might not have sufficient resources to continue to make the investments necessary to maintain its competitive position.

 

Larger competitors with substantially greater financial resources, including other manufacturers of industrial light sources for advanced lithography, may attempt to enter the market.  Further, other competitors may introduce new and enhanced product offerings that customers deem superior to Cymer’s products.  Future competitors may also be attracted to Cymer’s growing installed base of  light sources and seek to provide consumables and refurbished parts to that installed base.

 

Employees

 

On December 31, 2002, Cymer employed 841 persons worldwide. No employees are currently covered by collective bargaining agreements or are members of any labor organization as far as Cymer is aware. Cymer has not experienced any work stoppages and believes that its employee relations are good.

 

Executive Officers

 

Set forth below is certain information regarding the executive officers of Cymer and their ages as of March 14, 2003.

 

Name		Age		Position
Robert P. Akins		51		Chairman of the Board and Chief Executive Officer
Pascal Didier		44		President and Chief Operating Officer
Nancy J. Baker		40		Senior Vice President, Chief Financial Officer
Hugh R. Grinolds		51		Executive Vice President, Corporate Process and Services
Edward P. Holtaway		47		Executive Vice President, Lithography System Solutions
Brian C. Klene		45		Executive Vice President, Emerging Technology and Applications
John Shin		48		Executive Vice President, Semiconductor Manufacturing Solutions
Rae Ann Werner		38		Vice President, Controller and Chief Accounting Officer
Tsunehisa Yamashita		56		President, Cymer Japan

 

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Robert P. Akins, one of Cymer’s co-founders, has served as its chairman and chief executive officer since its inception in 1986, and also served as president of the company from its inception until May 2000. He currently serves on the board of directors for both Extraction Systems Inc. and SEMI North America, and on the council of advisors to the Irwin and Joan Jacobs School of Engineering at the University of California, San Diego. Mr. Akins received the Ernst & Young Entrepreneur of the Year Award for San Diego County in 1997, and with fellow co-founder Rick Sandstrom, received the outstanding alumnus award from the University of California, San Diego and the prestigious SEMI Award for North America, the highest honor conferred by Semiconductor Equipment and Materials International, in 1996 for contributions to the field of DUV lithography. Mr. Akins received a bachelor’s degree in physics, a bachelor’s degree in literature, and a doctorate in applied physics from the University of California, San Diego.

 

Pascal Didier has served as president and chief operating officer since May 2000. He served as senior vice president, worldwide customer operations from November 1997 until May 2000, and served as vice president of sales and marketing from July 1997, when he joined the company, until November of that year. He served as vice president of worldwide sales and field operations with GaSonics International, a semiconductor capital equipment manufacturer, from June 1995 to June 1997, and served in the additional capacity of vice president of Asia/Pacific for that company from June 1995 to June 1996. Prior to that, Mr. Didier served for two years as vice president of international operations for Megatest Corporation, a semiconductor test equipment manufacturer. Mr. Didier received a bachelor’s degree in business and administration from the College de Paris VII and a bachelor’s degree in electronics from the Institut Universitaire de Lyon.

 

Nancy J. Baker has served as senior vice president and chief financial officer since January 2002.  Prior to that, she served as Cymer’s vice president, finance and treasurer from June 1998 to December 2001.  During 2000, she headed the company’s successful effort to implement a new Enterprise Resource Planning ("ERP") system, which was implemented in San Diego in only six months, and globally in only nine months. From October 1996 to June 1998 she served as director, corporate finance and treasurer.  She joined Cymer as corporate controller for worldwide operations in August 1992.  Ms. Baker’s professional career spans more than 17 years, and prior to joining Cymer, she held a variety of financial management positions with an international manufacturer in the San Diego area.  Ms. Baker received a bachelor’s degree in accounting from the University of Texas at Austin in 1985 and completed the executive advanced management program at Harvard Business School in 1999.

 

Hugh R. Grinolds has served as executive vice president of the Corporate Processes and Services group since October 2002. Before that, he served as a senior director of the EUV program, the post he had held since joining the company in May 2002. Prior to joining Cymer, he served as site manager for Agilent Technologies in Fort Collins, Colo. from 1999, when Agilent was spun-off from Hewlett Packard, until May 2002. Dr. Grinolds began his business career with Hewlett-Packard Co. in 1979, and during his tenure with that company, served in a variety of increasingly responsible positions, including managing VLSI design for HP’s internal ASIC needs in Corvallis, Oregon, and serving as manufacturing manager in Fort Collins, Colo. for HP’s internal ASICs which included responsibility for the production of HP’s PA-RISC processors. He assumed the role of worldwide manufacturing manager at HP in 1998. Dr. Grinolds has published 21 technical articles and papers, and holds one patent. He received bachelor’s, master’s and doctorate degrees in electrical engineering from the University of Minnesota.

