**UNITED STATES SECURITIES ANDEXCHANGE 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 March 31, 2003**                                                                                                                                                                                                                              |
|                               |                                                                                                                                                                                                                                                                            |
| **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**                                                                         |   | **33-0175463**                       |
|------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization)                    |   | (I.R.S. Employer Identification No.) |
|                                                                               |   |                                 |
| **16750 Via Del Campo Court, San Diego, CA**                                       |   | **92127**                            |
| (Address of principal executive offices)                                           |   | (Zip Code)                           |
|                                                                               |   |                                 |
| Registrant’s telephone number, including area code:                           |   | **(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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  ý      No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).  Yes   ý      No  o

 

The number of shares of Common Stock, with $0.001 par value,outstanding on May 8, 2003 was 34,524,849.

 

 

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**CYMER,INC.**

 

**FORM10-Q**

 

**Forthe Quarter Ended March 31, 2003**

 

**INDEX**

 
| **PART I.**        | **FINANCIAL INFORMATION**                                                                   |
|--------------------|---------------------------------------------------------------------------------------------|
|               |                                                                                        |
| ITEM 1.            | Consolidated Financial Statements (unaudited)                                               |
|               |                                                                                        |
|               | Consolidated Balance Sheets as of December 31, 2002 and March 31,  2003                     |
|               |                                                                                        |
|               | Consolidated Statements of Income for the  three months ended March 31, 2002 and 2003       |
|               |                                                                                        |
|               | Consolidated Statements of Cash Flows for  the three months ended March 31, 2002 and 2003   |
|               |                                                                                        |
|               | Notes to Consolidated Financial Statements                                                  |
|               |                                                                                        |
| ITEM 2.            | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|               |                                                                                        |
| ITEM 3.            | Quantitative and Qualitative Disclosures  About Market Risk                                 |
|               |                                                                                        |
| ITEM 4.            | Controls and Procedures                                                                     |
|               |                                                                                        |
| **PART II.**       | **OTHER INFORMATION**                                                                       |
|               |                                                                                        |
| ITEM 1.            | Legal  Proceedings                                                                          |
|               |                                                                                        |
| ITEM 2.            | Changes  in Securities and Use of Proceeds                                                  |
|               |                                                                                        |
| ITEM 3.            | Defaults  upon Senior Securities                                                            |
|               |                                                                                        |
| ITEM 4.            | Submission  of Matters to a Vote of Security Holders                                        |
|               |                                                                                        |
| ITEM 5.            | Other  Information                                                                          |
|               |                                                                                        |
| ITEM 6.            | Exhibits  and Reports on Form 8-K                                                           |
|               |                                                                                        |
| **SIGNATURE PAGE** |
|               |
| **CERTIFICATIONS** |

 

2

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM1.  Financial Statements**

 

**CYMER,INC.**

**CONSOLIDATEDBALANCE SHEETS****(UNAUDITED)**

**(Inthousands, except share data)**

 
|                                                                                                                                                                               |   | **December  31,  2002** |       | **March 31,  2003** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|---------------------|------------|
| **ASSETS**                                                                                                                                                                         |   |                    | ** ** |                | ** ** |
|                                                                                                                                                                               |   |                    |       |                |       |
| CURRENT ASSETS:                                                                                                                                                                    |   |                    |       |                |       |
| Cash and cash equivalents                                                                                                                                                          |   | $                       | 196,643    |                | $          | 168,242 |   |
| Short-term investments                                                                                                                                                             |   | 71,249                  |       | 80,011              |       |
| Accounts receivable – net                                                                                                                                                     |   | 52,341                  |       | 65,602              |       |
| Inventories                                                                                                                                                                        |   | 100,119                 |       | 104,363             |       |
| Deferred income taxes                                                                                                                                                              |   | 20,041                  |       | 20,041              |       |
| Prepaid expenses and other assets                                                                                                                                                  |   | 6,029                   |       | 5,477               |       |
| Total current assets                                                                                                                                                               |   | 446,422                 |       | 443,736             |       |
|                                                                                                                                                                               |   |                    |       |                |       |
| PROPERTY AND EQUIPMENT – NET                                                                                                                                                  |   | 112,209                 |       | 131,985             |       |
| LONG-TERM INVESTMENTS                                                                                                                                                              |   | 159,029                 |       | 138,943             |       |
| DEFERRED INCOME TAXES                                                                                                                                                              |   | 20,553                  |       | 20,742              |       |
| GOODWILL –   NET                                                                                                                                                         |   | 10,597                  |       | 10,597              |       |
| INTANGIBLE ASSETS – NET                                                                                                                                                       |   | 8,565                   |       | 8,203               |       |
| OTHER ASSETS                                                                                                                                                                       |   | 9,512                   |       | 9,334               |       |
|                                                                                                                                                                               |   |                    |       |                |       |
| TOTAL ASSETS                                                                                                                                                                       |   | $                       | 766,887    |                | $          | 763,540 |   |
|                                                                                                                                                                               |   |                    |       |                |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                      |   |                    |       |                |       |
|                                                                                                                                                                               |   |                    |       |                |       |
| CURRENT LIABILITIES:                                                                                                                                                               |   |                    |       |                |       |
| Accounts payable                                                                                                                                                                   |   | $                       | 26,499     |                | $          | 26,249 |   |
| Accrued warranty and installation                                                                                                                                                  |   | 30,078                  |       | 26,050              |       |
| Accrued payroll and benefits                                                                                                                                                       |   | 7,334                   |       | 6,507               |       |
| Foreign currency forward exchange contracts                                                                                                                                        |   | 907                     |       | 571                 |       |
| Accrued interest                                                                                                                                                                   |   | 3,300                   |       | 1,085               |       |
| Income taxes payable                                                                                                                                                               |   | 11,321                  |       | 9,725               |       |
| Revolving loan                                                                                                                                                                     |   | 6,667                   |       | 10,003              |       |
| Accrued and other current liabilities                                                                                                                                              |   | 9,189                   |       | 11,736              |       |
| Total current liabilities                                                                                                                                                          |   | 95,295                  |       | 91,926              |       |
|                                                                                                                                                                               |   |                    |       |                |       |
| CONVERTIBLE SUBORDINATED NOTES                                                                                                                                                     |   | 250,000                 |       | 250,000             |       |
| OTHER LIABILITIES                                                                                                                                                                  |   | 5,154                   |       | 5,356               |       |
| MINORITY INTEREST                                                                                                                                                                  |   | 4,104                   |       | 4,418               |       |
|                                                                                                                                                                               |   |                    |       |                |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                      |   |                    |       |                |       |
|                                                                                                                                                                               |   |                    |       |                |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                         |   |                    |       |                |       |
| Preferred stock – authorized 5,000,000  shares; $.001 par value, no shares issued or outstanding                                                                              |   | —                  |       | —              |       |
| Common stock – $.001 par value per share;  100,000,000 shares authorized; 34,227,000 and 34,353,000 shares outstanding  at December 31, 2002 and March 31, 2003, respectively |   | 34                      |       | 34                  |       |
| Additional paid-in capital                                                                                                                                                         |   | 302,501                 |       | 305,364             |       |
| Unearned compensation                                                                                                                                                              |   | (2,358                  | )          | (2,081              | )          |
| Accumulated other comprehensive loss                                                                                                                                               |   | (3,429                  | )          | (3,701              | )          |
| Retained earnings                                                                                                                                                                  |   | 115,586                 |       | 112,224             |       |
| Total stockholders’ equity                                                                                                                                                    |   | 412,334                 |       | 411,840             |       |
|                                                                                                                                                                               |   |                    |       |                |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                    |   | $                       | 766,887    |                | $          | 763,540 |   |

** **

See Notes to Unaudited Consolidated Financial Statements.

 

3

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**CYMER,INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS****(UNAUDITED)**

**(Inthousands, except per share data)**

 
|                                                             |   | **For the  three months ended  March 31,** |   |
|------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                             |   | **2002**                                   |   | **2003** |   |
|                                                             |   |                                       |   |   |   |
| REVENUES:                                                        |   |                                       |   |   |   |
| Product sales                                                    |   | $                                          | 61,449 |   | $ | 67,336 |   |
| Other                                                            |   | 534                                        |   | 263 |   |
| Total revenues                                                   |   | 61,983                                     |   | 67,599 |   |
|                                                             |   |                                       |   |   |   |
| COSTS AND EXPENSES:                                              |   |                                       |   |   |   |
| Cost of product sales                                            |   | 32,480                                     |   | 42,870 |   |
| Research and development                                         |   | 14,986                                     |   | 17,524 |   |
| Sales and marketing                                              |   | 3,684                                      |   | 4,094 |   |
| General and administrative                                       |   | 3,686                                      |   | 5,773 |   |
| Amortization of intangibles                                      |   | 40                                         |   | 40 |   |
| Loss on debt extinguishment                                      |   | 163                                        |   | — |   |
|                                                             |   |                                       |   |   |   |
| Total costs and expenses                                         |   | 55,039                                     |   | 70,301 |   |
|                                                             |   |                                       |   |   |   |
| OPERATING INCOME (LOSS)                                          |   | 6,944                                      |   | (2,702 | ) |
|                                                             |   |                                       |   |   |   |
| OTHER INCOME (EXPENSE):                                          |   |                                       |   |   |   |
| Foreign currency exchange gain (loss) – net                 |   | 157                                        |   | (360 | ) |
| Interest and other income                                        |   | 1,956                                      |   | 2,489 |   |
| Interest and other expense                                       |   | (3,353                                     | )      | (2,475 | ) |
|                                                             |   |                                       |   |   |   |
| Total other expense – net                                   |   | (1,240                                     | )      | (346 | ) |
|                                                             |   |                                       |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAX PROVISION AND  MINORITY INTEREST |   | 5,704                                      |   | (3,048 | ) |
|                                                             |   |                                       |   |   |   |
| INCOME TAX PROVISION                                             |   | 1,584                                      |   | — |   |
| MINORITY INTEREST                                                |   | (32                                        | )      | (314 | ) |
|                                                             |   |                                       |   |   |   |
| NET INCOME (LOSS)                                                |   | $                                          | 4,088  |   | $ | (3,362 | ) |
|                                                             |   |                                       |   |   |   |
| EARNINGS (LOSS) PER SHARE:                                       |   |                                       |   |   |   |
| Basic earnings (loss) per share                                  |   | $                                          | 0.13   |   | $ | (0.10 | ) |
| Weighted average common shares outstanding  - basic              |   | 31,282                                     |   | 34,306 |   |
|                                                             |   |                                       |   |   |   |
| Diluted earnings (loss) per share                                |   | $                                          | 0.12   |   | $ | (0.10 | ) |
| Weighted average common shares outstanding  - diluted            |   | 33,142                                     |   | 34,306 |   |

 

See Notes to Unaudited Consolidated FinancialStatements.

