**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K /A**

**AmendmentNo. 1**

 

| **(Mark One)**                                                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                           |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                 |   |   |
| **For the Fiscal Year Ended December 31, 2003**                                                                                                 |
|                                                                                                                                                 |
| **OR**                                                                                                                                               |
|                                                                                                                                                 |   |   |
| **o**                                                                                                                                                |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                 |   |   |
| **FOR THE TRANSITION PERIOD FROM                      TO** |

 

**Commission File Number 0-21321**

 

**CYMER, INC.**

(Exact name of registrantas specified in its charter)

 

| **Nevada**                                                                           |   | **33-0175463**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                      |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |                                  |
| **17075 Thornmint Court, San Diego, CA**                                             |   | **92127**                             |
| (Address of principal executive offices)                                             |   | (Zip Code)                            |
|                                                                                 |
| Registrant’s  telephone number including area code: **(858)  385-7300**         |
|                                                                                 |
| Securities  registered pursuant to Section 12(b) of the Act: **None**                |
|                                                                                 |
| Securities  registered pursuant to Section 12(g) of the Act:                         |
|                                                                                 |
| **Common Stock, $.001 par value  Preferred Share Purchase Rights**  (Title of class) |

 

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

 

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

 

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

 

The aggregate market value of the voting stock heldby non-affiliates of the registrant, based upon the closing price of $32.07 forshares of the registrant’s Common Stock on June 30, 2003 as reported on theNasdaq National Market, was approximately $1,106,405,764.  In calculating such aggregate market value, shares of Common Stock ownedof record or beneficially by officers or directors, and persons known to theregistrant to own more than ten percent of the registrant’s voting securitieswere excluded because such persons may be deemed to be affiliates.  The registrant disclaims the existence ofcontrol or any admission thereof for any other purpose.

 

Number of shares of Common Stock outstanding as of March 3,2004:  36,655,892.

 

DOCUMENTS INCORPORATED BY REFERENCE

The following document is incorporated by reference in Part III of thisAnnual Report on Form 10-K: portions of registrant’s proxy statement for itsannual meeting of stockholders to be held on May 20, 2004.

 

 

EXPLANATORY NOTE

 

This Amendment No. 1 to Cymer, Inc.’s Annual Report on Form 10-K for theyear ended December 31, 2003 is being filed to add the conformed signature ofKPMG, LLP to the Independent Auditor’s Report. The conformed signature wasinadvertently omitted from the Independent Auditor’s Report filed with theoriginal Form Annual Report on 10-K filed on March 11, 2003.  There have been no changes to the balance ofthe Form 10-K from the original filing.

 

 

2

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PART IV

 

### **Item15.  Exhibits**, FinancialStatement Schedules, and Reports on Form 8-K

 

(a)  Documents included in this report.

(1)(2)  Financial Statements and Financial StatementSchedule.

**IndependentAuditors’ Report**

 

The Board of DirectorsCymer, Inc.:

 

We have audited the accompanyingconsolidated balance sheets of Cymer, Inc. and subsidiaries as of December 31,2002 and 2003, and the related consolidated statements of operations,stockholders’ equity and cash flows for each of the years in the three-yearperiod ended December 31, 2003. In connection with our audits of theconsolidated financial statements, we also have audited financial statementSchedule II. These consolidated financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these consolidated financial statements andfinancial statement schedule based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Cymer, Inc. and subsidiaries as ofDecember 31, 2002 and 2003, and the results of their operations and their cashflows for each of the years in the three-year period ended December 31, 2003,in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in our opinion,the related financial statement Schedule II, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly, inall material respects, the information set forth therein.

 

As discussed in Note 1 tothe consolidated financial statements, the Company adopted SFAS No. 142, *Goodwill and Other Intangible Assets,* and,accordingly, changed its method of accounting for goodwill in 2002.

 
| /s/ KPMG LLP |
|--------------|

 

SanDiego, CaliforniaJanuary 23, 2004, except for note 17,     which is as of February 4, 2004

F-1

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**CYMER, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share data)**

 
|                                                                                                                                                                      |   | **December  31,  2002** |    | **December  31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                                                                                |   |                    |    |                    |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| CURRENT ASSETS:                                                                                                                                                           |   |                    |    |                    |   |
| Cash and cash  equivalents                                                                                                                                                |   | $                       | 196,643 |                    | $      | 230,657 |   |
| Short-term  investments                                                                                                                                                   |   | 71,249                  |    | 93,474                  |   |
| Accounts  receivable – net                                                                                                                                           |   | 52,341                  |    | 62,819                  |   |
| Inventories                                                                                                                                                               |   | 100,119                 |    | 93,012                  |   |
| Deferred income  taxes                                                                                                                                                    |   | 20,041                  |    | 1,407                   |   |
| Prepaid expenses  and other assets                                                                                                                                        |   | 6,029                   |    | 5,513                   |   |
| Total current  assets                                                                                                                                                     |   | 446,422                 |    | 486,882                 |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| PROPERTY AND  EQUIPMENT – NET                                                                                                                                        |   | 112,209                 |    | 128,849                 |   |
| LONG-TERM  INVESTMENTS                                                                                                                                                    |   | 159,029                 |    | 77,509                  |   |
| DEFERRED INCOME  TAXES                                                                                                                                                    |   | 20,553                  |    | 80,711                  |   |
| GOODWILL – NET                                                                                                                                                       |   | 10,597                  |    | 7,647                   |   |
| INTANGIBLE  ASSETS – NET                                                                                                                                             |   | 8,565                   |    | 12,925                  |   |
| OTHER ASSETS                                                                                                                                                              |   | 9,512                   |    | 8,698                   |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| TOTAL ASSETS                                                                                                                                                              |   | $                       | 766,887 |                    | $      | 803,221 |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                            |   |                    |    |                    |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| CURRENT  LIABILITIES:                                                                                                                                                     |   |                    |    |                    |   |
| Accounts payable                                                                                                                                                          |   | $                       | 26,344  |                    | $      | 19,099 |   |
| Accounts payable  – related party                                                                                                                                    |   | 155                     |    | —                  |   |
| Accrued warranty  and installation                                                                                                                                        |   | 30,078                  |    | 26,486                  |   |
| Accrued payroll and  benefits                                                                                                                                             |   | 7,334                   |    | 7,196                   |   |
| Accrued patents,  royalties and other fees                                                                                                                                |   | 6,806                   |    | 8,436                   |   |
| Foreign currency  forward exchange contracts                                                                                                                              |   | 907                     |    | 6,401                   |   |
| Income taxes  payable                                                                                                                                                     |   | 11,321                  |    | 16,473                  |   |
| Revolving loan                                                                                                                                                            |   | 6,667                   |    | —                  |   |
| Accrued and  other current liabilities                                                                                                                                    |   | 5,683                   |    | 4,945                   |   |
| Total current  liabilities                                                                                                                                                |   | 95,295                  |    | 89,036                  |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| CONVERTIBLE  SUBORDINATED NOTES                                                                                                                                           |   | 250,000                 |    | 250,000                 |   |
| OTHER  LIABILITIES                                                                                                                                                        |   | 5,154                   |    | 5,660                   |   |
| MINORITY  INTEREST                                                                                                                                                        |   | 4,104                   |    | 5,195                   |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| COMMITMENTS AND  CONTINGENCIES (Note 12)                                                                                                                                  |   |                    |    |                    |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| 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 36,345,000 shares outstanding at December 31, 2002 and 2003,  respectively |   | 34                      |    | 36                      |   |
| Additional  paid-in capital                                                                                                                                               |   | 302,501                 |    | 358,988                 |   |
| Unearned  compensation                                                                                                                                                    |   | (2,358                  | )       | (146                    | )      |
| Accumulated  other comprehensive loss                                                                                                                                     |   | (3,429                  | )       | (5,734                  | )      |
| Retained  earnings                                                                                                                                                        |   | 115,586                 |    | 100,186                 |   |
| Total  stockholders’ equity                                                                                                                                          |   | 412,334                 |    | 453,330                 |   |
|                                                                                                                                                                      |   |                    |    |                    |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                          |   | $                       | 766,887 |                    | $      | 803,221 |   |

 

See Notes to Consolidated Financial Statements.