 

Edward P. (Ted) Holtaway has served as executive vice president of the Lithography System Solutions business unit since October 2002. He served as senior vice president of operations and business process management from May 2000 until October 2002. He joined Cymer in July 1998 as

 

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senior vice president of process quality. Prior to joining Cymer, Mr. Holtaway spent 13 years developing processes for San Diego-based Brooktree Corp., a fabless semiconductor company acquired by Rockwell Semiconductor Systems in September 1996. During his tenure, Mr. Holtaway’s executive posts included director of Rockwell’s San Diego operations from 1997 to 1998, vice president and managing director of Brooktree’s Singapore operations from 1995 to 1996, and vice president of corporate quality from 1989 to 1995. Mr. Holtaway received a bachelor’s degree in electrical engineering from the New Jersey Institute of Technology, a master’s degree in electrical engineering from the Polytechnic Institute of New York, and a master’s degree in business administration from San Diego State University.

 

Brian C. Klene has served as executive vice president of the Emerging Technology and Applications business unit since October 2002. Previously, he served as senior vice president, marketing and business development, which he had held since joining Cymer in June 2000. Prior to joining Cymer, Mr. Klene spent two years as vice president, strategic planning and business development at Chartered Semiconductor Manufacturing Ltd. in Singapore. From 1995 to 1997, he served as executive vice president, sales and marketing at Micron Electronics, Inc., Nampa, Idaho. Before that, he served as director of North American sales with Micron Technology, Inc., Boise, Idaho, from 1989 to 1994. He also served in a variety of sales and marketing positions of increasing responsibility with IBM Corp. Mr. Klene received a master’s degree in business administration from the University of Southern California, and a bachelor’s degree from The Citadel, Charleston, S.C.

 

John Shin has served as executive vice president of the Semiconductor Manufacturing Solutions business unit since October 2002. He served as senior vice president, worldwide customer operations from June 2000 until October 2002. Previously, he served as vice president, worldwide customer operations from September 1999 to June 2000, as vice president of worldwide field operations from April to September 1999, and as vice president, Asia/Pacific Operations from March 1998 to April 1999. He joined Cymer as president, Cymer Korea in May 1997. Immediately prior to joining Cymer, Mr. Shin served as president of Tencor Instruments Korea. From early 1993 to late 1996 he served as country manager in Korea with Watkins-Johnson Co, sales account manager in Korea for Applied Materials, and business development manager with Samsung America. Mr. Shin received a master’s degree in computer science from Indiana University and a bachelor’s degree in business from Hankuk University of Foreign Studies, Seoul, Korea.

 

Rae Ann Werner has served as vice president, controller, and chief accounting officer since January 2003. Prior to that, she served as Cymer’s Controller from February 1999 to January 2003. From 1993 to 1999 she held a variety of finance positions with increasing responsibilities since joining the company in November 1993.  Ms. Werner’s professional career spans more than 15 years, and prior to joining Cymer, she held a variety of financial positions with semiconductor and communications companies in the San Diego area.  Ms. Werner received a bachelor’s degree in accounting from San Diego State University in 1987.

 

Tsunehisa Yamashita has served as president of Cymer Japan since March 2003.  Prior to joining Cymer, Mr. Yamashita served for more than four years as general manager of the Japanese Division of Teradyne, Inc., a leading supplier of automatic test equipment for the semiconductor industry. From 1997 to 1998, he served as president of Brooks Automation, Japan where he managed the Japanese operations—including sales and technical support of semiconductor wafer and LCD plate handling automation and robotics.  During the first 24 years of his career, he served in a variety of positions with Nikon Corporation, including one year as general manager of business planning and strategic marketing, and nine years as a senior manager responsible for developing product-marketing plans.  During his tenure, he also supported overseas sales and marketing activities at various U.S.- and European-based Nikon subsidiaries.  Prior to that, Mr. Yamashita was instrumental in establishing Nikon’s U.S.-based lithography operations in San Bruno, California.  He holds a bachelor’s degree in mechanical engineering from Hokkaido University in Japan.