 

4

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**CYMER,INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS****(UNAUDITED)**

**(Inthousands)**

 
|                                                                                                |   | **For the  three months ended  March 31,** |    |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                                |   | **2002**                                   |    | **2003** |   |
|                                                                                                |   |                                       |    |   |   |
| OPERATING ACTIVITIES:                                                                               |   |                                       |    |   |   |
| Net income (loss)                                                                                   |   | $                                          | 4,088   |   | $ | (3,362 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                                       |    |   |   |
| Extraordinary loss on debt extinguishment                                                           |   | 163                                        |    | — |   |
| Depreciation and amortization                                                                       |   | 6,105                                      |    | 7,974 |   |
| Non-cash stock-based compensation                                                                   |   | —                                     |    | 397 |   |
| Amortization of unearned compensation                                                               |   | 277                                        |    | 277 |   |
| Minority interest                                                                                   |   | 32                                         |    | 314 |   |
| Provision for deferred income taxes                                                                 |   | 5                                          |    | — |   |
| Loss on disposal or impairment of property  and equipment                                           |   | 173                                        |    | 194 |   |
| Change in assets and liabilities:                                                                   |   |                                       |    |   |   |
| Accounts receivable – net                                                                      |   | (7,601                                     | )       | (13,261 | ) |
| Income taxes receivable                                                                             |   | 2,024                                      |    | — |   |
| Foreign currency forward exchange contracts                                                         |   | (570                                       | )       | (57 | ) |
| Inventories                                                                                         |   | (8,415                                     | )       | (4,244 | ) |
| Prepaid expenses and other assets                                                                   |   | 163                                        |    | 303 |   |
| Accounts payable                                                                                    |   | 3,029                                      |    | (250 | ) |
| Accrued and other liabilities                                                                       |   | 764                                        |    | (4,128 | ) |
| Income taxes payable                                                                                |   | —                                     |    | (1,596 | ) |
|                                                                                                |   |                                       |    |   |   |
| Net cash provided by (used in) operating  activities                                                |   | 237                                        |    | (17,439 | ) |
|                                                                                                |   |                                       |    |   |   |
| INVESTING ACTIVITIES:                                                                               |   |                                       |    |   |   |
| Acquisition of property and equipment                                                               |   | (3,547                                     | )       | (27,155 | ) |
| Purchases of investments                                                                            |   | (65,191                                    | )       | (25,321 | ) |
| Proceeds from sold or matured investments                                                           |   | 23,225                                     |    | 36,953 |   |
| Acquisition of minority interest                                                                    |   | (360                                       | )       | (180 | ) |
|                                                                                                |   |                                       |    |   |   |
| Net cash used in investing activities                                                               |   | (45,873                                    | )       | (15,703 | ) |
|                                                                                                |   |                                       |    |   |   |
| FINANCING ACTIVITIES:                                                                               |   |                                       |    |   |   |
| Net borrowings under revolving loan and  security agreements                                        |   | (22                                        | )       | 3,334 |   |
| Proceeds from issuance of common stock                                                              |   | 9,073                                      |    | 2,466 |   |
| Redemption of convertible subordinated  notes                                                       |   | (39,598                                    | )       | — |   |
| Issuance of convertible subordinated notes                                                          |   | 250,000                                    |    | — |   |
| Issuance of convertible subordinated notes  offering costs                                          |   | (7,799                                     | )       | — |   |
| Payments on capital lease obligations                                                               |   | (9                                         | )       | (13 | ) |
|                                                                                                |   |                                       |    |   |   |
| Net cash provided by financing activities                                                           |   | 211,645                                    |    | 5,787 |   |
|                                                                                                |   |                                       |    |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS                                       |   | 252                                        |    | (1,046 | ) |
|                                                                                                |   |                                       |    |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                               |   | 166,261                                    |    | (28,401 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                                   |   | 111,195                                    |    | 196,643 |   |
|                                                                                                |   |                                       |    |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                          |   | $                                          | 277,456 |   | $ | 168,242 |   |
|                                                                                                |   |                                       |    |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                                                  |   |                                       |    |   |   |
| Interest paid                                                                                       |   | $                                          | 5,777   |   | $ | 1,963 |   |
| Income taxes paid (refunded), net                                                                   |   | $                                          | (443    | ) | $ | 4,431 |   |
|                                                                                                |   |                                       |    |   |   |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH  INVESTING AND FINANCING ACTIVITIES:                            |   |                                       |    |   |   |
| Conversion of subordinated notes to equity                                                          |   | $                                          | 112,998 |   | — |   |

 

See Notes to UnauditedConsolidated Financial Statements.

 

5

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**CYMER,INC.**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**ThreeMonths Ended March 31, 2003**

**(Unaudited)**

 

**1.****              BASISOF PRESENTATION**

 

The accompanying consolidated financialinformation has been prepared by Cymer, Inc., and its wholly-owned andmajority-owned subsidiaries (collectively, “Cymer”), without audit, inaccordance with the instructions to Form 10-Q and therefore does not includeall information and footnotes necessary for a fair presentation of financialposition, results of operations and cash flows in accordance with accountingprinciples generally accepted in the United States of America.

 

*Principles ofConsolidation* – The consolidated financial statementsinclude the accounts of Cymer, Inc., its wholly-owned subsidiaries – CymerJapan, Inc. (“Cymer Japan”), Cymer Singapore Pte Ltd. (“Cymer Singapore”),Cymer B.V. in the Netherlands (“Cymer B.V.”), Cymer Southeast Asia, Inc., inTaiwan (“Cymer SEA”),  CymerSemiconductor Equipment Shanghai Co., Ltd, in the People’s Republic of China(“Cymer PRC”), and its majority-owned subsidiary, Cymer Korea, Inc. (“CymerKorea”).  Cymer, Inc. owns 75% of CymerKorea.  During 2002, Cymer Boston(formerly known as Active Control eXperts, Inc. or ACX) was a wholly-ownedsubsidiary of Cymer, Inc.  EffectiveJanuary 1, 2003, Cymer Boston was merged with and into Cymer, Inc.  Cymer sells its excimer light sources inJapan primarily through Cymer Japan. Cymer SEA, Cymer PRC, Cymer Singapore andCymer B.V. are field service offices for customers in those respectiveregions.  Cymer Korea includes manufacturing,refurbishment, field service, and administrative activities for thatregion.  All significant intercompanybalances have been eliminated in consolidation.

 

*Accounting Estimates* – The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results maydiffer from those estimates.

 

*Unaudited InterimFinancial Data* – In the opinion of management, theunaudited consolidated financial statements for the interim periods presentedreflect all adjustments, consisting only of normal recurring adjustments,necessary for a fair presentation of the financial position and results ofoperations as of and for such periods indicated.  These consolidated financial statements and notes hereto shouldbe read in conjunction with the consolidated financial statements and notesthereto included in Cymer’s Annual Report on Form 10-K for the year endedDecember 31, 2002.  Results for theinterim periods presented herein are not necessarily indicative of resultswhich may be reported for any other interim period or for the entire fiscalyear.

 

*Reclassifications –* Certain amounts in the prior yearconsolidated financial statements have been reclassified to conform to currentperiod presentation.

* *

Cymeradopted the provisions of Statement of Financial Accounting Standards No. 143(“SFAS No. 143”), “Accounting for Asset Retirement Obligations” on January 1,2003.  SFAS No. 143 addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. SFAS No.143 applies to tangible long-lived assets that have a legal obligationassociated with their retirement that results from the acquisition,construction or development or normal use of the asset. This standard iseffective for fiscal years beginning after June 15, 2002. Cymer has determinedthat the adoption of this statement did not have an impact on its financialcondition or results of operations.

 

Cymer adopted the provisions of Statement of Financial AccountingStandards No. 145 (“SFAS No. 145”), "Rescission of FASB Statements No. 4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"(“SFAS 145”) on January 1, 2003.  SFAS145 provides guidance on the classification of gains and losses from theextinguishment of debt and on the accounting for certain specified leasetransactions. Cymer reclassified the 2002 loss on extinguishment debt from anextraordinary loss on debt extinguishment to operating expenses in theconsolidated statement of operations.

 

Cymer adopted the provisions of Statement of Financial AccountingStandards No. 146 (“SFAS No. 146”), Accounting for Costs Associated with Exit or Disposal Activities, onJanuary 1, 2003.

 

6

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SFAS No. 146 revises theaccounting for specified employee and contract terminations that are part ofrestructuring activities and allows recognition of a liability for the costassociated with an exit or disposal activity only when the liability isincurred and can be measured at fair value. This statement applies on aprospective basis to exit or disposal activities that are initiated afterDecember 31, 2002.

 

Cymer adopted the initial recognition and measurement provisions ofFinancial Accounting Standards Board (“FASB”) Interpretation No. 45 (“FIN 45”),“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others”, on January 1, 2003, which applyon a prospective basis to guarantees issued or modified after December 31,2002. We adopted the disclosure provisions of FIN 45 during the quarter endedDecember 31, 2002.  In the ordinarycourse of business, Cymer is not subject to potential obligations underguarantees that fall within the scope of FIN 45 except for warranty provisions,intellectual property indemnification clauses that are contained within many ofour customer agreements and third-party bank guarantees for subsidiary officelines of credit. All these provisions give rise only to the disclosurerequirements prescribed by FIN 45.

 

Cymer adopted the interimdisclosure provisions of Statement of Accounting Standards No. 148, “Accountingfor Stock-Based Compensation - Transition and Disclosure”, during the quarterended March 31, 2003.  Related interimdisclosures are included in footnote 2.

** **

**2.****             ****STOCK-BASED COMPENSATION**

 

Cymer applies the intrinsic value-based method ofaccounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”,and related interpretations including Financial Accounting Standards Board(“FASB”) Interpretation No. 44, “Accountingfor Certain Transactions involving Stock Compensation an interpretation of APBOpinion No. 25”**to account for its stock optionplans.  Under this method,employee-based stock compensation expense is measured on the date of grant onlyif the then current market price of the underlying stock exceeded the exerciseprice and is recorded on a straight-line basis over the applicable vestingperiod. FASB Statement of Financial Accounting Standards No. 123 (“SFAS No.123”), “Accounting for Stock-BasedCompensation”*,* established accounting and disclosurerequirements using a fair value-based method of accounting for stock-basedemployee compensation plans.  As allowed by SFASNo. 123, Cymer has elected to continue to apply the intrinsic value-basedmethod of accounting described above, and has adopted the disclosurerequirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure”*.*

 

AsCymer accounts for its stock-based employee compensation plans under therecognition and measurement principles of APB Opinion No. 25,  and related interpretations, no stock-basedemployee compensation cost is reflected in net income (loss), as all optionsgranted under the plans had an exercise price equal to the market value of theunderlying common stock on the date of grant.

 

The following table compares net income (loss) per share as reported byCymer to the pro forma amounts that would be reported had compensation expensebeen recognized for Cymer’s stock-based compensation plans in accordance withSFAS No. 123, (in thousands, except per share amounts):

 

7

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|                                                                                                                                              |   | **Three months ended March 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                              |   | **2002**                         |   | **2003** |   |
|                                                                                                                                              |   |                             |   |   |   |
| Net income (loss), as reported                                                                                                                    |   | $                                | 4,088  |   | $ | (3,362 | ) |
| Deduct: Total stock-based employee compensation  expense determined under the fair value based method for all awards, net of  related tax effects |   | (8,187                           | )      | (8,253 | ) |
|                                                                                                                                              |   |                             |   |   |   |
| Pro forma net loss                                                                                                                                |   | $                                | (4,099 | ) | $ | (11,615 | ) |
|                                                                                                                                              |   |                             |   |   |   |
| Earnings (loss) per share:                                                                                                                        |   |                             |   |   |   |
| Basic – as reported                                                                                                                          |   | $                                | 0.13   |   | $ | (0.10 | ) |
| Basic – pro forma                                                                                                                            |   | $                                | (0.13  | ) | $ | (0.34 | ) |
|                                                                                                                                              |   |                             |   |   |   |
| Diluted – as reported                                                                                                                        |   | $                                | 0.12   |   | $ | (0.10 | ) |
| Diluted – pro forma                                                                                                                          |   | $                                | (0.13  | ) | $ | (0.34 | ) |

 

**3.****              EARNINGS(LOSS) PER SHARE**

 

*Earnings (Loss) Per Share* – Basic earnings (loss) per share (“EPS”)excludes dilution and is computed by dividing net income or loss attributableto common stockholders by the weighted-average of common shares outstanding forthe period.  Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock (convertible subordinated notes, warrants to purchase common stockand common stock options using the treasury stock method) were exercised orconverted into common stock.  Potentialdilutive securities are excluded from the diluted EPS computation in lossperiods as their effect would be anti-dilutive.

 

The following table sets forththe computation of diluted weighted average common and potential common sharesoutstanding for the three months ended March 31, 2002 and 2003 (in thousands):

 
|                                                  |   | **Three months ended March 31,** |   |
|-------------------------------------------------------|--------|----------------------------------|--------|
|                                                  |   | **2002**                         |   | **2003** |   |
|                                                  |   |                             |   |   |   |
| Weighted average  common shares outstanding - basic   |   | 31,282                           |   | 34,306 |   |
|                                                  |   |                             |   |   |   |
| Effect of  dilutive securities:                       |   |                             |   |   |   |
| Warrants                                              |   | 41                               |   | — |   |
| Options                                               |   | 1,819                            |   | — |   |
|                                                  |   |                             |   |   |   |
| Weighted  average common shares outstanding - diluted |   | 33,142                           |   | 34,306 |   |

 

For the three months ended March 31, 2002 and 2003, weighted averageoptions and warrants to purchase 536,000 and 3,738,000 shares of common stock,respectively, were outstanding but not included in the computation of dilutedearnings per share as their effect was anti-dilutive.  In addition, for the three months ended March 31, 2002 and 2003,weighted average common shares attributable to convertible subordinated notesof 5,313,452 and 5,000,000, respectively, were not included in the calculationof diluted earnings per share as their effect was also anti-dilutive.