 

F-2

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**CYMER, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per sharedata)**

 
|                                                                       |   | **Years  ended December 31,** |    |
|----------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                       |   | **2001**                      |    | **2002** |   | **2003** |   |
|                                                                       |   |                          |    |   |   |   |   |
| REVENUES:                                                                  |   |                          |    |   |   |   |   |
| Product sales                                                              |   | $                             | 267,003 |   | $ | 287,995 |   | $ | 265,816 |   |
| Other                                                                      |   | 2,441                         |    | 2,165 |   | 1,680 |   |
| Total revenues                                                             |   | 269,444                       |    | 290,160 |   | 267,496 |   |
|                                                                       |   |                          |    |   |   |   |   |
| COSTS AND  EXPENSES:                                                       |   |                          |    |   |   |   |   |
| Cost of product  sales                                                     |   | 151,340                       |    | 162,095 |   | 187,679 |   |
| Research and  development                                                  |   | 58,368                        |    | 73,714 |   | 58,231 |   |
| Sales and  marketing                                                       |   | 19,617                        |    | 17,153 |   | 16,966 |   |
| General and  administrative                                                |   | 18,990                        |    | 18,212 |   | 39,094 |   |
| Amortization of  goodwill and intangible assets                            |   | 3,148                         |    | 160 |   | 160 |   |
| Purchased  in-process research and development                             |   | 5,050                         |    | — |   | — |   |
| (Gain) loss on  debt extinguishment                                        |   | (610                          | )       | 163 |   | — |   |
|                                                                       |   |                          |    |   |   |   |   |
| Total costs and  expenses                                                  |   | 255,903                       |    | 271,497 |   | 302,130 |   |
|                                                                       |   |                          |    |   |   |   |   |
| OPERATING INCOME  (LOSS)                                                   |   | 13,541                        |    | 18,663 |   | (34,634 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| OTHER INCOME  (EXPENSE):                                                   |   |                          |    |   |   |   |   |
| Foreign currency  exchange gain (loss) – net                          |   | 877                           |    | (723 | ) | 436 |   |
| Interest and  other income                                                 |   | 8,290                         |    | 10,055 |   | 8,928 |   |
| Interest and  other expense                                                |   | (10,614                       | )       | (11,246 | ) | (10,503 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| Total other  expense – net                                            |   | (1,447                        | )       | (1,914 | ) | (1,139 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| INCOME (LOSS)  BEFORE INCOME TAX PROVISION (BENEFIT) AND MINORITY INTEREST |   | 12,094                        |    | 16,749 |   | (35,773 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| INCOME TAX  PROVISION (BENEFIT)                                            |   | 2,871                         |    | 2,706 |   | (21,464 | ) |
| MINORITY  INTEREST                                                         |   | (368                          | )       | (447 | ) | (1,091 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| INCOME (LOSS)  BEFORE CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE            |   | 8,855                         |    | 13,596 |   | (15,400 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| Cumulative  change in accounting principle, net of taxes                   |   | (370                          | )       | — |   | — |   |
|                                                                       |   |                          |    |   |   |   |   |
| NET INCOME  (LOSS)                                                         |   | $                             | 8,485   |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                       |   |                          |    |   |   |   |   |
| EARNINGS (LOSS)  PER SHARE:                                                |   |                          |    |   |   |   |   |
| Basic earnings  (loss) per share:                                          |   |                          |    |   |   |   |   |
| Before  cumulative change in accounting principle                          |   | $                             | 0.29    |   | $ | 0.41 |   | $ | (0.44 | ) |
| Cumulative  change in accounting principle                                 |   | (0.01                         | )       | — |   | — |   |
| Basic earnings  (loss) per share                                           |   | $                             | 0.28    |   | $ | 0.41 |   | $ | (0.44 | ) |
| Weighted average  common shares outstanding                                |   | 30,474                        |    | 33,317 |   | 35,065 |   |
|                                                                       |   |                          |    |   |   |   |   |
| Diluted earnings  (loss) per share:                                        |   |                          |    |   |   |   |   |
| Before  cumulative change in accounting principle                          |   | $                             | 0.28    |   | $ | 0.39 |   | $ | (0.44 | ) |
| Cumulative  change in accounting principle                                 |   | (0.01                         | )       | — |   | — |   |
| Diluted earnings  (loss) per share                                         |   | $                             | 0.27    |   | $ | 0.39 |   | $ | (0.44 | ) |
| Weighted average  common and dilutive potential common shares outstanding  |   | 31,108                        |    | 34,712 |   | 35,065 |   |

 

See Notes to Consolidated Financial Statements.

 

F-3

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**CYMER, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(In thousands)**