 

Executive officers serve at the discretion of the Board of Directors.  There are no family relationships between any of the directors and executive officers of Cymer.

 

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Item 2.  Properties

 

Cymer’s corporate headquarters is located in San Diego, California and includes administrative, manufacturing, engineering, and R&D facilities.  In addition, Cymer has field service offices located throughout the United States and internationally.  Cymer completed construction of a refurbishment facility in Korea at the end of 2002.  This manufacturing facility will be used to refurbish chamber assemblies and was qualified for production at the end of 2002.  In the third quarter of 2002, Cymer began construction of a new company-owned building in San Diego, which will include additional manufacturing facilities for Cymer’s new XLA product as well as additional administrative offices.  The manufacturing portion of the building is expected to be complete in April 2003.  Other sections of this building will complete construction throughout  2003, as required.

 

At December 31, 2002, details on Cymer’s leased and owned property were as follows:

 

Location			Lease Expiration		Total Square Footage		Primary Usage
San Diego, California			January 2010		155,000		Corporate headquarters,manufacturing, engineering, R&D facilities (two buildings)
San Diego, California			January 2010		61,300		Facility sub-leased
San Diego, California			Owned		135,000		Corporate headquarters, manufacturing, engineering, R&D facilities
San Diego, California			March 2007		22,200		Corporate warehouse
San Diego, California(1)			Owned		265,000		New building under construction – manufacturing and administrative
Santa Clara, California			February 2005		1,857		Field service office
Austin, Texas			October 2005		1,627		Field service office
Portland, Oregon			April 2006		1,857		Field service office
Charlestown, Massachusetts			January 2008		21,262		Engineering and field service office
Ichikawa, Japan			June 2003		13,831		Field service and sales office
Osaka, Japan			December 2003		807		Field service and sales office
Hsln-Chu, Taiwan			June 2004		4,821		Field service and sales office
United Square, Singapore			May 2004		1,866		Field service and sales office
Maarssen, Netherlands			May 2004		3,715		Field service and sales office
Veldhoven, Netherlands			May 2005		2,605		Field service and sales office
Pyongtaek-city, Kyonggi	– Land(2)		December 2020				Manufacturing, sales and administrative
	– Building(2)		Owned		26,000
Pudong, Shanghai			October 2004		4,641		Field service and sales office

 

(1)  Land is owned by Cymer.  Building construction is self-funded.

(2)  Land lease is through December 2020.  Building is owned by Cymer.

 

Item 3.    Legal Proceedings

 

None.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of the security holders of Cymer during the fourth quarter of the fiscal year ended December 31, 2002.

 

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PART II

 

Item 5.    Market for Registrant’s Common Stock and Related Stockholder Matters

 

Cymer’s Common Stock is publicly traded on the Nasdaq National Market under the symbol “CYMI”.  The following table sets forth, for the periods indicated, the high and low closing sales prices of Cymer’s Common Stock as reported by the Nasdaq National Market.

 

Year ended December 31, 2001		High			Low
First quarter		$	36.00		$	18.81
Second quarter		$	34.35		$	18.35
Third quarter		$	30.20		$	14.15
Fourth quarter		$	28.15		$	14.91
Year ended December 31, 2002
First quarter		$	50.80		$	26.55
Second quarter		$	53.44		$	31.05
Third quarter		$	35.48		$	17.19
Fourth quarter		$	38.91		$	16.31

 

The closing sales price of Cymer’s Common Stock on the Nasdaq National Market was $25.17 on March 14, 2003 and there were 352 registered holders of record as of that date.

 

Cymer has never declared or paid cash dividends on its Common Stock and currently does not anticipate paying cash dividends in the  future.

 

The information required to be disclosed by Item 201(d) of Regulation S-K “Securities Authorized for Issuance Under Equity Compensation Plans” is included under Item 12 of Part III of this Annual Report on Form 10-K.

 

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Item 6.    Selected Financial Data

 

The following selected consolidated financial data should be read in conjunction with Cymer’s consolidated financial statements and notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”  which are included elsewhere in this report.