 

8

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**4.****              INVENTORIES**

 

Inventories consist of the following as of December 31, 2002 andMarch 31, 2003 (in thousands):

 
|                                        |   | **December  31,  2002** |    | **March 31,  2003** |   |
|---------------------------------------------|--------|-------------------------|---------|---------------------|--------|
| INVENTORIES:                                |   |                    |    |                |   |
| Raw materials                               |   | $                       | 44,252  |                | $      | 45,230 |   |
| Work-in-progress                            |   | 32,718                  |    | 36,135              |   |
| Finished goods                              |   | 37,849                  |    | 36,858              |   |
| Allowance for excess and obsolete inventory |   | (14,700                 | )       | (13,860             | )      |
| Total                                       |   | $                       | 100,119 |                | $      | 104,363 |   |

** **

**5.****              REPORTINGCOMPREHENSIVE INCOME (LOSS)**

 

Comprehensive income includes net income(loss), effective unrealized gains and losses on foreign currency forwardexchange contracts, foreign currency translation adjustments, and unrealizedgains and losses on available-for-sale securities, which are recorded asshort-term and long-term investments in the accompanying consolidated balancesheets.

 

The following table summarizes the change in each component ofaccumulated other comprehensive loss for the three months ended March 31, 2003(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, 2002 |   | Balance           |   | $                                        | (5,272 | )                                                                            | $      | 2,342                                                                                              |   | $                                           | (499   | ) | $ | (3,429 | ) |
|              |   | Period net change |   | (618                                     | )      | 182                                                                          |   | 164                                                                                                |   | (272                                        | )      |
| March 31, 2003    |   | Balance           |   | $                                        | (5,890 | )                                                                            | $      | 2,524                                                                                              |   | $                                           | (335   | ) | $ | (3,701 | ) |

** **

**6.****              GOODWILLAND INTANGIBLE ASSETS**

 

As of the date of adoption of Statement ofFinancial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and OtherIntangible Assets” on January 1, 2002, Cymer had unamortized goodwill in theamount of $9.8 million and unamortized identifiable intangible assets,excluding acquired patents, in the amount of $1.1 million,  all of which were subject to the transitionprovisions of SFAS No 142.

 

As of December 31, 2002 and March 31, 2003,the components of intangible assets acquired in prior purchase businesscombinations were as follows (in thousands):

 
|                                   |   | **December 31, 2002**      |   | **March 31, 2003**            |   |
|----------------------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                                   |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                                   |   |                       |   |                          |   |   |   |   |   |
| Amortized  intangible assets:          |   |                       |   |                          |   |   |   |   |   |
| Existing  technology - ACX acquisition |   | $                          | 640    |                          | $      | 300 |   | $ | 640 |   | $ | 340 |   |
|                                   |   |                       |   |                          |   |   |   |   |   |
| Unamortized  intangible assets:        |   |                       |   |                          |   |   |   |   |   |
| Goodwill                               |   | $                          | 13,713 |                          | $      | 3,116 |   | $ | 13,713 |   | $ | 3,116 |   |

 

9

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The above table only includes intangibleassets associated with prior purchase business combinations.  Also included in intangible assets – net onthe accompanying balance sheets are amounts associated with patents which wereacquired in 2001.  As of December 31,2002 and March 31, 2003, the net carrying amount of these patents was $8.2million and $7.9 million, respectively.

 

Aggregate amortization expense was $40,000 for each of the three monthsended March 31, 2002 and 2003.  As ofMarch 31, 2003, future estimated amortization expense is expected to be as follows(in thousands):

 

|                                 |   | **Future  Amortization** |   |
|--------------------------------------|--------|--------------------------|--------|
|                                 |   |                     |   |
| Nine months  ended December 31, 2003 |   | $                        | 120    |   |
| Year ended  December 31, 2004        |   | $                        | 160    |   |
| Year ended  December 31, 2005        |   | $                        | 20     |   |

 

**7.****              GUARANTEES**

 

Cymer adopted the disclosure provisions of FIN 45, during the quarterended December 31, 2002 and has adopted the recognition and measurementprovisions as required after December 31, 2002.  FIN No. 45 provides expanded accounting guidance surroundingliability recognition and disclosure requirements related to guarantees, asdefined by this Interpretation.

 

In the ordinary course of business, Cymer is not subject to potentialobligations under guarantees that fall within the scope of FIN No. 45,except for standard warranty provisions associated with product sales, indemnificationprovisions related to intellectual property that are contained within many ofits customer agreements, and third-party bank guarantees for subsidiary officelines of credit.  All of theseprovisions give rise only to the disclosure requirements prescribed by FIN No.45.

 

Product Warranties – Warranty provisions contained withinCymer’s customer agreements are generally consistent with those prevalent inthe semiconductor equipment industry. The warranty period and terms varyby light source model.  In general, thelight source system warranty period ranges from 17 to 26 months aftershipment.  Cymer also warrantsconsumables and spare parts sold to its customers and the coverage periodvaries by spare part type as some types include time-based warranty periods andothers include usage-based warranty periods. On average, the warranty period for consumables and spare parts isapproximately 6 months from the date of shipment.  Cymer records a provision for warranty for all products which isincluded in cost of product sales in the consolidated statements of operationsand is recorded at the time that the related revenue is recognized. Thewarranty provision for light source systems is determined by using a financialmodel which takes into consideration actual historical expenses and potentialrisks associated with Cymer’s different light source system models. Thisfinancial model is then used to calculate the future probable expenses relatedto warranty and the required level of the warranty provision.  The risk levels used within this model arereviewed and updated as risk levels change by model over its product lifecycle. The warranty provision for consumables and spares is determined by usingactual historical data.  For both lightsource systems and spares, if actual warranty expenditures differ substantiallyfrom Cymer’s estimates, revisions to the warranty provision would berequired.  Actual warranty expendituresare recorded against the warranty provision as they are incurred.

 

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The followingtable summarizes information related to Cymer’s warranty provision for thethree months ended March 31, 2003 (in thousands):

 
| Balance, January 1, 2003                                                                          |   | $      | 29,600 |   |
|---------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Liabilities accrued for warranties issued  during the quarter, net of adjustments and expirations |   | (531   | ) (1)  |
| Warranty expenditures recorded during the  quarter                                                |   | (3,469 | )      |
| Balance, March 31, 2003                                                                           |   | $      | 25,600 |   |

 

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(1)  Included in this amount are adjustments to existingwarranty reserves as a result of normal recurring updates made to the riskfactors used in the warranty model during the first quarter of 2003.

 

IntellectualProperty Indemnifications – Cymer includes intellectual propertyindemnification clauses within its general terms and conditions with itscustomers and the general purchase agreements with its three major customers,ASM Lithography, Canon, and Nikon.  Ingeneral, these indemnification provisions provide that Cymer will defend itscustomers against any infringement claims that arise related to Cymer’spatents.  Under the indemnificationclauses, Cymer will pay all costs and damages, including attorney’s fees,associated with such settlements or defenses, provided that the customerfollows specific procedures for notifying Cymer of such claims and allows Cymerto manage the settlement proceedings. Due to the nature of theseindemnification provisions, they are indefinite and extend beyond the term ofthe actual customer agreements.

 

Anindemnification provision is also included in the contract manufacturingagreement with Seiko, which was terminated effective March 31, 2003.  As with Cymer’s indemnification provisionson intellectual property, Cymer will continue to honor this indemnification clausewithin the agreement even after its termination.  Seiko and at least one Japanese customer have been notified thatCymer’s light source systems in Japan may infringe certain Japanesepatents.  Cymer believes, based upon theadvice of counsel, that Cymer’s products do not infringe any valid claim of theasserted patents or that it is entitled to prior use claims in Japan.

 

Guarantees onSubsidiary Debt – Currently, Cymer is party to a Parent Guarantee associatedwith a revolving Loan Agreement held by Cymer Japan. This guarantee is betweena commercial bank in the United States and Cymer.  The Parent Guarantee was entered into in 2001 in order toestablish a banking relationship between this commercial bank and Cymer Japan.  Per the terms of the Parent Guarantee, Cymerguarantees payment of any obligations under the revolving loan agreement in theevent that Cymer Japan cannot make such payments due or defaults on theloan.  The maximum amount that CymerJapan can borrow under this revolving loan agreement is the yen-denominatedequivalent of U.S. $20 million. To date, Cymer Japan has made all payments perthe terms of the Loan Agreement and thus, Cymer has not incurred any guarantorobligations under the Parent Guarantee. Since Cymer Japan is a wholly-owned subsidiary of Cymer and Cymer Japan recordsthe revolving loan outstanding balance as a liability on its financialstatements, the carrying amount of the liability is included in theconsolidated balance sheets. As of March 31, 2003, the outstanding balances onthe revolving loans were $10.0 million.

 

**8.****              CONTINGENCIESAND COMMITMENTS**

 

Cymer is party to legal actions in the normalcourse of business.  Based in part onthe advice of legal counsel, management does not expect the outcome of legalaction in the normal course of business to have a material impact on thefinancial position or results of operations of Cymer.

 

Cymer’s former Japanese manufacturingpartner, Seiko, and one of Cymer’s Japanese customers have been notified thatCymer’s light source systems in Japan may infringe certain Japanese patentsheld by another Japanese company.  Cymerhas agreed to indemnify its former Japanese manufacturing partner and itscustomers against patent infringement claims under certain circumstances, evenafter the termination date of the contract manufacturing agreement.  Cymer believes, based upon the advice ofcounsel, that Cymer’s products do not infringe any valid claim of the assertedpatents or that Cymer is entitled to prior user rights in Japan.

 

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In July 2002, Cymer entered into an agreementwith a contractor for the construction of a 265,000 square foot buildingadjacent to its corporate headquarters located in San Diego, California. Thismanufacturing and office facility will be completed in two phases, with phaseone currently scheduled for completion in the second quarter of 2003 and phasetwo, as required throughout 2003.  Cymerwill finance the cost of the construction project, which is estimated to beapproximately $50 million, using existing capital.

 

**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

*Statementsin this quarterly report on Form 10-Q that are not strictly historical innature are forward-looking statements. These statements include, but are not limited to, references tomanufacturing activities; expected product sales and development; service andsupport; research and development expenditures; expected product development;expected international product sales, development and revenue; adequacy ofcapital resources and investments; effects of business cycles in thesemiconductor business; competitive positioning; and continuing relationshipswith third-party manufacturers for product manufacturing, and may contain wordssuch as “believes,” “anticipates,” “expects,” and words of similar import.  These statements are only predictions basedon current information and expectations and involve a number of risks anduncertainties.  The underlyinginformation and expectations are likely to change over time.  Actual events or results may differmaterially from those projected in the forward-looking statements due tovarious factors, including, but not limited to, those set forth in this Item 2and under the caption “Risks and Uncertainties That May Affect Results” andelsewhere in this quarterly report on Form 10-Q.*

 

*Thefollowing discussion of the financial condition and results of operations ofCymer should be read in conjunction with Cymer’s consolidated financialstatements and notes thereto included in this quarterly report on Form 10-Q andits consolidated financial statements and notes thereto included in Cymer’sannual report on Form 10-K for the year ended December 31, 2002.*

 

**RESULTS OF OPERATIONS**

 