 
|                                                              |   |              |       |       |       | **Additional  Paid-in  Capital** |       | **Treasury  Stock** |       | **Unearned  Compensation** |       | **Accumulated  Other  Comprehensive  (loss)** |       | **Retained  Earnings** |       | **Total  Stockholders’  Equity** |       | **Total  Comprehensive  Income (loss)** |       |
|-------------------------------------------------------------------|--------|-------------------|------------|------------|------------|----------------------------------|------------|---------------------|------------|----------------------------|------------|-----------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|-----------------------------------------|------------|
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |
|                                                              |   | **Common  Stock** |       |       |       |                             |       |                |       |                       |
|                                                              |   | **Shares**        |       | **Amount** |       |                             |       |                |       |                       |       |                                          |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| **BALANCE, JANUARY 1, 2001**                                      |   | **29,496**        | ** ** | **$**      | **29**     | ** **                       | **$**      | **145,996**         | ** ** | **(24,871**                | **)**      | **$**                                         | **—** | ** **             | **$**      | **(1,691**                            | **)**      | **$**                                   | **93,505** | ** ** | **$** | **212,968** | ** ** |   | ** ** |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Exercise of common stock options and warrants                     |   | 550               |       | 1          |       | 9,631                            |       |                |       |                       |       |                                          |       |                   |       | 9,632                                 |       |                                    |       |
| Issuance of employee stock purchase plan shares                   |   | 113               |       |       |       | 2,148                            |       |                |       |                       |       |                                          |       |                   |       | 2,148                                 |       |                                    |       |
| Issuance of shares in acquisition of ACX                          |   | 689               |       | 1          |       | 14,981                           |       |                |       |                       |       |                                          |       |                   |       | 14,982                                |       |                                    |       |
| Issuance of options in acquisition of ACX                         |   |              |       |       |       | 5,889                            |       |                |       | (4,439                     | )          |                                          |       |                   |       | 1,450                                 |       |                                    |       |
| Issuance of warrants under SRL license agreement                  |   |              |       |       |       | 4,322                            |       |                |       |                       |       |                                          |       |                   |       | 4,322                                 |       |                                    |       |
| Amortization of unearned compensation                             |   |              |       |       |       |                             |       |                |       | 971                        |       |                                          |       |                   |       | 971                                   |       |                                    |       |
| Income tax benefit from stock options exercised                   |   |              |       |       |       | 1,827                            |       |                |       |                       |       |                                          |       |                   |       | 1,827                                 |       |                                    |       |
| Net income                                                        |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       | 8,485                  |       | 8,485                                 |       | $                                       | 8,485      |   |
| Other comprehensive income:                                       |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Translation adjustment, net of tax                                |   |              |       |       |       |                             |       |                |       |                       |       | (3,610                                        | )          |                   |       | (3,610                                | )          | (3,610                                  | )          |
| Net unrealized gain on available-for-sale investments, net of tax |   |              |       |       |       |                             |       |                |       |                       |       | 270                                           |       |                   |       | 270                                   |       | 270                                     |       |
| Net unrealized gain on derivatives, net of tax                    |   |              |       |       |       |                             |       |                |       |                       |       | 1,369                                         |       |                   |       | 1,369                                 |       | 1,369                                   |       |
| Total comprehensive income                                        |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       | $                                       | 6,514      |   |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| **BALANCE, DECEMBER 31, 2001**                                    |   | **30,848**        | ** ** | **31**     | ** ** | **184,794**                      | ** ** | **(24,871**         | **)**      | **(3,468**                 | **)**      | **(3,662**                                    | **)**      | **101,990**            | ** ** | **254,814**                           | ** ** |                                    | ** ** |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Exercise of common stock options and warrants                     |   | 900               |       | 1          |       | 19,748                           |       |                |       |                       |       |                                          |       |                   |       | 19,749                                |       |                                    |       |
| Issuance of employee stock purchase plan shares                   |   | 154               |       |       |       | 2,798                            |       |                |       |                       |       |                                          |       |                   |       | 2,798                                 |       |                                    |       |
| Amortization of unearned compensation                             |   |              |       |       |       |                             |       |                |       | 1,110                      |       |                                          |       |                   |       | 1,110                                 |       |                                    |       |
| Conversion of 1997 Notes to common stock                          |   | 2,325             |       | 2          |       | 88,125                           |       | 24,871              |       |                       |       |                                          |       |                   |       | 112,998                               |       |                                    |       |
| Non-employee stock options granted                                |   |              |       |       |       | 75                               |       |                |       |                       |       |                                          |       |                   |       | 75                                    |       |                                    |       |
| Employee stock options – change in status                    |   |              |       |       |       | 86                               |       |                |       |                       |       |                                          |       |                   |       | 86                                    |       |                                    |       |
| Employee stock awards                                             |   |              |       |       |       | 22                               |       |                |       |                       |       |                                          |       |                   |       | 22                                    |       |                                    |       |
| Income tax benefit from stock options exercised                   |   |              |       |       |       | 6,853                            |       |                |       |                       |       |                                          |       |                   |       | 6,853                                 |       |                                    |       |
| Net income                                                        |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       | 13,596                 |       | 13,596                                |       | $                                       | 13,596     |   |
| Other comprehensive income:                                       |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Translation adjustment, net of tax                                |   |              |       |       |       |                             |       |                |       |                       |       | 135                                           |       |                   |       | 135                                   |       | 135                                     |       |
| Net unrealized gain on available-for-sale investments, net of tax |   |              |       |       |       |                             |       |                |       |                       |       | 1,966                                         |       |                   |       | 1,966                                 |       | 1,966                                   |       |
| Net unrealized loss on derivatives, net of tax                    |   |              |       |       |       |                             |       |                |       |                       |       | (1,868                                        | )          |                   |       | (1,868                                | )          | (1,868                                  | )          |
| Total comprehensive income                                        |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       | $                                       | 13,829     |   |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| **BALANCE, DECEMBER 31, 2002**                                    |   | **34,227**        | ** ** | **34**     | ** ** | **302,501**                      | ** ** | **—**          | ** ** | **(2,358**                 | **)**      | **(3,429**                                    | **)**      | **115,586**            | ** ** | **412,334**                           | ** ** |                                    | ** ** |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Exercise of common stock options and warrants                     |   | 1,899             |       | 2          |       | 44,083                           |       |                |       |                       |       |                                          |       |                   |       | 44,085                                |       |                                    |       |
| Issuance of employee stock purchase plan shares                   |   | 217               |       |       |       | 4,072                            |       |                |       |                       |       |                                          |       |                   |       | 4,072                                 |       |                                    |       |
| Amortization of unearned compensation                             |   |              |       |       |       |                             |       |                |       | 737                        |       |                                          |       |                   |       | 737                                   |       |                                    |       |
| Reversal of unearned compensation                                 |   |              |       |       |       | (1,475                           | )          |                |       | 1,475                      |       |                                          |       |                   |       | **—**                            |       |                                    |       |
| Non-employee stock options granted                                |   |              |       |       |       | 235                              |       |                |       |                       |       |                                          |       |                   |       | 235                                   |       |                                    |       |
| Employee stock options – change in status                    |   |              |       |       |       | 1,102                            |       |                |       |                       |       |                                          |       |                   |       | 1,102                                 |       |                                    |       |
| Employee stock awards                                             |   | 2                 |       |       |       | 22                               |       |                |       |                       |       |                                          |       |                   |       | 22                                    |       |                                    |       |
| Income tax benefit from stock options exercised                   |   |              |       |       |       | 8,448                            |       |                |       |                       |       |                                          |       |                   |       | 8,448                                 |       |                                    |       |
| Net loss                                                          |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       | (15,400                | )          | (15,400                               | )          | $                                       | (15,400    | ) |
| Other comprehensive income:                                       |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| Translation adjustment, net of tax                                |   |              |       |       |       |                             |       |                |       |                       |       | 799                                           |       |                   |       | 799                                   |       | 799                                     |       |
| Net unrealized loss on available for-sale investments, net of tax |   |              |       |       |       |                             |       |                |       |                       |       | (894)                                         |       |                   |       | (894)                                 |       | (894)                                   |       |
| Net unrealized loss on derivatives, net of tax                    |   |              |       |       |       |                             |       |                |       |                       |       | (2,210                                        | )          |                   |       | (2,210                                | )          | (2,210                                  | )          |
| Total comprehensive loss                                          |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       | $                                       | (17,705    | ) |
|                                                              |   |              |       |       |       |                             |       |                |       |                       |       |                                          |       |                   |       |                                  |       |                                    |       |
| **BALANCE, DECEMBER 31, 2003**                                    |   | **36,345**        | ** ** | **$**      | **36**     | ** **                       | **$**      | **358,988**         | ** ** | **$**                      | **—** | ** **                                    | **$**      | **(146**               | **)**      | **$**                                 | **(5,734** | **)**                                   | **$**      | **100,186** | ** ** | **$** | **453,330** | ** ** |   | ** ** |
|                                                                   |        |                   |            |            |            |                                  |            |                     |            |                            |            |                                               |            |                        |            |                                       |            |                                         |            |  |  |  |  |  |  |  |  |

 

SeeNotes to Consolidated Financial Statements.