 

		Years ended December 31,
		1998			1999			2000			2001			2002
					(in thousands, except per share data)
Consolidated Statements of Income Data:
Revenues:
Product sales		$	184,828		$	220,051		$	366,280		$	267,003		$	287,995
Other		313			399			1,180			2,441			2,165
Total revenues		185,141			220,450			367,460			269,444			290,160
Costs and expenses:
Cost of product sales		125,713			143,105			187,579			151,340			162,095
Research and development		30,152			34,518			45,433			58,368			73,714
Sales and marketing		14,528			16,742			20,098			19,617			17,153
General and administrative		9,487			13,101			22,510			18,990			18,212
Amortization of goodwill and intangible assets		—			—			108			3,148			160
Purchased in-process research and development		—			—			—			5,050			—
Total costs and expenses		179,880			207,466			275,728			256,513			271,334
Operating income		5,261			12,984			91,732			12,931			18,826
Other expense - net		(3,568		)	(3,748		)	(1,230		)	(1,447		)	(1,914		)
Income before income tax provision (benefit) and minority interest		1,693			9,236			90,502			11,484			16,912
Income tax provision (benefit)		(1,250		)	—			26,246			2,871			2,706
Minority interest		(420		)	(663		)	(484		)	(368		)	(447		)
Income before extraordinary item and cumulative change in accounting principle		2,523			8,573			63,772			8,245			13,759
Extraordinary gain (loss) on debt extinguishment, net of taxes		—			—			—			610			(163		)
Cumulative change in accounting principle, net of taxes		—			—			—			(370		)	—
Net income		$	2,523		$	8,573		$	63,772		$	8,485		$	13,596
Basic earnings per share		$	0.09		$	0.31		$	2.19		$	0.28		$	0.41
Weighted average common shares outstanding		28,226			27,907			29,113			30,474			33,317
Diluted earnings per share		$	0.09		$	0.29		$	2.07		$	0.27		$	0.39
Weighted average common and dilutive potential common shares outstanding		29,566			29,640			30,758			31,108			34,712

 

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		December 31,
		1998			1999			2000			2001			2002
					(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	53,130		$	75,765		$	79,678		$	111,195		$	196,643
Working capital		198,645			213,121			278,546			257,851			351,127
Total assets		342,173			404,825			501,562			483,346			766,887
Total long-term debt		175,924			175,771			175,510			151,772			255,154
Treasury stock		(24,871		)	(24,871		)	(24,871		)	(24,871		)	—
Stockholders’ equity		106,531			126,893			212,968			254,814			412,334

 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Statements in this annual report on Form 10-K 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, and may contain words such as “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 in this Item 7 and under the caption  “Risks and Uncertainties That May Affect Results” and  elsewhere in this annual report on Form 10-K.

 

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 in this annual report on Form 10-K.

 

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:

 

		Years ended December 31
		2000		2001		2002
Revenues:
Product sales		99.7	%	99.1	%	99.2	%
Other		0.3		0.9		0.8
Total revenues		100.0	%	100.0	%	100.0	%
Cost and expenses:
Cost of product sales		51.0		56.2		55.9
Research and development		12.4		21.6		25.4
Sales and marketing		5.5		7.3		5.9
General and administrative		6.2		7.0		6.3
Amortization of goodwill and intangible assets		—		1.2		—
Purchased in-process research and development		—		1.9		—
Total costs and expenses		75.1		95.2		93.5
Operating income		24.9		4.8		6.5

 

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		Years ended December 31,
		2000		2001		2002
Other expense – net		(0.3	)	(0.5	)	(0.7	)
Income before income tax provision and minority interest		24.6		4.3		5.8
Income tax provision		7.1		1.1		1.0
Minority interest		(0.1	)	(0.1	)	(0.1	)
Income before extraordinary item and cumulative change in accounting principle		17.4		3.1		4.7
Extraordinary gain (loss) on debt extinguishment, net of taxes		—		—		—
Cumulative change in accounting principle, net of taxes		—		—		—
Net income		17.4	%	3.1		4.7	%
Gross margin on product sales		48.8	%	43.3	%	43.7	%

 

YEARS ENDED DECEMBER 31, 2001 AND 2002

 