The following table sets forth certain items in Cymer’s consolidatedstatements of operations as a percentage of total revenues for the periodsindicated:

 
|                                                             |   | **Three  months ended  March 31,** |   |
|------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                             |   | **2002**                           |   | **2003** |   |
| Revenues:                                                        |   |                               |   |   |   |
| Product sales                                                    |   | 99.1                               | %      | 99.6 | % |
| Other                                                            |   | 0.9                                |   | 0.4 |   |
| Total revenues                                                   |   | 100.0                              | %      | 100.0 | % |
|                                                             |   |                               |   |   |   |
| Cost and expenses:                                               |   |                               |   |   |   |
| Cost of product sales                                            |   | 52.4                               |   | 63.4 |   |
| Research and development                                         |   | 24.2                               |   | 25.9 |   |
| Sales and marketing                                              |   | 5.9                                |   | 6.1 |   |
| General and administrative                                       |   | 5.9                                |   | 8.5 |   |
| Amortization of goodwill and intangible  assets                  |   | 0.1                                |   | 0.1 |   |
| Loss on debt extinguishment                                      |   | 0.3                                |   | — |   |
| Total costs and expenses                                         |   | 88.8                               |   | 104.0 |   |
|                                                             |   |                               |   |   |   |
| Operating income (loss)                                          |   | 11.2                               |   | (4.0 | ) |
| Other expense – net                                         |   | (2.0                               | )      | (0.5 | ) |
|                                                             |   |                               |   |   |   |
| Income (loss) before income tax provision  and minority interest |   | 9.2                                |   | (4.5 | ) |
|                                                             |   |                               |   |   |   |
| Income tax provision                                             |   | 2.6                                |   | — |   |
| Minority interest                                                |   | —                             |   | (0.5 | ) |
|                                                             |   |                               |   |   |   |
| Net income (loss)                                                |   | 6.6                                | %      | (5.0 | )% |
| Gross margin on product sales                                    |   | 47.1                               | %      | 36.3 | % |

 

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**THREE MONTHS ENDEDMARCH 31, 2002 AND 2003**

 

*Revenues*. Cymer’s revenues consist of product sales, which include salesof light source systems, consumable and spare parts, upgrades, service, servicecontracts, and training. Other revenues include revenue from funded developmentactivities performed for customers and government contracts and licenseagreements.  Revenue from light sourcesystem sales is generally recognized at the time of shipment, unless customeragreements contain inspection, acceptance or other conditions, in which case revenueis recognized at the time such conditions are satisfied. Revenue fromconsumables and spare parts sales is recognized at the point that legal titlepasses to the customer, which is generally upon shipment from the Cymerfacility.  Service and training revenueis generally recognized at the time that the services are rendered or thetraining class is completed.  Servicecontracts revenues are generally recorded as revenue ratably over the life ofthe contract or per the specific terms of the agreement. Funded developmentcontracts are accounted for on the percentage-of-completion method based on therelationship of costs incurred to total estimated costs.  If milestones on funded developmentcontracts require that specific results be achieved or reported by Cymer,revenue is not recognized until that milestone is completed.

 

Productsales increased 10% from $61.4****million for the three months ended March31, 2002 to $67.3 million for the three months ended March 31, 2003, primarilydue to a 40% increase in consumable and spare parts, service revenue and othernon-system products from $17.1 million to $23.9 million.  The increase in this type of product saleswas due to slightly increased utilization of Cymer’s deep ultraviolet (“DUV”)light sources by chipmakers and an increased installed base in the three monthsended March 31, 2003.  Although the number of light source systemssold in the three months ended March 31, 2003 was slightly lower than thenumber of systems sold in the three months ended March 31, 2002, light sourcesystem revenue was fairly constant from period to period due to increases inthe average selling price (“ASP”) for light source systems.  A total of 62 light source systems were sold in thethree months ended March 31, 2002 at an ASP of $715,000, compared to 56 systemssold in the three months ended March 31, 2003 at an ASP of $776,000.  On a foreign currency adjusted basis, theASP for the three months ended March 31, 2002 was $742,000 compared to $768,000for the three months ended March 31, 2003. This increase in ASPs from period to period primarily reflects theintroduction of the higher priced XLA 100, our dual-discharge chamber MasterOscillator Power Amplifier (“MOPA”) design product in the first quarter of2003. Revenues from funded development projects were $534,000 and $263,000 forthe three months ended March 31, 2002 and 2003, respectively.

 

Cymer’s backlog at March 31,2002 was $102.6 million compared to $97.1 million at March 31, 2003.  Bookings for the three months ended March31, 2002 and March 31, 2003 were $63.2 million and $58.1 million,respectively.  The book-to-bill ratiofor the three months ended March 31, 2002 was 1.09 compared to 0.94 for thethree months ended March 31, 2003.  Thisdecrease in bookings and book-to-bill ratio was primarily due to reduced ordersof KrF light sources in the first quarter of 2003.     Cymer installed 76 light sources at chipmakers and otherend-users during the first quarter of 2002 as compared to 67 light sourcesinstalled during the first quarter of 2003.

 

Cymer’ssales are generated primarily by shipments to customers in Japan, theNetherlands, and the United States. Approximately 84% and 88% of Cymer’s sales for the three 

 

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months ended March31, 2002 and 2003, respectively, were derived from customers outside the UnitedStates.  Cymer maintains a wholly-ownedJapanese subsidiary which sells to Cymer’s Japanese customers.  Revenues from Japanese customers, generatedprimarily by this subsidiary, accounted for 33% and 41% of revenues for thethree months ended March 31, 2002 and 2003, respectively.  The activities of Cymer’s Japanesesubsidiary are limited to sales and service of products purchased by thesubsidiary from the parent corporation. Cymer anticipates that international sales will continue to account fora significant portion of its net sales.

 

Salesto Cymer’s three largest customers, ASM Lithography, Canon, and Nikon, amountedto 38%, 16% and 19%, respectively, of total revenue for the three months endedMarch 31, 2002, and 30%, 23% and 19%, respectively, of total revenue for thethree months ended March 31, 2003.

 

*Cost ofProduct Sales*.  Cost of product sales includes directmaterial and labor, warranty expenses, license fees, and manufacturing andservice overhead, and foreign exchange gains and losses on foreign currencyforward exchange contracts associated with purchases of Cymer’s products by itsJapanese subsidiary for resale under firm third-party sales commitments.  Although the number of light source systems recorded as revenue was lower inthe first quarter of 2003 as compared to the first quarter of 2002, the cost ofproduct sales increased 32% from $32.5 million for the three months ended March31, 2002 to $42.9 million for the three months ended March 31, 2003.  This increase from period to period isprimarily due to the higher overall costs associated with the introduction ofCymer's new XL series light source system and its initial transition tomanufacturing during the first quarter of 2003.  These cost of product sales were partially offset by a decreasein warranty expenses on more mature product models for the three months endedMarch 31, 2003.  As a result of thesehigher product costs, the gross margin on product sales was 36% for the threemonths ended March 31, 2003 as compared to 47% for the same three month periodin 2002.  We anticipate that the grossmargins will decrease further in the next couple of quarters as we increase thelevel of XL series production relative to other model light sources.  We anticipate that this will be partiallyoffset by a reduction in the number of inefficiencies related to themanufacture of this newer and more complex product.

 

*Researchand Development*.  Research and development expenses includecosts of internally-funded and externally-funded projects as well as continuingresearch support expenses which primarily include employee and material costs,depreciation of equipment and other engineering related costs. Research anddevelopment expenses increased 17% from $15.0 million for the three monthsended March 31, 2002 to $17.5 million for the three months ended March 31,2003, due primarily to Cymer’s most recent product development effort, the XLseries which uses the MOPA platform. Cymer shipped the first light source system that utilizes the MOPAplatform, the XLA 100, in February 2003. Cymer also continued to invest in EUV and BDU (Beam Delivery Unit)technology and the continuing engineering of the ELS-7000 and NanoLith-7000products.  As a percentage of totalrevenues, such expenses increased from 24.2% to 25.9%, primarily due to MOPAplatform development effort.  We anticipate R&D spending in  absolute dollars and as a percentage oftotal revenues, will decrease as the XLA 100 productization and the transitionto manufacturing is completed.

 

*Sales andMarketing*. Sales andmarketing expenses include the expenses of the sales, marketing and customersupport staffs and other marketing expenses. Sales and marketing expenses increased 11% from $3.7 million for thethree months ended March 31, 2002 to $4.1 million for the three months endedMarch 31, 2003, due primarily to cost saving measures, including salaryreductions that were initiated in the latter part of 2001 and were reflected inexpenses for the first quarter of 2002. During the first quarter of 2003, sales and marketing expenses werehigher than the 2002 levels due to the reinstatement of these salary reductionsin early 2003.  These increased expenseswere offset by lower expenses resulting from the movement of various seniormembers of sales and marketing to general and administrative functions in thelast quarter of 2002.  As a percentageof total revenues, such expenses increased slightly from 5.9% to 6.1%.

 

*General andAdministrative*. Generaland administrative expenses consist primarily of management and administrativepersonnel costs, professional services and administrative operating costs.  General and administrative expensesincreased 57% from $3.7 million for the three months ended March 31, 2002 to$5.8 million for the three months ended March 31, 2003, due to a number offactors.  In the first quarter of 2002,overall general and administrative expenses were lower due to cost savingsmeasures, including salary reductions that were initiated 

 

14

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in the latter part of2001.  During the first quarter of 2003,general and administrative expenses were significantly increased from the 2002levels due to the reinstatement of the 2001 salary reductions and the movementof various senior personnel from sales and marketing to general andadministrative functions in the last quarter of 2002.  As a percentage of total revenues, such expenses increased from 5.9%to 8.5%.

 

*Amortizationof intangible assets. *Amortization of intangible assets totaled$40,000 for the three months ended March 31, 2002 and 2003.  This amortization of intangible assetsexpense is consistent from period to period and relates to the existingtechnology associated with the ACX acquisition which was completed in early2001.  With the adoption of SFAS 142 onJanuary 1, 2002 Cymer discontinued the amortization of goodwill and intangibleassets with indefinite useful lives associated with previous purchase businesscombinations.

 

*OtherExpense*–*Net.*  Netother income (expense) consists primarily of interest income and expense andforeign currency exchange gains and losses associated with fluctuations in thevalue of the Japanese yen against the United States dollar.  Net other expense totaled $1.2 million and$346,000 for the three months ended March 31, 2002 and 2003, respectively.  The decrease in net other expense wasprimarily due to increased interest income and a decrease in interest expensewhich were partially offset by foreign currency exchange losses. The increasedinterest income in the first quarter of 2003 was primarily due to higheraverage cash and investment balances in the first quarter of 2003 compared to2002, resulting from the bond transactions which occurred in the first quarterof 2002. These transactions included the private placement of the 2002 Notes inFebruary 2002 and the redemption of the 1997 Notes that were not converted tocommon stock prior to the March 25, 2002 redemption date.  The decreased interest expense from periodto period was caused by the lower interest rate on the 2002 bonds which isreflected in the interest expense amounts for the first quarter of 2003 as comparedto additional interest which was recorded in the first quarter of 2002 as theresult of the 1997 Notes and 2002 Notes being outstanding during that threemonth period.  Foreign currency exchangegains totaled $157,000, interest income totaled $2.0 million and interestexpense totaled $3.4 million for the three months ended March 31, 2002,compared to foreign currency exchange losses of $360,000, interest income of$2.5 million and interest expense of $2.5 million for the three months endedMarch 31, 2003.

 

*Income TaxProvision*.  The tax provision of $1.6 million and $0 forthe three months ended March 31, 2002 and 2003, respectively, reflects anannual effective rate of 27% and 0%, respectively.  The decrease in the annual effective tax rate during the threemonths ended March 31, 2003 from 27% to 0% is primarily attributable toincreased tax benefits derived from export sales and from U.S. and state taxcredits. The annual effective tax rates for both periods are less than the U.S.statutory rate of 35% primarily as a result of benefits from export sales andtax credits.

 

# **LIQUIDITY AND CAPITAL RESOURCES**

 

Asof March 31, 2003, Cymer had approximately $168.2 million in cash and cashequivalents, $80.0 million in short-term investments, $138.9 million inlong-term investments, and $351.8 million in working capital (computed bysubtracting current liabilities from current assets). To supplement our consolidated financialstatements presented in accordance with accounting principles generallyaccepted in the United States of America (“GAAP”), Cymer uses thisnon-GAAP financial measure. Cymer believesthat working capital is an important financial measure that reflects ourability to meet future obligations. Historically, Cymer has provided thisnon-GAAP financial measure to the investment community and believes thatincluding this non-GAAP financial measure herein provides consistency in ourfinancial reporting.

 

In August 1997, Cymer issued $172.5 million in aggregateprincipal amount in a private placement of notes. The 31⁄2% / 71⁄4% Step-Up Convertible SubordinatedNotes were due on August 6, 2004 and wereconvertible at the option of the holder into shares of common stock of Cymer.The conversion rate on the 1997 Notes was 21.2766 shares per $1,000 principalamount or an effective conversion price of $47.00 per share.   The 1997 Notes were called for redemptionon March 25, 2002.  Immediately prior tothe March 25, 2002 redemption date, holders of $109.3 million of the outstandingprincipal amount converted their 1997 Notes into shares of Cymer’s commonstock.  As a result of theseconversions, 2,325,542 shares of Cymer common stock were issued to the noteholders and the remaining $38.0 million of the outstanding principal amount ofthe 1997 Notes was redeemed.