 

F-4

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**CYMER, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

 
|                                                                                                 |   | **Years  ended December 31,** |    |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                                 |   | **2001**                      |    | **2002** |   | **2003** |   |
|                                                                                                 |   |                          |    |   |   |   |   |
| OPERATING  ACTIVITIES:                                                                               |   |                          |    |   |   |   |   |
| Net income  (loss)                                                                                   |   | $                             | 8,485   |   | $ | 13,596 |   | $ | (15,400 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                          |    |   |   |   |   |
| Cumulative  change in accounting principle                                                           |   | 370                           |    | — |   | — |   |
| (Gain) loss on  debt extinguishment                                                                  |   | (610                          | )       | 163 |   | — |   |
| Depreciation and  amortization                                                                       |   | 25,699                        |    | 25,492 |   | 30,938 |   |
| Non-cash  stock-based compensation                                                                   |   | —                        |    | 183 |   | 1,359 |   |
| Amortization of  unearned compensation                                                               |   | 971                           |    | 1,110 |   | 737 |   |
| Minority  interest                                                                                   |   | 368                           |    | 447 |   | 1,091 |   |
| Purchased  in-process research and development                                                       |   | 5,050                         |    | — |   | — |   |
| Provision for  deferred income taxes                                                                 |   | (386                          | )       | (31 | ) | (1,305 | ) |
| Loss on disposal  and impairment of property and equipment                                           |   | 505                           |    | 675 |   | 18,106 |   |
| Change in assets  and liabilities – net of acquisition in 2001:                                 |   |                          |    |   |   |   |   |
| Accounts  receivable – net                                                                      |   | 35,969                        |    | (2,285 | ) | (10,478 | ) |
| Income taxes  receivable                                                                             |   | (3,039                        | )       | 3,153 |   | — |   |
| Foreign currency  forward exchange contracts                                                         |   | 1,417                         |    | 939 |   | 1,749 |   |
| Inventories                                                                                          |   | 15,179                        |    | (38,335 | ) | 7,107 |   |
| Prepaid expenses  and other assets                                                                   |   | 615                           |    | (2,538 | ) | 59 |   |
| Accounts payable                                                                                     |   | (8,146                        | )       | 10,770 |   | (7,400 | ) |
| Accrued expenses  and other liabilities                                                              |   | (16,322                       | )       | 5,813 |   | (8,092 | ) |
| Income taxes  payable                                                                                |   | (7,741                        | )       | 6,651 |   | (22,066 | ) |
|                                                                                                 |   |                          |    |   |   |   |   |
| Net cash  provided by (used in) operating activities                                                 |   | 58,384                        |    | 25,803 |   | (3,595 | ) |
|                                                                                                 |   |                          |    |   |   |   |   |
| INVESTING  ACTIVITIES:                                                                               |   |                          |    |   |   |   |   |
| Acquisition of  property and equipment                                                               |   | (20,405                       | )       | (45,217 | ) | (62,783 | ) |
| Purchases of  investments                                                                            |   | (164,302                      | )       | (284,352 | ) | (107,749 | ) |
| Proceeds from  sold or matured investments                                                           |   | 184,759                       |    | 163,410 |   | 165,527 |   |
| Acquisition of  Active Control eXperts, Inc., net of cash acquired                                   |   | (279                          | )       | — |   | — |   |
| Acquisition of  patents                                                                              |   | (6,000                        | )       | — |   | — |   |
| Acquisition of  minority interest                                                                    |   | —                        |    | (360 | ) | (180 | ) |
|                                                                                                 |   |                          |    |   |   |   |   |
| Net cash used in  investing activities                                                               |   | (6,227                        | )       | (166,519 | ) | (5,185 | ) |
|                                                                                                 |   |                          |    |   |   |   |   |
| FINANCING  ACTIVITIES:                                                                               |   |                          |    |   |   |   |   |
| Net repayments  under revolving loan and security agreements                                         |   | (1,093                        | )       | (1,672 | ) | (6,667 | ) |
| Proceeds from  issuance of common stock                                                              |   | 11,781                        |    | 22,547 |   | 48,157 |   |
| Redemption of  convertible subordinated notes                                                        |   | (24,930                       | )       | (39,598 | ) | — |   |
| Issuance of  convertible subordinated notes                                                          |   | —                        |    | 250,000 |   | — |   |
| Issuance of  convertible subordinated notes offering costs                                           |   | —                        |    | (7,873 | ) | — |   |
| Minority  interest investments in subsidiary                                                         |   | —                        |    | 1,900 |   | — |   |
| Payments on  capital lease obligations                                                               |   | (281                          | )       | (56 | ) | (50 | ) |
|                                                                                                 |   |                          |    |   |   |   |   |
| Net cash (used  in) provided by financing activities                                                 |   | (14,523                       | )       | 225,248 |   | 41,440 |   |
|                                                                                                 |   |                          |    |   |   |   |   |
| EFFECT OF EXCHANGE  RATE CHANGES ON CASH AND CASH EQUIVALENTS                                        |   | (6,117                        | )       | 916 |   | 1,354 |   |
|                                                                                                 |   |                          |    |   |   |   |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                                           |   | 31,517                        |    | 85,448 |   | 34,014 |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF THE YEAR                                                  |   | 79,678                        |    | 111,195 |   | 196,643 |   |
|                                                                                                 |   |                          |    |   |   |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF THE YEAR                                                        |   | $                             | 111,195 |   | $ | 196,643 |   | $ | 230,657 |   |

 

F-5

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|                                                                                                             |   | **Years  ended December 31,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                             |   | **2001**                      |   | **2002** |   | **2003** |   |
|                                                                                                             |   |                          |   |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                               |   |                          |   |   |   |   |   |
| Interest paid                                                                                                    |   | $                             | 7,778  |   | $ | 10,473 |   | $ | 9,004 |   |
| Income taxes  paid (refunded), net                                                                               |   | $                             | 13,982 |   | $ | (7,821 | ) | $ | 1,325 |   |
|                                                                                                             |   |                          |   |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                                         |   |                          |   |   |   |   |   |
| Warrants issued  for acquisition of patents                                                                      |   | $                             | 4,322  |   | $ | — |   | $ | — |   |
| Stock and stock  options issued in acquisition of Active Control eXperts, Inc.                                   |   | $                             | 20,871 |   | $ | — |   | $ | — |   |
| Conversion of  subordinated notes to equity                                                                      |   | $                             | — |   | $ | 112,998 |   | $ | — |   |
| Reversal of  unearned compensation related to cancelled stock options previously issued  for the ACX acquisition |   | $                             | — |   | $ | — |   | $ | 1,475 |   |
| Intangible  assets included in accrued liabilities                                                               |   | $                             | — |   | $ | — |   | $ | 5,990 |   |
| Reversal of  deferred tax asset valuation allowance against goodwill                                             |   | $                             | — |   | $ | — |   | $ | 2,950 |   |

 

SeeNotes to Consolidated Financial Statements.

 

F-6

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**CYMER, INC.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                     ****SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

***Nature ofOperations*** –Cymer, Inc. and its wholly-owned and majority-owned subsidiaries (collectively,“Cymer” or the Company), are engaged primarily in the development,manufacturing and marketing of excimer light sources for sale to manufacturersof photolithography tools in the semiconductor equipment industry.  Cymer sells its product to customersprimarily in Japan, Asia, Europe and the United States.