Revenues.   Cymer’s revenues consist of product sales, which include sales of light source systems, consumable and spare parts, upgrades, service, service contracts, and training. Other revenues include revenue from funded development activities performed for customers and government contracts and license agreements.  Revenue from light source system 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. Revenue from consumables and spare parts sales is recognized at the point that legal title passes to the customer, which is generally upon shipment from the Cymer facility.  Service and training revenue is generally recognized at the time that the services are rendered or the training class is completed.  Service contracts revenues are generally recorded to revenue ratably over the life of the contract or per the specific terms of the agreement. Funded development contracts are accounted for on the percentage-of-completion method based on the relationship of costs incurred to total estimated costs.  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 8% from $267.0 million in 2001 to $288.0 million in 2002, primarily due to a 27% increase in the ASP of Cymer’s light source systems and an increase in consumable and spare parts, service revenue and other non-system products.   A total of 335 light source systems were sold in 2001 at an ASP of $566,000, compared to 282 systems sold in 2002 at an ASP of $720,000.  On a foreign  currency adjusted basis, the ASP for 2001 was $578,000 compared to $716,000 for 2002.  This increase in foreign currency adjusted ASP from period to period reflects increased sales in 2002 of Cymer’s NanoLith-7000 and ELS-7000 series products which have higher ASPs compared to the ELS-6000/6010 KrF series products sold in 2001.  Sales of consumable and spare parts and service products increased 10% from $77.5 million to $84.9 million for the years ended December 31, 2001 and 2002, respectively.  The increase in this type of product sales was due to slightly increased utilization of Cymer’s deep ultraviolet (“DUV”) light sources by chipmakers and an increased installed base in the year ended December 31, 2002.  Revenues from funded development projects were $2.4 million and $2.2 million for the years ended December 31, 2001 and 2002, respectively.

 

Cymer’s backlog at December 31, 2001 was $97.1 million as compared to $100.1 million at December 31, 2002.  Bookings for the year ended December 31, 2001 and December 31, 2002 were $216.6 million and $274.2 million, respectively.  This increase was primarily due to bookings of Cymer’s higher priced ELS-7000 and XLA 100 product in 2002.  Cymer installed 356 light sources at chipmakers and other end-users during 2001 as compared to 284 light sources installed during 2002.

 

17

 

Cymer’s sales are generated primarily by shipments to customers in Japan, the Netherlands, and the United States.  Approximately 85% and 90% of Cymer’s sales in 2001 and 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 41% and 43% of revenues in 2001 and 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.

 

Sales to Cymer’s three largest customers, ASM Lithography, Canon, and Nikon, amounted to 32%, 15% and 29%, respectively, of total revenue for the year ended December 31, 2001, and 32%, 21% and 24%, respectively, of total revenue for the year ended December 31, 2002.

 

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).  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.

 

For the year ended December 31, 2001, only those foreign currency forward exchange contracts meeting the transition period requirements under SFAS 133 and contracts entered into after July 1, 2001 were included in cost of product sales in the consolidated statements of income. For the year ended December 31, 2002, Cymer qualified for hedge accounting treatment under SFAS 133 and was able to record the net effect of 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 a gain in cost of sales on such contracts of $2.3 million and a net loss of $992,000 for the years ended December 31, 2001 and 2002, respectively.

 

Although the number of light source systems recognized to revenue was lower in 2002 as compared to 2001, the cost of product sales increased 7% from $151.3 million in 2001 to $162.1 million in 2002.  This increase from period to period is primarily due to the higher material cost of the ELS-7000 and NanoLith 7000 light source systems and the higher warranty provisions required for the early shipments of these newer model light sources in 2002.  In addition, net losses in 2002 as compared to net gains in 2001 on the foreign currency forward exchange contracts entered into by Cymer’s Japan subsidiary contributed to this overall cost of sales increase.  These cost of product increases during 2002 were partially offset by increased manufacturing efficiencies in 2002.

 

The gross margin on product sales was 43.3% and 43.7% for 2001 and 2002, respectively. The increase in gross margin in 2002 as compared to 2001 is primarily due to the building of inventories in 2002 in preparation for the initial manufacturing of the XLA 100 product.  With the XLA 100 production starting in the fourth quarter of 2002, production activities were higher than normal in the earlier quarters of 2002 to accommodate the ramp of this new product.  Although there were fewer light source system unit sales during 2002 as compared to 2001, production levels were much higher, resulting in increased manufacturing efficiencies and higher ending inventory balances in 2002.  A portion of the dollar increase in inventory is due to the initial material build requirements and higher overall cost of the XLA 100 product.  For the twelve months ended December, 2001, Cymer’s  inventory balances decreased by $15.2 million from December 31, 2000, whereas inventory balances increased by $38.3 million during the twelve

 

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months ended December 31, 2002.