 

15

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In February 2002, Cymer issued $250.0 million inaggregate principal amount in a private placement of notes.  The 2002 Notes are due on February 15, 2009with interest payable semi-annually on February 15 and August 15 of each yearat 31⁄2% per annum.  The 2002 Notes areconvertible into shares of Cymer common stock at a conversion rate of 20 sharesper $1,000 principal amount or an effective conversion price of $50.00 pershare.  Cymer used a portion of the netproceeds from this private placement to redeem the 1997 Notes. The remainingproceeds will be used for Cymer’s future operating, investing and financingactivities.

 

Netcash provided by operating activities was approximately $237,000 for the threemonths ended March 31, 2002 as compared to $17.4 million net cash used inoperating activities for the three months ended March 31, 2003.  The net cash provided by operatingactivities for the three months ended March 31, 2002 was primarily attributableto net income and increases in accounts payable and accrued and otherliabilities offset by increases in accounts receivable and inventory.  Net cash used in operating activities forthe three months ended March 31, 2003 primarily reflects the net loss for theperiod, higher accounts receivable balances primarily due to the timing ofsales and related customer invoicing late in the quarter and increases ininventories and accrued liabilities for the period.

 

Netcash used in investing activities was approximately $45.9 million and $15.7million for the three months ended March 31, 2002 and 2003, respectively.  The decrease in cash used in investingactivities from period to period was primarily attributable to the timing ofshort-term and long-term investments maturing and being invested offset by cashused for capital expenditures. During the first quarter of 2002, capitalexpenditures totaled $3.5 million as compared to capital expenditures of $27.2million for the first quarter of 2003. This increased level of capital expenditures was due to the continuedconstruction of the new manufacturing and office facility located in San Diego,California.

 

Net cash provided by financing activities wasapproximately $211.6 million and $5.8 million for the three months ended March31, 2002 and 2003, respectively.  Thedecrease in cash provided by financing activities was primarily attributable tothe activity on Cymer’s convertible subordinated notes and higher proceeds fromemployee stock option exercises during the first quarter of 2002.  The private placement of the 2002 Notesresulted in net proceeds of approximately $242.2 million, offset by a use of$39.6 million to redeem a portion of its 1997 Notes.  Proceeds from employee stock option exercises during the three monthsended March 31, 2002 totaled $9.1 million. In the three months ended March 31, 2003, financing activities fromCymer’s Japanese revolving loan provided $3.3 million in cash and $2.5 millionwas provided by the exercise of employee stock options.

 

Cymer maintains certain loan agreements with a commercial bank (the“Loan Agreements”) which provide for unsecured revolving loan facilitiesallowing for borrowings of $10.0 million and $20.0 million under a U.S. line ofcredit and Japanese line of credit, respectively.  Under the Loan Agreements, Cymer may borrow in U.S. dollars orJapanese yen, and interest accrues on outstanding borrowings at LIBOR plus1.75% on U.S. dollar-denominated borrowings and at the yen Cost of Funds rateplus 1.5% on yen-denominated borrowings. The Loan Agreements require Cymer tomaintain compliance with certain financial and other covenants, includingtangible net worth, quick ratio and profitability requirements.  As of March 31, 2003, Cymer was incompliance with all such covenants. The Loan Agreements expire on June 16,2003.  As of March 31, 2003, there was$10.0 million outstanding on the Japanese line of credit at an annual interestrate of 1.56%.

 

Sinceits initial****public offering and a secondary public offering, both in1996, Cymer has funded its operations primarily from cash generated fromoperations, the proceeds of convertible subordinated note offerings in August1997 and February 2002, bank borrowings, and the proceeds from employee stockoption exercises.

 

Cymerrequires substantial working capital to fund its business, particularly tofinance inventories and accounts receivable and for capital expenditures.Cymer’s future capital requirements depend on many factors, including Cymer’smanufacturing activity, the timing and 

 

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extent of spending to support productdevelopment efforts, expansion of sales and marketing and field service andsupport, competitive labor market compensation requirements, the timing ofintroductions of new products and enhancements to existing products, and themarket acceptance of Cymer’s products. Cymer believes that it has sufficientworking capital and available banking arrangements to sustain operations andprovide for the future expansion of its business for at least the next 12months.

 

# **CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Cymer’sdiscussion and analysis of its financial condition and results of operationsare based upon Cymer’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  Thepreparation of these financial statements requires Cymer to make estimates anduse judgment that may impact the reported amounts of assets, liabilities,revenues, expenses, and related disclosure of contingent assets andliabilities.  As a part of its on-goinginternal processes, Cymer evaluates its estimates, including those related toinventory allowances, warranty provisions, revenue recognition, allowances forbad debt, long-lived assets valuation, intangible assets valuation, incometaxes,  and contingencies andlitigation.  Cymer bases these estimatesupon both historical information and other assumptions that it believes validand reasonable under the circumstances. These assumptions form the basis for making judgments and determiningthe carrying values of assets and liabilities that are not apparent from othersources.  Actual results could vary fromthose estimates under different assumptions and conditions.

 

Cymer believes that inventoryallowances and warranty provisions require more significant judgments andestimates in the preparation of its consolidated financial statements thanother accounting estimates.

 

Cymermaintains an inventory allowance to record inventory at net realizablevalue.  The value of this allowance isdetermined by taking into consideration certain assumptions related to marketconditions and future demands for its products which may result in excess orobsolete inventory.  In addition toestimating excess and obsolete inventory, Cymer estimates and records aseparate liability which is included in the accrued and other liabilities inthe accompanying balance sheets for any vendor amounts owed by Cymer as aresult of cancelled or modified orders. If actual market conditions are more or less favorable than projected bymanagement, adjustments to this inventory allowance or these liabilities may berequired.

 

Cymer provides for the estimated cost of product warranties at the timethe related revenue is recognized. The warranty coverage period and terms varyby light source model.  In general, thelight source system warranty period ranges from 17 to 26 months aftershipment.  Cymer also warrantsconsumables and spare parts sold to its customers and the coverage periodvaries by spare part type as some types include time based warranty periods andothers include usage based warranty periods. On average, the warranty period for consumables and spare parts isapproximately 6 months from the date of shipment.  Cymer records a provision for warranty for all products which isincluded in cost of product sales in the consolidated statements of operationsand is recorded at the time that the related revenue is recognized.  The warranty provision for light sourcesystems is determined by using a financial model which takes into considerationactual historical expenses and potential risks associated with Cymer’sdifferent light source system models. This financial model is then used tocalculate the future probable expenses related to warranty and the requiredlevel of the warranty provision.  Therisk levels used within this model are reviewed and updated as risk levelschange by model over its product life cycle. The warranty provision for consumables and spares is determined by usingactual historical data.  Although Cymerengages in product improvement programs and processes, its warranty obligationis affected by product failure rates and costs incurred to correct thoseproduct failures at customer sites. Should actual product failure rates or estimated costs to repair thoseproduct failures differ from Cymer’s estimates, revisions to its estimatedwarranty provision would be required.

 

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# **RECENT ACCOUNTING PRONOUNCEMENTS**

 

In January 2003, the FASB issued Interpretation No. 46(“FIN 46”), “Consolidation of Variable Interest Entities”.  FIN 46 provides guidance on how to identifya variable interest entity (VIE) and determines when the assets, liabilities,and results of operations of a VIE need to be included in a company’sconsolidated financial statements.  FIN46 also requires additional disclosures by primary beneficiaries and othersignificant variable interest holders in a VIE.  The provisions of FIN 46 are effective immediately for all VIEscreated after January 31, 2003.  ForVIEs created before February 1, 2003, the provisions of FIN 46 must be adoptedat the beginning of the first interim or annual reporting period beginning afterJune 15, 2003.  While Cymer is currentlyevaluating the potential impact of the adoption of FIN 46, Cymer believes thatit will not be subject to the consolidation or disclosure requirements of FIN46.

 

In November 2002, the Emerging IssuesTask Force (“EITF”) issued EITF Issue No. 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresseshow to determine whether a revenue arrangement involving multiple deliverablescontains more than one unit of accounting for the purposes of revenue recognitionand how the revenue arrangement consideration should be measured and allocatedto the separate units of accounting. EITF Issue No. 00-21 applies torevenue arrangements entered into after June 27, 2003. The adoption ofthis statement is not currently anticipated to have a material impact onCymer’s financial condition or results of operations.

 

In April 2003, the FASB issued Statement ofFinancial Accounting Standards No. 149 (“SFAS No. 149”), “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities”.  SFAS No. 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts and for hedging activitiesunder FASB Statement No. 133.  Thisstatement is effective for contracts entered into or modified after June 30,2003 and for hedging relationships designated after June 30, 2003.  Cymer is currently evaluating the potentialimpact this statement will have on its consolidated financial statements.

#### ** **

#### **Risks and Uncertainties That May Affect Results**

 

*In this section, references to “we”, “us” or “our” arereferences to Cymer.  Our business facessignificant 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 areimmaterial may also impair our business operations.  If any of the events or circumstances described in the followingrisks actually occur, our business, financial condition or results ofoperations could suffer, and the trading price of our common stock coulddecline.*

 

Our revenues and operating results fromquarter-to-quarter have varied in the past and our future operating results maycontinue to fluctuate significantly due to many factors including those listed inthis section and throughout this quarterly report on Form 10-Q for the periodended March 31, 2003. These factors include:

 

•                  demand forsemiconductors in general and, in particular, for leading edge devices withsmaller circuit geometries;

•                  cyclicality in themarket for semiconductor manufacturing equipment;

•                  rates at whichsemiconductor device manufacturers take delivery of photolithography tools fromour customers;

•                  rates at which ourcustomers take delivery of light source systems from us;

•                  timing and size oforders from our small base of customers;

•                  mix of light sourcemodels, consumable and spare parts and service revenues in our total revenues;

•                  changes in the price andprofitability of our products;

 

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•                  our ability to developand implement new technologies and introduce new products;

•                  utilization rates oflight sources and sales of consumable and spare parts and services;

•                  our ability to manageour manufacturing requirements;

•                  foreign currencyexchange rate fluctuations, principally with respect to the Japanese yen (inwhich sales by our Japanese subsidiary are denominated);

•                  worldwide politicalinstability;

•                  changing global economicconditions; and

•                  intellectual propertyprotection.

 

We also have historically derived a large portion of ourquarterly and annual revenues from selling a small number of light sourcesystems. Because we sell a small number of products, the precise time that werecognize revenue from an order may have a significant impact on our totalrevenue for a particular period. Our customers may cancel or reschedule orderswith little or no penalty. Orders expected in one quarter could shift toanother period due to changes in the anticipated timing of customers’ purchasedecisions or rescheduled delivery dates requested by our customers. Ouroperating results for a particular quarter or year may be adversely affected ifour customers, particularly our three largest customers, cancel or rescheduleorders, or if we cannot fill orders in time due to unexpected delays inmanufacturing, testing, shipping, and product acceptance.

 

We manage our expense levels based, in large part, onexpected future revenues. As a result, our expenses are relatively fixed forthe 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 achieveour expectations as to future revenue, gross profit and operating income.  Our failure to meet the performanceexpectations set and published by external sources could result in a sudden andsignificant 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.

 

**Our businessdepends on the semiconductor equipment industry, which is highly volatile andunpredictable.**

 

The semiconductor equipment industry is highly cyclical.We derive a substantial percentage of our revenues from photolithography toolmanufacturers (“our customers”). Our customers depend in turn on the demand fortheir photolithography tool products from their customers, the semiconductordevice manufacturers. The capital equipment expenditures of semiconductormanufacturers depend on a number of factors, including the current andanticipated market demand for semiconductors and products using semiconductors.

 

The semiconductor industry is cyclical in nature andhistorically has experienced periodic ups and downs and is currently in asignificant and prolonged downturn. This cyclical nature of the industry inwhich we operate affects our ability to accurately predict future revenue andthus, future expense levels. When cyclical fluctuations result in lower thanexpected revenue levels, operating results may be adversely affected and costreduction measures may be necessary in order for us to remain competitive andfinancially sound.  During a down cycle,we must be in a position to adjust our cost and expense structure to prevailingmarket conditions and to continue to motivate and retain our keyemployees.  In addition, during periodsof rapid growth, we must be able to increase manufacturing capacity andpersonnel to meet customer demand.  Wecan provide no assurance that these objectives can be met in a timely manner inresponse to industry cycles.