 

***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, Ltd, 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. (“Cymer Korea”).  Cymer, Inc. owns 75% of Cymer Korea.  During 2002, Active Control eXperts, Inc. orACX was a wholly-owned subsidiary of Cymer, Inc.  Effective January 1, 2003, ACX was merged with and into Cymer,Inc.  Cymer sells its excimer lightsources in Japan primarily through Cymer Japan. Cymer SEA, Cymer PRC, CymerSingapore and Cymer B.V. are field service offices for customers in thoserespective regions.  Cymer Koreaprovides manufacturing, refurbishment, field service, and administrativeactivities for that region. All significant intercompany balances have beeneliminated in consolidation.

 

***AccountingEstimates*** – Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults may differ from those estimates.

 

***Cash Equivalents***– Cashequivalents consist of money market instruments, commercial paper and otherhighly liquid investments purchased with an original maturity of three monthsor less.

 

***Investments***– 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 onthe balance sheet at fair value, with unrealized gains and losses reported instockholders’ equity.  Unrealized lossesat December 31, 2003 were $9,000.  Wehave concluded that this unrealized loss is a temporary impairment, as itrepresents an excess of book value over market value on a single U.S.government agency bond, held for only 8 days and due to mature in less than 90days as of December 31, 2003.  Due tothe conservative nature of the investment portfolio, a sudden change ininterest rates would not have a material effect on the value of the portfolio.

 

***Inventories*** – Inventories are carried at the lowerof standard cost, which approximates first-in, the first-out method, ormarket.  Cost includes material, laborand manufacturing overhead costs. Cymer reviews the components of its inventoryon a regular basis for excess or obsolete inventory and makes appropriateallowances and dispositions in the period that such inventory is identified.

 

***Property and Equipment*** – Property and equipment are stated at cost lessaccumulated depreciation.  Equipment acquired under capital leases isstated at the present value of the future minimum lease payments. Additions andimprovements are capitalized and maintenance and repairs are expensed whenincurred.  Depreciation isprovided using the straight-line method over the

 

F-7

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estimated useful lives ofthe assets (generally one to five years). The Cymer owned buildings are depreciated over a useful life of twentyyears. Leasehold improvements and equipment held under capital leases areamortized using the straight-line method over the shorter of the life of theasset or the remaining lease term. Amortization of equipment obtained undercapital leases is included in depreciation expense in the accompanyingconsolidated financial statements. Light source systems built for internal use are capitalized anddepreciated using the straight-line method over three years.

 

***Goodwill****/**IntangibleAssets** –*Cymer adopted Statement of Financial AccountingStandards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets*”*on January 1, 2002. SFAS 142superceded Accounting Principles Board Opinion No. 17, “Intangible Assets”,and discontinued the amortization of goodwill and intangible assets withindefinite useful lives associated with purchase business combinations. Inaddition, SFAS 142 includes provisions regarding the reclassificationbetween goodwill and identifiable intangible assets in accordance with the newdefinition of intangible assets set forth in Statement of Financial AccountingStandards No. 141 (“SFAS 141”), “Business Combinations”, thereassessment of the useful lives of existing intangible assets, and the annualtesting for impairment of existing goodwill and other intangible assets withindefinite lives. In accordance with the adoption of SFAS 142 onJanuary 1, 2002, Cymer ceased the amortization of goodwill and intangibleassets with indefinite lives, and completed the required transitionalimpairment test, which resulted in no indication of impairment. Cymer alsore-evaluated the classifications of its existing intangible assets and goodwillin accordance with SFAS No. 141.  As aresult, Cymer reclassified assembled workforce net of amortization of $617,000from intangible assets to goodwill, as assembled workforce no longer meets thedefinition of an identifiable intangible asset under the provisions of SFAS No.141. In accordance with SFAS 142,Cymer conducts an annual impairment test of goodwill.  This test is conducted in the fourth quarter of each fiscal year,or whenever events or circumstances occur indicating potential impairment.

 

Intangible assets consistprimarily of acquired patents and purchased technology. Intangible assets withdefinite lives are recorded at cost and are amortized using the straight-linemethod over their expected useful lives from four to eight years. Cymer reviewsthe carrying value and remaining useful life of intangibles for impairmentwhenever events or circumstances indicate that the carrying amount may not berecoverable. The amount of impairment, if any, is measured based on theprojected discounted future operating cash flows using a discount ratereflecting Cymer’s average cost of funds. The assessment of the recoverability of intangible assets will beimpacted if estimated future operating cash flows are not achieved.

 

***Impairment ofLong-Lived Assets and Long-Lived Assets to Be Disposed Of –*** On January 1, 2002, Cymer adopted Statement of Financial AccountingStandards No. 144 (“SFAS 144”), “Accountingfor the Impairment or Disposal of Long-Lived Assets”, which addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  While SFAS 144 supersedes SFAS121, it retains many of the fundamental provisions of SFAS 121, including therecognition and measurement of the impairment of long-lived assets to be heldand used, and the measurement of long-lived assets to be disposed of by sale. Long-lived assets and certain identifiableintangibles are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of the assets to future net cash flows(undiscounted and without interest) expected to be generated by the asset.  If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less costs to sell.

 

***Fair Value ofFinancial Instruments*** – The following methods and assumptions were used to estimate the fairvalue of each class of financial instruments for which it is practicable toestimate that value:

 

Cash and cash equivalents, accounts receivable,accounts payable, accounts payable – related party, accrued warranty andinstallation, accrued payroll and benefits, accrued patents, royalties

 

F-8

----

 

and other fees, income tax payable and accrued andother current liabilities – The carrying amount reported in the consolidatedbalance sheets for cash and cash equivalents, accounts receivable, income taxesreceivable, accounts payable, accounts payable – related party, accruedwarranty and installation, accrued payroll and benefits, accrued patents,royalties and other fees, accrued interest, income tax payable and accrued andother current liabilities approximates fair value because of the short maturityof these instruments.

 

Investments – Investments are carried at fair valuewhich is based on quoted market prices for such securities.

 

Foreign Currency Forward Exchange Contracts – Thefair value of foreign currency forward exchange contracts is determined usingthe quoted exchange rate (see “Derivative Instruments” below).

 

Convertible Subordinated Notes – ConvertibleSubordinated Notes are recorded at face value of $250.0 million at December 31,2002 and 2003. The fair value of such debt, based on quoted market prices atDecember 31, 2002 and 2003 was $245.9 million and $276.0 million, respectively.

 

Revolving Loan – The carrying amount reported forCymer’s revolving loan approximates its fair value because the underlyinginstrument bears interest at rates comparable to current rates offered to Cymerfor instruments of similar terms and risk.

 

***Guarantees***–******Cymer adopted thedisclosure provisions of Financial Accounting Standards Board InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness to Others”, duringthe quarter ended December 31, 2002 and has adopted the recognition and measurementprovisions as required after December 31, 2002.  FIN 45 provides expanded accounting guidance surroundingliability recognition and disclosure requirements related to guarantees, asdefined by this interpretation.