 

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 26% from $58.4 million for the year ended December 31, 2001 to $73.7 million for the year ended December 31, 2002, due primarily to Cymer’s most recent product development effort, the MOPA platform, or XL series.  Cymer shipped the first light source system that utilizes the MOPA platform, the XLA 100, in February 2003.  Cymer also continued to invest in EUV technology and the continuing engineering of the ELS-7000 and NanoLith-7000 products.  As a percentage of total revenues, such expenses increased from 21.6% to 25.4%, primarily due to MOPA platform development effort.  We do not expect this upward trend to continue and anticipate that R&D spending on DUV systems will begin to decrease in absolute dollars as the productization of the XLA 100 approaches completion.

 

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 13% from $19.6 million for the year ended December 31, 2001 to $17.2 million for the year ended December 31, 2002, due primarily to increased operational efficiencies as well as heightened cost controls made necessary by the continuing downturn in the semiconductor industry.  As a percentage of total revenues, such expenses decreased from 7.3% to 5.9%.

 

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 4% from $19.0 million for the year ended December 31, 2001 to $18.2 million for the year ended December 31, 2002, due primarily to ongoing improvements in operational efficiencies and increased cost controls in 2002 necessitated by overall industry conditions.  As  a percentage of total revenues, such expenses decreased from 7.0% to 6.3%.

 

Amortization of goodwill and intangible assets. Amortization of goodwill and intangible assets totaled $3.1 million for the year ended December 31, 2001 as compared to $160,000 for the year ended December 31, 2002. This decrease in amortization of goodwill and intangible assets was primarily due to the adoption of SFAS 142 on January 1, 2002 which discontinued the amortization of goodwill and intangible assets with indefinite useful lives associate with previous purchase business combinations.  In 2001, Cymer amortized amounts associated with the goodwill and intangible assets resulting from the acquisition of ACX (now known as Cymer Boston) in February 2001.  In 2002, Cymer only amortized intangible assets with definite lives per SFAS 142.

 

Purchased In-Process Research and Development.  Purchased in-process research and development  expenses  consist of  costs associated with the acquisition of a company and its in-process research and development projects.  Cymer incurred $5.1 million of such expenses during the year ended December 31, 2001 compared to no such expenses for the year ended December 31, 2002. These expenses for the year ended December 31, 2001 were due to the acquisition of  ACX and represented the fair value of  ACX development projects associated with the application of its technology to the semiconductor market.  As of the date of the  ACX 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.

 

Other 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 $1.4 million and $1.9 million for the years ended December 31, 2001 and 2002, respectively.  The increase in net other expense was primarily due to increased interest expense and foreign exchange losses during the year which were almost completely offset by increased interest income. Although the interest rate on the 2002 Notes is lower than the blended rate on the 1997 Notes, interest expense was higher in 2002 as compared to 2001 as a result of additional interest from both the 1997 Notes and 2002 Notes being outstanding in early 2002. The increased interest income in 2002 was primarily due to higher cash balances, which resulted from the bond transactions, which occurred in the first quarter of 2002.  These transactions included the private placement of the 2002 Notes in February 2002 and the redemption of the 1997 Notes that were not converted to common stock prior to the March 25, 2002 redemption date.  Foreign currency exchange gains totaled $877,000, interest income totaled $8.3 million and interest expense totaled $10.6 million for the year ended December 31, 2001, compared to foreign currency exchange losses of $723,000, interest income of $10.1 million and interest expense of $11.2 million for the year ended December 31, 2002.

 

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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 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 light source system is received by Cymer’s Japanese subsidiary is reclassified to cost of sales on the date that the light source system 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 $2.9 million and $2.7 million for the years ended December 31, 2001 and 2002, respectively, reflects an annual effective rate of 25% and 16%, respectively.  The decrease in the annual effective tax rate during the year ended December 31, 2002 from 25% to 16% is primarily attributable to tax benefits from U.S. export incentive programs and research and development and manufacturing investment credits. 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.