 

The current downturn has had a severe effect on thedemand for semiconductor manufacturing equipment, including photolithographytools that our customers produce. We are not able to predict when the semiconductorindustry will recover. If overall market conditions continue to deteriorate inthe near term, our current operating levels may negatively impact ourprofitability. We believe that downturns in the semiconductor manufacturingindustry will occur periodically, and result in periodic decreases in demandfor all semiconductor manufacturing equipment, including photolithography toolsour customers manufacture. As a result, fluctuating 

 

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levels of investment bysemiconductor device manufacturers and pricing volatility will continue tomaterially affect our aggregate bookings, revenues and operating results. Also,even during periods of reduced revenues we believe we must continue to investin research and development and to maintain extensive ongoing worldwidecustomer service and support capabilities to remain competitive, which maytemporarily harm our financial results. Accordingly, these downturns are likely to continue to adversely affectour business, financial condition and operating results and our operatingresults may fall below the expectations of public market analysts or investorsin some future quarter or quarters. Such failure to meet operating resultexpectations would materially adversely affect the price of our common stock.

 

Our customers try to manage their inventories andproduction requirements to appropriate levels that best reflect their expectedsales to semiconductor device manufacturers. Market conditions in the industryand production efficiency of the photolithography tool manufacturers can causeour customers to expand or reduce their orders for new light source systems asthey try to manage their inventories and production requirements to theselevels. We continue to work with our customers to better understand theseissues. However, we cannot guarantee that we will be successful inunderstanding our customers’ inventory management and production requirementsor that our customers will not build up an excess inventory of light sourceproducts. If our customers retain an excess inventory of light source products,our revenue could be reduced in future periods as the excess inventory isutilized, which could adversely affect our operating results, financialcondition and cash flows.

 

**We depend onthe introduction of new products for our success, and we are subject to risksassociated with rapid technological change.**

 

Rapid technological changes in semiconductormanufacturing processes subject us to increased pressure to developtechnological advances enabling such processes. We believe that our futuresuccess depends in part upon our ability to develop, manufacture and timelyintroduce new light source products with improved capabilities and to continueto enhance our existing light source systems and process capabilities.  Due to the risks inherent in transitioningto new products, we must forecast accurate demand for new products whilemanaging the transition from older products.

 

Our newest product introduction project consists of atechnology change from a single- discharge-chamber designed excimer lightsource to a dual-discharge-chamber design called MOPA.  This MOPA design represents a paradigm shiftfrom current lithography technology and is projected to enable higher power,tighter bandwidth and lower cost of operation for future optical lithographyapplications across all three DUV wavelengths – 248nm, 193nm and 157nm.  There are risks inherent in transitioning tothis new technology.  These risksinclude effective execution of the product development plan, adoption of theproduct by photolithography tool manufacturers and semiconductor manufacturers,manufacturability and cost effectiveness of the new products and thedevelopment of a comparable product by our competitors.

 

We believe that semiconductor device manufacturers arecurrently developing a capability to produce devices that are measured at 0.13micron or less, and these efforts are driving the current demand for our lightsource products for DUV photolithography systems. After semiconductor devicemanufacturers have this capability, their demand for our light source productswill depend, in part, on whether they want to expand their capacity tomanufacture these devices. This will in turn depend on whether their salesforecasts and projected manufacturing process yields justify the necessaryinvestments.

 

Future technologies, such as EUV and (“EPL”) electronprojection lithography, may render our excimer light source products obsolete.We must manage product transitions, as introduction of new products couldadversely affect our sales of existing products. If new products are notintroduced on time, or have reliability or quality problems, our performancemay be impacted by reduced orders, higher manufacturing costs, delays inacceptance of and payment for new products, and additional service and warrantyexpenses. We may not be able to develop and introduce new products orenhancements to our existing products and processes in a timely 

 

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or cost effective mannerthat satisfies customer needs or achieves market acceptance. Failure to developand introduce these new products and enhancements could materially adverselyaffect our operating results, financial condition and cash flows.

 

We expect to face significant competition from multiplecurrent and future competitors. We believe that other companies are developingsystems and products that are competitive to ours and are planning to introducenew products to this market, which may affect our ability to sell our newproducts. Furthermore, new products represent significant investments of ourresources and their success, or lack thereof, could have a material effect onour financial results.

 

**A significantpercentage of our revenue is derived from sales to a few large customers, andif we are not able to retain these customers, or they reschedule, reduce orcancel orders, delay or default on payments, our revenues would be reduced andour financial condition and cash flows would suffer.**

 

Three large companies, ASM Lithography, Canon and Nikondominate the photolithography tool business. Collectively, these threecompanies accounted for the following percentage of our total revenue duringthe periods indicated:

 
|            |   | **Three months ended  March 31,** |   |
|-----------------|--------|-----------------------------------|--------|
|            |   | **2002**                          |   | **2003** |   |
|            |   |                              |   |   |   |
| ASM Lithography |   | 38                                | %      | 30 | % |
| Canon           |   | 16                                | %      | 23 | % |
| Nikon           |   | 19                                | %      | 19 | % |
|            |   |                              |   |   |   |
| Total           |   | 73                                | %      | 72 | % |

 

Collectively, these three companies account for thefollowing percentage of our total accounts receivable for the periodsindicated:

 
|            |   | **December 31,  2002** |   | **March 31,  2003** |   |
|-----------------|--------|------------------------|--------|---------------------|--------|
|            |   |                   |   |                |   |
| ASM Lithography |   | 40                     | %      | 29                  | %      |
| Canon           |   | 12                     | %      | 17                  | %      |
| Nikon           |   | 18                     | %      | 22                  | %      |
|            |   |                   |   |                |   |
| Total           |   | 70                     | %      | 68                  | %      |

 

We expect that sales of our light source products tothese three customers will continue to account for a substantial majority ofour revenue in the foreseeable future. None of our customers are obligated topurchase a minimum number of our products in the aggregate or during anyparticular period. The loss of any significant business from or productionproblems for any one of these three customers will have a material adverseeffect on our business and financial condition. Sales to these customers may beaffected by many factors, some of which are beyond our control. These factorsinclude:

 

•                  a change in a customer’scompetitive position in its industry;

•                  a customer experiencingDUV photolithography tool production problems;

•                  a decision to purchaselight sources from other suppliers;

•                  changes in economicconditions in the semiconductor or the photolithography tool industries; and

•                  a decline in acustomer’s financial condition.

 

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**A substantialpercentage of our revenue is derived from the sale of a limited number ofprimary products.**

 

Our only product line is excimer light source systems,which include krypton fluoride, argon fluoride and fluorine systems, and weexpect these primary products to continue to account for a large percentage ofour revenues in the near term. Continued market acceptance of our primaryproducts is, therefore, critical to our future success. The primary market forexcimer light sources is in the use of DUV photolithography equipment formanufacturing deep-submicron semiconductor devices using smaller circuitgeometries. The demand for our products depends in part on the rate at whichsemiconductor device manufacturers further adopt excimer light sources as thechosen light source for their photolithography tools. Semiconductormanufacturers may choose not to adopt excimer light sources for a variety ofreasons, including:

 

•                  inadequate performanceof photoresists used in advanced DUV photolithography; and

•                  potential shortages ofspecialized materials used in DUV optics.

 

We cannot guarantee that these factors can or will be overcomeor that the demand for our excimer light source products will not be materiallyreduced. The demand for our light source products, and therefore our operatingresults, financial condition and cash flows, could be adversely affected by anumber of factors, including:

 

•                  a decline in demand forour customers’ DUV photolithography tools;

•                  a failure to achievecontinued market acceptance of our products;

•                  an improved version ofproducts being offered by a competitor in the market we participate in;

•                  technological changethat we are unable to address with our products; and

•                  a failure to release newenhanced versions of our products on a timely basis.

 

**Economic,political, regulatory and other events in geographic areas where we havesignificant sales or operations could interfere with our business.**

 

We serve an increasingly global market.  A large portion of our total revenues isderived from customers located outside of the United States, particularly inAsian countries.  We expect ourinternational sales to continue to account for a very large portion of ourtotal revenues. In order to support our foreign customers, we must maintainsubsidiaries located in Japan, Korea, Taiwan, Singapore, the People’s Republicof China and the Netherlands, as well as further develop our field service,support, and manufacturing operations.

 

We may not be able to manage our operations to addressand support our global customers effectively. Further, our investments in thesetypes of activities may not make us competitive in the global market or we maynot be able to meet the service, support, and manufacturing levels required byour global customers.

 

Additionally, we are subject to the risks inherent indoing business globally, including:

 

•                  unexpected changes inregulatory requirements,

•                  fluctuations in exchangerates and currency controls,

•                  political and economicconditions and instability,

•                  imposition of tradebarriers and restrictions, including changes in tariff and freight rates,foreign customs and duties,

•                  difficulty incoordinating our management and operations in several different countries,

•                  difficulties in staffingand managing foreign subsidiary and branch operations,

•                  limited intellectualproperty protection in some countries,

•                  potentially adverse taxconsequences in some countries,

•                  the possibility ofaccounts receivable collection difficulties,

•                  in the case of Asia, therisk of business interruption and damage from earthquakes,

 

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•                  the effect of acts ofterrorism and war, and

•                  the burdens of complyingwith a variety of foreign laws.

 

Many of our major customers and many of thesemiconductor device manufacturers who use our light source products in theirphotolithography systems are located in Asia. Economic problems and currencyfluctuations 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 UnitedStates export controls, these export rules could change in the future and makeit more difficult or impossible for us to export our products to manycountries.  Any of these vulnerabilitiescould have a material adverse effect on our business, financial condition andresults of operations.

 

**We musteffectively manage changes in our business.**

 

In order to respond to the business cycles of thesemiconductor industry, in the past few years we have sharply expanded andcontracted the scope of our operations and the number of employees in many ofour departments. As the semiconductor industry grows and contracts we will needto:

 

•                  closely manage ourglobal operations;

•                  improve our process andother internal management systems;

•                  improve our qualitycontrol, order fulfillment, field service and customer support capabilities;

•                  quickly adapt tochanging sales and marketing channels;

•                  effectively manage ourinventory levels; and

•                  attract, train, retainand manage key personnel.

 

If we fail to effectively manage changes in ourbusiness, our operating results, financial condition and cash flows would beadversely affected.

 

**We depend on afew key suppliers for purchasing components and subassemblies that are includedin our products.**

 

We purchase some of the components andsubassemblies included in our light source products from a single supplier or alimited group of suppliers.  Forcertain optical components used in its light source systems, we currentlyutilize a single supplier.  Although wehave not aggressively pursued other vendors for these optical components, wehave attempted to qualify one other vendor. To date, this vendor has beenunsuccessful in producing these optical components and has not been qualifiedby us. To reduce the risk associated with this single supplier, we carry a twoyear supply of these optical components. This two year supply is based upon current business activities, so anysignificant increase in production would likely result in a quicker consumptionof these optical components. In addition,we outsource the manufacture of various subassemblies more often than in thepast. Further, some of our suppliers have specialized in supplying equipment ormanufacturing services to semiconductor equipment manufacturers and thereforehave been adversely affected by the current industry downturn. If the currentdownturn continues for an extended period of time, these suppliers may not beable to continue to meet our requirements or respond quickly enough.  Due to the nature of our product developmentrequirements, these key suppliers must rapidly advance their own technologiesand production capabilities in order to support the introduction schedule ofour new products. These suppliers may not be able to provide new modules andsubassemblies when they are needed to satisfy our product schedulerequirements. If we cannot purchase enough of these materials, components orsubassemblies, or if these items do not meet our quality standards, there couldbe delays or reductions in our product shipments, which would have a materialadverse effect on our operating results, financial condition and cash flows.

 

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**We face competition from two companiesand may face competition from additional competitors who enter the market.**

 

We are currently aware of two significant competitorsthat sell light sources for DUV photolithography applications. Thesecompetitors are:

 

•                  Gigaphoton, a jointventure between two large companies, Komatsu and Ushio, which is headquarteredin Japan; and

•                  Lambda-Physik, a companyheadquartered in Germany, majority owned by Coherent, Inc., a U.S. company.