 

In theordinary course of business, Cymer is not subject to potential obligationsunder guarantees that fall within the scope of FIN 45, except for standardwarranty provisions associated with product sales, indemnification provisionsrelated to intellectual property that are contained within many of its customeragreements, and third-party bank guarantees for subsidiary office lines ofcredit.  All of these provisions giverise only to the disclosure requirements prescribed by FIN 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 periodfor consumables and spare parts is approximately 6 months from the date ofshipment.  Cymer records a provision forwarranty for all products, which is included in cost of product sales in theconsolidated statements of operations and is recorded at the time that therelated revenue is recognized. The warranty provision for light source systemsis reviewed monthly and determined using a financial model, which considersactual historical expenses, and potential risks associated with Cymer’s differentlight source system models. This financial model is then used to calculate thefuture probable expenses related to warranty and the required level of thewarranty provision.  The risk levelsused within this model are reviewed and updated as risk levels change by modelover its product life cycle. The warranty provision for consumables and sparesis determined using actual historical data. For both light source systems andconsumables, if actual warranty expenditures differ substantially from Cymer’sestimates, revisions to the warranty provision would be required.  Actual warranty expenditures are recordedagainst the warranty provision as they are incurred.

 

F-9

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Thefollowing table summarizes information related to Cymer’s warranty provision forthe year ended December 31, 2002 and 2003 (in thousands):

 
|                                                                                               |   | **2002** |   | **2003** |   |
|----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                               |   |     |   |     |   |
| Balance, January 1                                                                                 |   | $        | 26,750 |     | $      | 29,600 |   |
| Liabilities accrued for warranties issued during the  year, net of adjustments and expirations (1) |   | 17,125   |   | 15,505   |   |
| Warranty expenditures incurred during the year                                                     |   | (14,275  | )      | (18,905  | )      |
| Balance, December 31                                                                               |   | $        | 29,600 |     | $      | 26,200 |   |

 

----

(1)  Included in this amount are adjustments toexisting warranty reserves as a result of normal recurring updates made to therisk factors used in the warranty model.

 

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’sproducts.  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 these indemnificationprovisions, they are indefinite and extend beyond the term of the actualcustomer agreements.

 

An indemnification provision is also included in the contractmanufacturing agreement with Seiko, which was terminated effective March 31,2003.  As with Cymer’s indemnificationprovisions on intellectual property, Cymer will continue to honor thisindemnification clause within the agreement even after its termination. Seikoand at least one Japanese customer have been notified that Cymer’s light sourcesystems in Japan may infringe certain Japanese patents.  Cymer believes, based upon the advice ofcounsel, that Cymer’s products do not infringe any valid claim of the assertedpatents or that it is entitled to prior use claims in Japan.

 

Guarantees on Subsidiary Debt – During the first quarter of 2003 andpart of the second quarter of 2003, Cymer was party to a Parent Guaranteeassociated with a revolving Loan Agreement held by Cymer Japan. This guaranteewas between a commercial bank in the United States and Cymer.  The Parent Guarantee was entered into in2001 in order to establish a banking relationship between this commercial bankand Cymer Japan.  Per the terms of theParent Guarantee, Cymer guaranteed payment of any obligations under the revolvingloan agreement in the event that Cymer Japan could not make such payments dueor defaults on the loan.  Cymer Japanmade all payments per the terms of the Loan Agreement and thus, Cymer did notincur any guarantor obligations under the Parent Guarantee.  Since Cymer Japan is a wholly-ownedsubsidiary of Cymer and Cymer Japan records the revolving loan outstandingbalance as a liability on its financial statements, the carrying amount of theliability was included in the consolidated balance sheets.  The Loan Agreement expired on June 16, 2003and was paid in full by Cymer Japan. The Loan Agreement was not renewed on thisexpiration date.

 

***Comprehensive Income –***Comprehensive income(loss) includes net income (loss), effective unrealized gains and losses onforeign currency forward exchange contracts, foreign currency translationadjustments, and unrealized gains and losses on available-for-sale securities,which are recorded as short-term and long-term investments in the accompanyingconsolidated balance sheets.

 

***RevenueRecognition*** – Cymerrecognizes revenue when all four revenue recognition criteria have beenmet.  These four criteria are asfollows: persuasive evidence of an arrangement exists; delivery has occurred orservices have been rendered; seller’s price to buyer is fixed or determinable;and collectibility is reasonably assured. Cymer’s revenue is generated fromproduct sales, which includes

 

F-10

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lightsource systems, consumables and spare parts, upgrades, service, servicecontracts and training.  In addition,Cymer generates other revenue which primarily represents revenue earned fromfunded development activities and license fees.

 

Cymer’srevenue recognition policy results in revenue being recognized as follows forproduct sales 1) For light source systems that have proven to meetspecifications prior to shipment and do not have acceptance provisions, therevenue is recognized once legal title passes to the customer.  The systems are tested by Cymer inenvironments similar to those used by the customers prior to shipment to ensurethat they meet the customer’s specifications and will interface with thecustomer’s software.  As the shippingterms vary by customer, title will transfer based upon the shipping termsspecific to that customer.  2)  For light source systems which are shippedto customers requiring acceptance provisions, the revenue is recognized at suchtime that the acceptance conditions are satisfied.  3)  For consumables andspare parts sales, revenue is recognized at the point that legal title passesto the customer.  For consumables andspare parts sales, legal title generally passes to the customer upon shipmentfrom the Cymer facility.  4)  For service and training sales which aregenerated from a billable service call or a training class, revenue isrecognized when the services or training have been rendered to the customer. 5)For service contract sales, revenue is generally recognized ratably over thelife of the contract or per the specific terms of the agreement.

 

Revenue classified as “other revenue” in Cymer’sstatements of operations is recorded as revenue on a basis consistent with theperformance requirement of the funded development or license agreement. Revenuefrom funded development contracts is generally recognized on thepercentage-of-completion method based on the relationship of costs incurred tototal estimated costs.  Revenuesgenerated from funded development contracts are derived from cost sharingcontracts between Cymer and certain customers. The costs associated with these contracts are included in research anddevelopment expenses in the period incurred and are not listed separately asother cost or expenses in the consolidated statements of operations.  If milestones on funded developmentcontracts require that specific results be achieved or reported by Cymer,revenue is not recognized until that milestone is completed.  Payments received in advance of performanceare recorded as deferred revenue.

 

***Warranty Expense***–Cymer warrants its new light source products against defects in design, *** ***materials, and workmanship. The warranty period andterms vary by light source model.  Ingeneral, the light source system warranty period ranges from 17 to 26 monthsafter shipment and the spare part warranty period on average is approximately 6months from the date of shipment. Cymer records a provision for warranty forall products when the related product revenue is recognized.  Warranty provisions are included in cost ofproduct sales in the accompanying consolidated statements of operations.  In general, the warranty provision for bothlight source systems and spare parts is based upon actual historical expensesand potential risks associated with Cymer’s different light source systemmodels. Actual warranty expenditures are recorded against the warrantyprovision as they are incurred.

 

***Research and Development*****– Research and development costs areexpensed in the period incurred and include costs associated with fundeddevelopment contracts.  The fundeddevelopment contracts are generally cost sharing contracts between Cymer and acustomer where each party pays near equivalent portions of the totaldevelopment costs.  As a result, costsfor the funded development contracts approximate the revenue recorded for thesecontracts in other revenue in the accompanying statements of operations. Theservices performed under the funded development contracts are provided on abest efforts basis.