 

YEARS ENDED DECEMBER 31, 2000 AND 2001

 

Revenues.   Product sales decreased 27% from $366.3 million in 2000 to $267.0 million in 2001, primarily due to decreased sales of light source systems, spares and consumables and service products. This decrease in sales from period to period was due to the downturn in the semiconductor industry which caused both a lower demand for light source systems and a decreased demand for consumables and spare parts as a result of lower utilization of Cymer’s installed base of light sources.  A total of 494 light source systems were sold in 2000 at an ASP of $518,000, compared to 335 systems sold in 2001 at an ASP of $566,000.  The higher ASP in 2001 helped to offset the lower quantity of light source systems sold during the year and was the result of Cymer’s continued introduction of newer model light sources which command higher prices.  Revenues from funded development projects increased from $1.2 million in 2000 to $2.4 million in 2001.  This increase from period to period was primarily due to additional government contract revenues generated through the acquisition of  ACX, now known as Cymer Boston, during the first quarter of 2001.  During 2001, the majority of revenues generated by Cymer Boston were from funded development contracts and accounted for $1.9 million of the total $2.4 million funded development projects revenue for the year ended December 31, 2001.

 

Approximately 81% and 85% of Cymer’s sales for the years ended December 31, 2000 and 2001, respectively, were derived from customers outside the United States.  Revenues from Japanese customers, generated primarily by Cymer’s wholly-owned Japanese subsidiary, accounted for 42% and 41% of revenues for the years ended December 31, 2000 and 2001, respectively.

 

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Sales to Cymer’s three largest customers, ASM Lithography, Canon, and Nikon amounted to 33%, 19% and 28%, respectively, of total revenue for the year ended December 31, 2000 and 32%, 15% and 29%, respectively, of total revenue for the year ended December 31, 2001.

 

Cost of Product Sales.  Cost of product sales decreased 19% from $187.6 million in 2000 to $151.3 million in 2001 due primarily to the decrease in sales of products from period to period. The gross margin on these sales decreased from 48.8% in 2000 to 43.3% in 2001. This decrease in gross margin was primarily the result of lower product sales absorbing both higher fixed manufacturing costs and worldwide field support infrastructure costs offset by continued operational efficiencies.

 

For the year ended December 31, 2000, net gains or losses from foreign currency forward exchange contracts were included in cost of product sales in the consolidated statements of income as the related sales to the third party were recognized.  For the year ended December 31, 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.  Cymer recognized net gains in cost of sales on such contracts of $3.2 million and $2.3 million for the years ended December 31, 2000 and 2001, respectively.

 

Research and Development.   Research and development expenses increased 29% from $45.4 million in 2000 to $58.4 million in 2001, due primarily to increased development efforts associated with ArF light source development which includes Cymer’s NanoLith 7000 light source and development efforts associated with MOPA product platform and EUV technology. Research and evelopment expenses associated with the NanoLith 7000 light source increased during the second half of 2001 as it moved into the production phase and initial units were shipped to customers during the third quarter of 2001.  Research and development expenses were also higher during 2001 due to continued investment in next generation product development to keep pace with technological change in industry requirements as well as the additional research and development expenses associated with Cymer Boston and its ACX technology. As a percentage of total revenues, such expenses increased from 12.4% to 21.6% due to both decreased revenues and increased spending from period to period.

 

Sales and Marketing.   Sales and marketing expenses decreased 2% from $20.1 million in 2000 to $19.6 million in 2001 due primarily to increased operational efficiencies as well as heightened cost controls as a result of the continued downturn in the semiconductor industry during 2001.  As a percentage of total revenues, such expenses increased from 5.5% to 7.3% due to decreased revenues.

 

General and Administrative.    General and administrative expenses decreased 16% from $22.5 million in 2000 to $19.0 million in 2001. This was due primarily to ongoing improvements in operational efficiencies and increased cost controls for the period due to industry conditions.  As a percentage of total revenues, such expenses increased from 6.2% to 7.0% due to  decreased revenues.

 

Amortization of goodwill and intangible assets. Amortization of goodwill and intangible assets totaled $108,000 for the year ended December 31, 2000 compared to $3.1 million for the year ended December 31, 2001. The increase in amortization of goodwill and intangible assets was primarily attributable to the amortization of goodwill of $2.9 million related to the acquisition of Cymer Boston in early 2001.

 

Purchased In-Process Research and Development.  Purchased in-process research and development  expenses  consist of  costs associated with the acquisition of Cymer Boston and its in-process research and development projects in 2001.  Cymer incurred $5.1 million of such expenses during the year ended December 31, 2001 related to this acquisition, compared to no such expenses for the year ended December 31, 2000.

 

Other Income (Expense)- net.  Net other expense totaled $1.2 million in 2000 compared to $1.4 million in 2001. The increase in net other expense from period to period is primarily due to lower cash and investment balances as well as lower yields on those investments.  This was offset by gains associated w