 

We believe that Gigaphoton and Lambda-Physik areaggressively trying to gain larger market penetration in the excimer lightsource industry. We believe that our customers have purchased products from thesetwo competitors and that our customers have approved these competitors’ lightsources for use with their products. We believe that Gigaphoton, in particular,has been approved by chipmakers in Japan and elsewhere for producing excimerlight sources.  Also, we believe thatLambda-Physik has been approved by chipmakers in the U.S. and Europe forproducing excimer light source products.

 

The market for excimer light sources is still small andimmature. Larger competitors with substantially greater resources, such asother manufacturers of industrial light sources for advanced lithography, mayattempt to sell competitive products to our customers. Potential competitorsmay also be attracted to our growing installed base of light sources and mayattempt to supply consumable products and refurbished parts to that installedbase. If any existing or future competitors gain market acceptance we couldlose market share and our growth could slow or decline, which could have amaterial adverse effect on our operating results, financial condition and cashflows.

 

**We depend onkey personnel, especially management and technical personnel, who may bedifficult to attract and retain.**

 

We are highly dependent on the services of many keyemployees in various areas, including:

 

•                  engineering;

•                  research anddevelopment;

•                  sales and marketing;

•                  field service;

•                  manufacturing; and

•                  management.

 

In particular, there are a limited number of experts inexcimer light source technology, and we require highly-skilled hardware and softwareengineers. Competition for qualified personnel is intense and we cannotguarantee that we will be able to continue to attract and retain qualifiedpersonnel as needed.  We do not haveemployment agreements with most of our employees. We believe that our futuregrowth and operating results will depend on:

 

•                  the continued servicesof our engineering, research and development, sales and marketing,manufacturing and field service, and management personnel;

•                  our ability to attract,train and retain highly-skilled key personnel; and

•                  the ability of ourpersonnel and key employees to continue to expand, train and manage ouremployee base.

 

If we are unable to hire, train and retain key personnelas required, our operating results, financial condition and cash flows could be adversely affected.

 

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**Failure tomaintain effectively our direct field service and support organization couldhave a material adverse effect on our business.**

 

We believe it is critical for us to provide quick andresponsive service directly to the semiconductor device manufacturersthroughout the world that use our light source products in theirphotolithography systems, and that it is essential to maintain our ownpersonnel or trained third-party resources to provide these services.Accordingly, we have an ongoing effort to develop our direct support systemwith locations in the United States, Japan, Europe, Korea, Singapore, Taiwanand the People’s Republic of China. This requires us to do the following:

 

•                  recruit and trainqualified field service personnel;

•                  identify qualifiedindependent firms; and

•                  maintain effective andhighly trained organizations that can provide service to our customers invarious countries.

 

We might not be able to attract and train qualifiedpersonnel to maintain our direct support operations successfully. We may not beable to find and engage qualified third-party resources to supplement andenhance our direct support operations. Further, we may incur significant costsin providing these support services. Failure to implement our direct supportoperation effectively could have a material adverse effect on our operatingresults, financial condition and cash flows.

 

**Our ability tocompete could be jeopardized if we are unable to protect our intellectualproperty rights. These types of claims could seriously harm our business orrequire us to incur significant costs.**

 

We believe our success and ability to compete depend inlarge part upon protecting our proprietary technology. We rely on a combinationof patent, trade secret, copyright and trademark laws, non-disclosure and othercontractual agreements and technical measures to protect our proprietaryrights.

 

As of March 31, 2003, we owned 174 United States patentscovering certain aspects of technology related to light sources and piezotechniques. These patents will expire at various times during the period fromJanuary 2008 to November 2021.  As ofMarch 31, 2003, we also had applied for 83 additional patents in the UnitedStates.  As of March 31, 2003, we owned165 foreign patents and had filed 303 patent applications pending in variousforeign countries.

 

Our pending patent applications and any futureapplications might not be approved. Our patents might not provide us with acompetitive advantage and may be challenged by third parties. In addition,third parties’ patents might have an adverse effect on our ability to dobusiness. As a result of cost constraints, we did not begin filing in Japan andother countries our patents for inventions covered by United States patents andpatent applications until 1993. As a result we do not have the right to seekforeign patent protection for some of our early inventions. Additionally, lawsof some foreign countries in which our products are or may be developed,manufactured or sold, including various countries in Asia, may not protect ourproducts or intellectual property rights to the same extent as do the laws ofthe United States. Thus, the possibility of piracy of our technology andproducts are more likely in these countries. Further, third parties mightindependently develop similar products, duplicate our products or, designaround patents that are granted to us.

 

Other companies or persons may have filed or may file inthe future patent applications that are similar or identical to ours. We mayhave to participate in interference proceedings declared by the United StatesPatent and Trademark Office (“USPTO”) in order for the patent office todetermine the priority of inventions. The patent office may determine thatthese third-party patent applications have priority over our patentapplications. Loss of priority in these interference proceedings could resultin substantial cost to us.

 

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We also rely on the following to protect ourconfidential information and our other intellectual property:

 

•                  trade secret protection,

•                  employee nondisclosureagreements,

•                  third-partynondisclosure agreements, and

•                  other intellectualproperty protection methods.

 

However, we may not be successful in protecting ourconfidential information and intellectual property, particularly our tradesecrets, because third parties may:

 

•                  independently developsubstantially the same proprietary information and techniques,

•                  gain access to our tradesecrets, or

•                  disclose our technology.

 

**The parties towhom we provide research and development services may dispute the ownership ofthe intellectual property that we develop performing these services.**

 

In the past, revenues from research and developmentarrangements with third parties have been used to pay for a portion of our ownresearch and development expenses. We receive these revenues fromgovernment-sponsored programs, customers and from SEMATECH, a researchconsortium, in connection with our designing and developing specific products.Currently, revenues from SEMATECH, photolithography tool manufacturers andsemiconductor manufacturers are used to fund a small portion of our developmentexpenses. In providing these research and development services to thesemanufacturers and SEMATECH, we try to make clear who owns the intellectualproperty that results from the research and development services we perform.However, disputes over the ownership or rights to use or market thisintellectual property may arise between us and the photolithography toolmanufacturers and SEMATECH. Any dispute over ownership of the intellectualproperty we develop could restrict our ability to market our products and havea material adverse effect on our business.

 

**In the future,we may be subject to patent litigation to enforce patents issued to us anddefend ourselves against claimed infringement by our competitors or any otherthird party.**

 

Third parties have notified us in the past, and maynotify us in the future, that we are infringing their intellectual propertyrights. Also, we have notified third parties in the past, and may notify themin the future, that they may be infringing our intellectual property rights.

 

Specifically, Komatsu has notified us that we may beinfringing some of its Japanese patents. During our discussions with Komatsu,they also asserted that we or our former Japanese manufacturing partner, Seiko,may be infringing on some of Komatsu’s United States patents and a number ofits additional Japanese patents. Komatsu has also notified one of ourcustomers, Nikon, of its belief that our light sources infringe several ofKomatsu’s Japanese and U.S. patents. As a result, we started proceedings in theJapanese Patent Office to oppose certain patents and patent applications ofKomatsu. The Japanese Patent Office has dismissed some of our oppositionclaims. Thus, litigation may result in connection with Komatsu’s Japanesepatents or U.S. patents. Also, Komatsu might claim that we infringe other oradditional patents. Komatsu notified Seiko that it intends to enforce itsrights against Seiko with respect to its Japanese patents if Seiko continued toengage in manufacturing activities for us. In connection with our formermanufacturing agreement with Seiko, we agree to pay Seiko under certainconditions for damages associated with these types of claims. Seiko may notprevail in any litigation against Komatsu, and therefore, we may be required topay Seiko for such damages.

 

We have notified our competitors and others of ourUnited States patent portfolio. Specifically, we have notified Komatsu thatthey may be infringing on some of our U.S. patents. We have discussed withKomatsu our claims against each other. Komatsu challenged one of our U.S. patents in the USPTO but it wassubsequently re-issued by the USPTO. Also, Komatsu transferred its lithographylight source business to one of our competitors, Gigaphoton. We also 

 

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have had discussionswith Lambda-Physik, another competitor, regarding allegations by each partyagainst the other for possible patent infringement. Any of these discussionswith our competitors may not be successful and litigation could result.

 

In the future, patent litigation may result due to aclaim of infringement by our competitors or any other third party or may benecessary to enforce patents issued to us. Any such litigation could result in substantial cost and diversion ofeffort by us, which would have an adverse effect on our business, financialcondition and operating results. Furthermore, our customers and the end usersof our products might assert other claims for indemnification that arise frominfringement claims against them. If these assertions are successful, ourbusiness, financial condition and operating results may be materially affected.Instead of litigation, we may seek a license from third parties to use theirintellectual property. However, we may not be able to obtain a license onreasonable terms. In the alternative, we may design around the third party’sintellectual property rights or we may challenge these claims in legalproceedings. Any adverse determination in a legal proceeding could result inone or more of the following, any of which could have a substantial adverseeffect on our business, financial condition and operating results:

 

•                  loss of our proprietaryrights,

•                  exposure to significantliabilities by other third parties,

•                  requirement that we geta license from third parties on terms that are not favorable, or

•                  restriction frommanufacturing or selling our products.

 

Any of these actions could be costly and would divertthe efforts and attention of Cymer’s management and technical personnel, which wouldmaterially adversely affect Cymer’s business, financial condition and resultsof operations.

 

**Trademarkinfringement claims against our registered and unregistered trademarks would beexpensive and we may have to stop using such trademarks and pay damages.**

 

We registered the trademark “CYMER” & “INSIST ONCYMER” in the United States and in some other countries. We are also trying toregister additional trademarks in the United States in other countries.  We use these trademarks and many other marksin our advertisements and other business materials, which are distributedthroughout the world. We may be subject to trademark infringement actions forusing these marks and other marks on a worldwide basis and this would be costlyto defend. If a trademark infringement action was successful, we would have tostop using the mark and possibly pay damages.

 

**We aredependent on air transport to conduct our business and disruption of domesticand international air transport systems could adversely affect our business.**

 

We depend on regular and reliable air transportation ona worldwide basis for many of our routine business functions. If civil aviationin the United States or abroad is disrupted by terrorist activities or securityresponses to the threat of terrorism or for any other reason, our businesscould be adversely affected in the following ways:

 

•                  supplies of rawmaterials and components for the manufacture of our products or our customers’products may be disrupted;

•                  we may not be able todeliver our products to our customers in a timely manner;

•                  we may not be able toprovide timely support of installed light sources for semiconductor devicemanufacturers; and

•                  our sales and marketingefforts may be disrupted.

 

**We are exposedto risks related to the fluctuations in the currency exchange rates for theJapanese yen.**

 

If we sell products to our Japanese subsidiary, the saleis denominated in U.S. dollars. If our Japanese subsidiary sells our productsdirectly to customers in Japan, the sale is 

 

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denominated in Japaneseyen.  Thus, our results of operationsmay fluctuate based on the changing value of the Japanese yen to the U.S.dollar. Our Japanese subsidiary manages its exposure to these fluctuations throughforeign 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 thesecurrency fluctuations. However, exchange rate fluctuations may still have amaterial adverse effect on our operating results. In the future, we may need tosell our products in other foreign currencies other than the Japanese yen andthe management of more currency fluctuations will be more difficult and exposeus to greater risks in this area.

 

**Compliance withchanging regulation of corporate governance and public disclosure may result inadditional expenses***.*

 

Changing laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations,Nasdaq Stock Market rules, and new accounting pronouncements are creatinguncertainty and additional complexities for companies such as ours. To maintainhigh standards of corporate governance and public disclosure, we intend toinvest all reasonable necessary resources to comply with evolving standards.This investment may result in increased general and administrative expenses anda diversion of management time and attention from strategic revenue-generatingand cost management activities.

 

**We are subjectto many standards and regulations of foreign governments and, even though weintend to comply, we may not always be in compliance with these rules, or wemay be unable to design or redesign our products to comply with these rules.**

 

Many foreign government standards and regulations applyto our products. These standards and regulations are always being amended.Although we intend to meet all foreign standards and regulations, our productsmay not comply with these foreign government standards and regulations.Further, it might not be cost effective for us to redesign our products tocomply with these foreign government standards and regulations. Our inabilityto design or redesign products to comply with foreign standards therefore couldhave a material adverse effect on our business.