 

***Income Taxes*** – Income taxes are accounted for under theasset and liability method.  Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates

 

F-11

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expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

***Stock-Based Compensation*** – Cymerapplies the intrinsic value-based method of accounting prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation aninterpretation of APB Opinion 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.  Statement of FinancialAccounting Standards Board No. 123 (“SFASNo. 123”) “Accounting forStock-Based Compensation”, 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”*.*

 

All options granted underthe plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

 

Cymer accounts for optionsgranted to non-employees under SFAS No. 123 and EITF Issue No. 96-18,“Accounting for Equity Instruments that are Issued to other than Employees forAcquiring or in Conjunction with Selling Goods or Services”.  Cymer measures the fair value of suchoptions using the Black-Scholes option-pricing model at each financialreporting date.  Cymer accounts forchanges in fair values between reporting dates in accordance with FinancialAccounting Interpretation 28. Stock-based compensation expense for options granted to non-employeesand for those related to employees who changed status for the years endedDecember 31, 2002 and 2003 was $161,000 and $1.3 million, respectively.  There was no stock-based compensationexpense recorded for non-employees for the year ended December 31, 2001.

 

Under SFAS 123, theweighted average per share fair value of the options granted for the yearsended 2001, 2002, and 2003 was $14.36, $17.45 and $19.20 , respectively, on thedate of grant.  Fair value under SFAS123 is determined using the Black-Scholes option-pricing model with theassumptions noted below.  For risk freeinterest, Cymer uses the then currently available rate on zero coupon U.S.Government issues with a remaining life of five years for valuing options andone year for ESPP.

 
|                                  |   | **2001** |   | **2002** |   | **2003** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                  |   |     |   |     |   |     |   |
| Dividend yield                        |   | None     |   | None     |   | None     |   |
| Volatility rate                       |   | 84       | %      | 83       | %      | 79       | %      |
| Weighted average risk free  interest: |   |     |   |     |   |     |   |
| Options                               |   | 4.42     | %      | 3.34     | %      | 3.16     | %      |
| ESPP                                  |   | 3.06     | %      | 1.88     | %      | 1.26     | %      |
| Assumed forfeiture rate               |   | 5        | %      | 5        | %      | 5        | %      |
| Expected life:                        |   |     |   |     |   |     |   |
| Options                               |   | 6 years  |   | 6 years  |   | 6 years  |   |
| ESPP                                  |   | .5 years |   | .5 years |   | .5 years |   |

 

F-12

----

 

The following table compares net income (loss) pershare as reported by Cymer to the pro forma amounts that would be reported hadcompensation expense been recognized for Cymer’s stock-based compensation plansin accordance with SFAS No. 123, (in thousands, except per share amounts):

 
|                                                                                                                                              |   | **Years ended December 31,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                                              |   | **2001**                     |    | **2002** |   | **2003** |   |
|                                                                                                                                              |   |                         |    |   |   |   |   |
| Net income (loss), as  reported                                                                                                                   |   | $                            | 8,485   |   | $ | 13,596 |   | $ | (15,400 | ) |
| Deduct: Total stock-based  employee compensation expense determined under the fair value based method  for all awards, net of related tax effects |   | (32,139                      | )       | (33,585 | ) | $ | (10,389 | ) |
|                                                                                                                                              |   |                         |    |   |   |   |   |
| Pro forma net loss                                                                                                                                |   | $                            | (23,654 | ) | $ | (19,989 | ) | $ | (25,789 | ) |
|                                                                                                                                              |   |                         |    |   |   |   |   |
| Earnings (loss) per share:                                                                                                                        |   |                         |    |   |   |   |   |
| Basic – as reported                                                                                                                          |   | $                            | 0.28    |   | $ | 0.41 |   | $ | (0.44 | ) |
| Basic – pro forma                                                                                                                            |   | $                            | (0.78   | ) | $ | (0.60 | ) | $ | (0.74 | ) |
|                                                                                                                                              |   |                         |    |   |   |   |   |
| Diluted – as reported                                                                                                                        |   | $                            | 0.27    |   | $ | 0.39 |   | $ | (0.44 | ) |
| Diluted – pro forma                                                                                                                          |   | $                            | (0.78   | ) | $ | (0.60 | ) | $ | (0.74 | ) |

 

***Foreign CurrencyTranslation*** – The financial statements of Cymer’s foreignsubsidiaries where the functional currency has been determined to be the localcurrency are translated into United States dollars using current rates ofexchange for assets and liabilities and rates of exchange that approximate therates in effect at the transaction date for revenues, expenses, gains andlosses. Gains and losses resulting from foreign currency translation areaccumulated as a separate component of consolidated stockholders’ equity asaccumulated other comprehensive income (loss). Gains and losses resulting fromforeign currency transactions are included in the consolidated statements ofoperations.

 

***DerivativeInstruments*****– Cymer conducts business in severalinternational currencies through its global operations. Due to the large volumeof Cymer’s business that is conducted in Japan, the Japanese operation posesthe greatest foreign currency risk. Cymer uses financial instruments, principally foreign currency forwardexchange contracts, to manage its foreign currency exposures in Japan. Cymerenters into foreign currency forward exchange contracts in order to reduce theimpact of currency fluctuations related to purchases of Cymer’s inventories byCymer Japan in US dollars for resale under firm third-party sales commitmentsdenominated in Japanese Yen.  Cymer doesnot enter into foreign currency forward exchange contracts for tradingpurposes.

 

Cymer’s foreign currency forward exchange contractsqualify for hedge accounting treatment per the provisions of Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”.  As a result,Cymer defers changes in the fair value of these contracts and records theamount in other comprehensive income (loss) and subsequently reclassifies thegain or loss to cost of product sales in the same period that the related saleis made to the third party.

 

Cymer’s derivative instruments are designated as cashflow hedging instruments. Cymer adopted SFAS 133 onJanuary 1, 2001 but did not qualify for cash flow hedgeaccounting treatment until July 1, 2001 due to the extensive documentationand administrative requirements. Accordingly, for contracts which Cymer enteredinto from January 1, 2001 to June 30, 2001, Cymer recordedchanges in the fair value of these foreign currency forward exchange contractsdirectly through earnings in other income (expense) in the period that suchchanges occurred.  For those contractsthat have been entered into on or after July 1, 2001, Cymer deferseffective changes in the fair value of its foreign currency forward exchangecontracts into other comprehensive income and subsequently reclassifies theeffective changes to cost of product sales in the same period that the relatedsale is made to the third party.  Priorto the adoption of SFAS 133, Cymer accounted for all such gains and lossesthrough cost of product sales in the same period as the related sale was madeto the third party.  Upon adoption ofSFAS 133 on January 1, 2001, Cymer recorded a loss to cumulativechange in accounting principle of $370,000 and a gain of $2.4 million toaccumulated other comprehensive income per SFAS 133 transition guidelines. 

 

F-13

----

 

At December 31, 2003, Cymer had outstanding foreigncurrency forward exchange contracts to buy US $81.0 million for 9.3 billion yenunder foreign currency exchange facilities with contract rates ranging from107.09 yen to 120.6****yen per US dollar.  These contracts expire on various expirationdates through February 2005.  Cymerrecognized a net gain through cost of product sales from the foreign currencyexchange contracts of $2,320,000 for the year ended December 31, 2001, and anet loss of $992,000 and $2,484,000 for the years ended December 31, 2002 and2003, respectively.