 

**Semiconductordevice manufacturers’ prolonged use of our products in high volume productionsmay not produce the results they desire and, as a result, our reputation andthat of our customers who supply photolithography tools to the semiconductormanufacturers could be damaged in the semiconductor industry.**

 

Over time, our light source products may not meetsemiconductor device manufacturers’ production specifications or operating costrequirements after the light source is used for a long period in high volumeproduction. If any semiconductor device manufacturer cannot successfullyachieve or sustain their volume production using our light sources, ourreputation could be damaged with the semiconductor device manufacturers and ourcustomers who are the limited number of photolithography tool manufacturers.This would have a material adverse effect on our business.

 

**We have in thepast and may in the future acquire a business that will involve numerous risks.We may not be able to address these risks successfully without substantialexpense, delay or other operational and financial problems.**

 

The risks involved with acquiring a new company includethe following:

 

•                  diversion ofmanagement’s attention and resources to integrate the new company,

•                  failure to retain keypersonnel,

•                  amortization of acquireddefinite-lived intangible assets and deferred compensation,

•                  client dissatisfaction orperformance problems with the acquired company,

 

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•                  the cost associated withacquisitions and the integration of acquired operations,

•                  failure to commercializepurchased technologies,

•                  ability of the acquiredcompanies to meet their financial projections, and

•                  assumption of unknownliabilities or other unanticipated events or circumstances.

 

Mergers and acquisitions are inherently subject tomultiple significant risks, and the inability to effectively manage these riskscould have a material adverse effect on our business.  Any of these risks could materially harm our business, financialcondition and operating results. Further, any business that we acquire may notachieve anticipated revenues or operating results.

 

**We mustdevelop and manufacture enhancements to our existing products and introduce newproducts in order to continue to grow our business. We may not effectivelymanage our growth and integrate these new enhancements and products, which couldmaterially harm our business.**

 

To continue to grow our business, our existing lightsource products and their process capabilities must be enhanced, and we mustdevelop and manufacture new products to serve other semiconductor applications.We cannot guarantee that we will be able to manage our growth effectively. Norcan we guarantee that we will be able to accelerate the development of newenhancements to our existing products and create new products. Further, we maynot be able to effectively integrate new products and applications into ourcurrent operations. Any of these risks could materially harm our business,financial condition and results of operations.

 

## **Weare dependent on our manufacturing facilities and subcontractors to assembleand test our products.**

 

Operations at our primary manufacturing facility and oursubcontractors are subject to disruption for a variety of reasons, includingwork stoppages, terrorism, fire, earthquake, energy shortages, flooding orother natural disasters.  Such disruptionscould cause delays in shipments of our products to our customers.  We cannot ensure that alternate productioncapacity would be available if a major disruption were to occur or that, if itwere available, it could be obtained on favorable terms.  Such disruption could result in cancellationof orders or loss of customers which would have a material adverse effect onour operating results, financial condition and cash flows.

 

**Our operationsare subject to environmental and other government regulations that may exposeus to liabilities for noncompliance.**

 

We are subject to federal, state and local regulations,such as regulations related to the environment, land use, public utilityutilization and the fire code, in connection with the storage, handling,discharge and disposal of substances that we use in our manufacturing processand on our facilities that we lease. We believe that our activities comply withcurrent government regulations that are applicable to our operations andcurrent facilities. We may be required to purchase additional capital equipmentor other requirements for our processes to comply with these governmentregulations in the future if they change. Further, these government regulationsmay restrict us from expanding our operations. Adopting measures to comply withchanges in the government regulations, our failure to comply with environmentaland land use regulations, or restrictions on our ability to discharge hazardoussubstances, could subject us to future liability or cause our manufacturingoperations to be reduced or stopped.

 

**Our productsare subject to potential product liability claims if personal injury or deathresult.**

 

We are exposed to significant risks for productliability claims if personal injury or death results from the use of ourproducts. We may experience material product liability losses in the future. Wemaintain insurance against product liability claims. However, our insurancecoverage may not continue to be available on terms that we accept. Thisinsurance coverage also may not adequately cover liabilities that we incur.Further, if our products are defective, we may be 

 

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required to recall orredesign these products. A successful claim against us that exceeds ourinsurance coverage level, or any claim or product recall that results inadverse publicity against us, could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**Theprice of our common stock has fluctuated and may continue to fluctuate widely.**

 

The price of our common stock has fluctuated in thepast. The market price of our common stock will continue to be subject tosignificant 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 marketprice of our common stock, including:

 

•                  the cyclical nature ofthe semiconductor industry,

•                  actual or anticipatedfluctuations in our operating results,

•                  conditions and trends inthe light source device and other technology industries,

•                  announcements ofinnovations in technology,

•                  new products offered byus or our competitors,

•                  developments of patentsor proprietary rights,

•                  changes in financialestimates by securities analysts,

•                  general worldwidepolitical, economic, and market conditions, 

•                  United States political,economic, and market conditions. and

•      failure to properly manage any single or combination of riskfactors listed in this section.

 

In addition, the stock market has experienced extremeprice and volume fluctuations that have particularly affected the market pricefor many high technology companies. Such fluctuations have in some cases beenunrelated to the operating performance of these companies. Severe pricefluctuations in a company’s stock have frequently been followed by securitieslitigation.  Any such litigation canresult in substantial costs and a diversion of management’s attention andresources and therefore could have a material adverse effect on Cymer’sbusiness, financial condition and results of operations.

 

**We have implemented steps to protectour company from hostile takeovers.**

 

Nevada law and our articles of incorporation containprovisions that discourage a proxy contest and provisions that make anacquisition of a substantial block of our common stock more difficult. Inaddition, our board of directors is authorized to issue, without stockholderapproval, shares of preferred stock. Such shares of preferred stock may havevoting, conversion and other rights and preferences that may be superior tothose of the common stock and this could adversely affect the voting power orother rights of holders of common stock. Our board can use the issuance of thepreferred stock or rights to purchase the preferred stock to discourage anyunsolicited acquisition proposal or attempt.

 

#### **Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

# **Foreign Currency Risk**

 

Cymer conducts business inseveral international currencies through its global operations. Due to thelarge volume of Cymer’s business that is conducted in Japan, the Japaneseoperation poses the greatest foreign currency risk.  Cymer uses financial instruments, principally foreign currencyforward exchange contracts, in Japan to manage its foreign currency exposures.Cymer enters into foreign currency forward exchange contracts in order toreduce the impact of currency fluctuations related to purchases of Cymer’sinventories by Cymer Japan in US dollars for resale under firm third-partysales commitments denominated in Japanese Yen. Cymer does not enter into foreign currency forward exchange contractsfor trading purposes.

 

As of March 31, 2003, Cymerhad outstanding foreign currency forward exchange contracts to buy US $65.6million for 7.9 billion yen under foreign currency exchange facilities with 

 

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contract rates ranging from 132.6 yen to 115.5****yenper U.S. dollar.  These contracts expireon various dates through January 2004.

 

# **Investment and DebtRisk**

 

Cymer maintains an investmentportfolio consisting primarily of government and corporate fixed incomesecurities, certificates of deposit and commercial paper.  While it is Cymer’s general intent to holdsuch securities until maturity, Cymer will occasionally sell certain securitiesfor cash flow purposes. Therefore, Cymer’s investments are classified asavailable-for-sale and are carried on the balance sheet at fair value.  Due to the conservative nature of theinvestment portfolio, a sudden change in interest rates would not have amaterial effect on the value of the portfolio.

 

InFebruary 2002, Cymer issued $250.0 million principal amount of unsecured fixedrate 31⁄2% Convertible Subordinated Notes due February 15, 2009 (“2002Notes”).  Interest on the 2002 Notes ispayable on February 15 and August 15 of each year, commencing August 15,2002.  The 2002 Notes are convertibleinto shares of Cymer’s common stock at a conversion rate of 20 shares per$1,000 principal amount subject to adjustment under certain conditions. Cymermay redeem the 2002 Notes on or after February 20, 2005, or earlier if theprice of its common stock reaches certain levels.  The 2002 Notes are subordinated to Cymer’s existing and futuresenior indebtedness and effectively subordinated to all indebtedness and otherliabilities of Cymer’s subsidiaries. Because the interest rate is fixed, webelieve there is no risk of increased interest expense.

 

#### **ITEM 4. Controls and Procedures**

 

*Evaluation ofdisclosure controls and procedures*. Cymer’s chief executive officer and its chief financial officer, afterevaluating the effectiveness of Cymer’s disclosure controls and procedures (asdefined in Exchange Act Rule 13a-14) as of a date within 90 days of the filingdate of this quarterly report on Form 10-Q (the “Evaluation Date”), haveconcluded that as of such date, Cymer’s disclosure controls and procedures wereadequate and sufficient to ensure that information required to be disclosed byCymer in the reports that it files under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time period specifiedin the Commission’s rules and forms.

 

*Changes ininternal controls*. There have been no significant changes in Cymer’s internal controlssince the Evaluation Date.  Cymer is notaware of any significant change in any other factor that could significantlyaffect its internal controls subsequent to the Evaluation Date.

 

**PART II.  OTHER INFORMATION**

 
| **ITEM 1.** | **Legal Proceedings**                                    |   |
|-------------|----------------------------------------------------------|--------|
|        |                                                     |   |
|        | None.                                                    |   |
|        |                                                     |   |
| **ITEM 2.** | **Changes in Securities and Use of Proceeds**            |   |
|        |                                                     |   |
|        | None.                                                    |   |
|        |                                                     |   |
| **ITEM 3.** | **Defaults upon Senior Securities**                      |   |
|        |                                                     |   |
|        | None.                                                    |   |
|        |                                                     |   |
| **ITEM 4.** | **Submission of Matters to a Vote of Security  Holders** |   |
|        |                                                     |   |
|        | None.                                                    |   |

 

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| **ITEM 5.** | **Other Information** |                                 |
|-------------|-----------------------|--------------------------------------|
|        |                  |                                 |
|        | None.                 |                                 |
|        |                  |
| **ITEM 6.** | **(a)**               | **Exhibits and Reports on Form 8-K** |
|        |                  |
|        | 3.4                   |                                 | Amendment to Bylaws of Cymer,  Inc. |
|        |                  |                                 |   |
|        | 10.1                  |                                 | Reduction in Force Benefits  Plan, as amended. |
|        |                  |                                 |   |
|        | 99.1                  |                                 | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. |
|        |                  |                                 |   |
|        | 99.2                  |                                 | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. |
|        |                  |                                 |   |
|        |                  | **Reports on Form 8-K**              |
|        |                  |                                 |
|        |                  | None.                                |
|             |                       |                                      |  |  |  |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this quarterly report on Form 10-Q to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                     |   | CYMER, INC.                                                                                                    |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------------|
|                     |   | (Registrant)                                                                                                   |
|                     |   |                                                                                                           |
|                     |   |                                                                                                           |
| Date:  May 13, 2003 | By:    | /s/ NANCY J. BAKER                                                                                             |   |
|                     |   | Nancy J. Baker                                                                                                 |
|                     |   | Senior Vice President and  Chief Financial Officer  (Duly Authorized Officer and  Principal Financial Officer) |

 

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**CERTIFICATION**

 

I,Robert P. Akins, certify that:

 

1.               I have reviewed this quarterly report on Form10-Q of Cymer, Inc.;

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officer andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a)        designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)       evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c)        presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officer andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)        all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and have identifiedfor the registrant’s auditors any material weaknesses in internal controls; and

 

b)       any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officer andI have indicated in this quarterly report whether there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

Date:  May 13, 2003

 

 
|                              | /s/ ROBERT P. AKINS |   |
|-----------------------------------|---------------------|--------|
| Robert P. Akins                   |
| Chairman, Chief Executive Officer |

 

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**CERTIFICATION**

 

I,Nancy J. Baker, certify that:

 

1.               I have reviewed this quarterly report on Form10-Q of Cymer, Inc.;

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officer andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a)         designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)        evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)        presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officer andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)        all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)       any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officer andI have indicated in this quarterly report whether there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

Date:  May 13, 2003

 

 
|                                        | /s/ NANCY J. BAKER |   |
|---------------------------------------------|--------------------|--------|
| Nancy J. Baker                              |
| Sr. Vice President, Chief Financial Officer |

 

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