 

***Concentration ofCredit Risk*** – Financial instruments, which potentially subjectCymer to concentrations of credit risk, consist principally of cash andaccounts receivable.

 

*Cash andcash equivalents* –Cymer invests its excess cash in an effort to preserve capital, provideliquidity, maintain diversification and generate returns relative to Cymer’scorporate investment policy and prevailing market conditions.  Cymer has not experienced any materiallosses on its cash and investment accounts. At times, cash balances held infinancial institutions are in excess of federally insured limits. Cymerperforms periodic evaluations of the relative credit standing of financialinstitutions and limits the amount of risk by selecting financial institutionswith a strong relative credit standing. At December 31, 2002 and 2003, Cymer had $196.6 million and $230.4million respectively, in deposits with major financial institutions thatexceeded the federally insured limit of $100,000.

 

*Accountsreceivable* – Cymermaintains an allowance for doubtful accounts for estimated losses resultingfrom the inability of its customers to make required payments, which results inbad debt expense.  Managementperiodically determines the adequacy of this allowance by continuallyevaluating individual customer receivables considering the customer’s financialcondition, security deposits, and current economic conditions.  Credit losses to date have been minimal.

 

***Major Customers***– Revenues from major customers are detailedas follows:

 
|            |   | **Years ended December 31,** |       |
|-----------------|--------|------------------------------|------------|
|            |   | **2001**                     |       | **2002** |   | **2003** |   |
|            |   | **(in thousands)**           | ** ** |
| **Customer**    |   |                         |       |   |   |   |   |
| ASM Lithography |   | $                            | 85,758     |   | $ | 92,286 |   | $ | 63,793 |   |
| Canon           |   | 41,698                       |       | 61,709 |   | 64,459 |   |
| Nikon           |   | 77,490                       |       | 68,358 |   | 55,107 |   |
|                 |        |                              |            |  |  |  |  |  |  |  |

 

Accounts receivable balances for these same majorcustomers are detailed as follows:

 
|            |   | **December 31,**   |   |
|-----------------|--------|--------------------|--------|
|            |   | **2002**           |   | **2003** |   |
|            |   | **(in thousands)** |   |
| **Customer**    |   |               |   |   |   |
| ASM Lithography |   | $                  | 20,729 |   | $ | 22,033 |   |
| Canon           |   | 6,290              |   | 8,041 |   |
| Nikon           |   | 9,262              |   | 10,550 |   |
|                 |        |                    |        |  |  |  |  |

 

Revenues from Japanese customers, generated primarilyby Cymer Japan, accounted for 41%, 43% and 44% of revenues for the years endedDecember 31, 2001, 2002, and 2003, respectively. Revenues from ASMLithography in the Netherlands accounted for 32%, 32% and 24% of revenues forthe years ended December 31, 2001, 2002, and 2003, respectively.

 

The loss of business of any of these major customerswould have a material adverse effect on our operating results, financialcondition, and cash flows.

 

***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

 

F-14

----

 

could occur if securities or other contractsto issue common stock (convertible subordinated notes, warrants to purchasecommon stock and common stock options using the treasury stock method) wereexercised or converted into common stock. Potential dilutive securities are excluded from the diluted EPScomputation in loss periods as their effect would be anti-dilutive.

 

The following table sets forth the computation ofdiluted weighted average common and potential common shares outstanding for theyears ended December 31, 2001, 2002 and 2003, respectively:

 
|                                                                     |   | **Years ended December 31,** |   |
|--------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                     |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                     |   | **(in thousands)**           |   |
| Basic weighted average  common shares outstanding                        |   | 30,474                       |   | 33,317 |   | 35,065 |   |
|                                                                     |   |                         |   |   |   |   |   |
| Effect of dilutive  securities:                                          |   |                         |   |   |   |   |   |
| Warrants                                                                 |   | —                       |   | 19 |   | — |   |
| Options                                                                  |   | 634                          |   | 1,376 |   | — |   |
|                                                                     |   |                         |   |   |   |   |   |
| Diluted weighted average  common and potential common shares outstanding |   | 31,108                       |   | 34,712 |   | 35,065 |   |

 

For the years ended December31, 2001, 2002, and 2003, weighted average options and warrants to purchase3,614,000, 2,489,000 and 3,943,000 shares of common stock, respectively, wereoutstanding but not included in the computation of diluted earnings per shareas their effect was anti-dilutive.  Inaddition, for the years ended December 31, 2001, 2002, and 2003, weightedaverage common shares attributable to convertible subordinated notes of 3,387,000,5,077,000 and 5,000,000, respectively, were not included in the computation ofdiluted earnings per share as their effect was also anti-dilutive.

 

***Reclassifications****–*Certainamounts in the prior year consolidated financial statements have beenreclassified to conform to current period presentation.

 

***AccountingPronouncements Adopted***

 

Cymer adopted the provisions of Statement ofFinancial Accounting Standards No. 143 (“SFAS No. 143”), “Accounting for AssetRetirement Obligations” on January 1, 2003. SFAS No. 143 addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. SFAS No. 143 applies to tangiblelong-lived assets that have a legal obligation associated with their retirementthat results from the acquisition, construction or development or normal use ofthe asset. The adoption of this statement did not have an impact on Cymer’sfinancial condition or results of operations.

 

Cymer adopted the provisions of Statement ofFinancial Accounting Standards No. 145 (“SFAS No. 145”), “Rescission of FASBStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections” on January 1, 2003.  SFASNo. 145 provides guidance on the classification of gains and losses from theextinguishment of debt and on the accounting for certain specified leasetransactions. Cymer reclassified the 2001 gain and the 2002 loss onextinguishment of debt from an extraordinary gain (loss) on debt extinguishmentto operating expenses in the consolidated statements of operations.

 

Cymeradopted the provisions of Statement of Financial Accounting Standards No. 146(“SFAS No. 146”),  “Accounting for CostsAssociated with Exit or Disposal Activities”, on January 1, 2003.  SFAS No. 146 revises the accounting forspecified employee and contract terminations that are part of restructuringactivities and allows recognition of a liability for the cost associated withan exit or disposal activity only when the liability is incurred and can bemeasured at fair value. This statement applies on a prospective basis to exitor disposal activities that are initiated after December 31, 2002.

 

F-15

----

 

Theadoption of this statement did not have an impact on Cymer’s financialcondition or results of operation.

 

Cymeradopted the initial recognition and measurement provisions of FIN 45 on January1, 2003, which apply on a prospective basis to guarantees issued or modifiedafter December 31, 2002.  Cymer adoptedthe disclosure provisions of FIN 45 during the quarter ended December 31, 2002.In the ordinary course of business, Cymer is not subject to potentialobligations under guarantees that fall within the scope of FIN 45 except forwarranty provisions, intellectual property indemnification clauses that arecontained within many of Cymer’s customer agreements and third-party bankguarantees that Cymer had with one of our subsidiaries until June 2003.  These provisions fall within the disclosurerequirements prescribed by FIN 45.

 

In November 2002, the Emerging Issues TaskForce (“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 revenuerecognition and how the revenue arrangement consideration should be measuredand allocated to the separate units of accounting. EITF Issue No. 00-21applies to revenue arrangements entered into after June 15, 2003.  The adoption of this statement did not havea material impact on Cymer’s financial condition or results of operations.

 

In April 2003, the FASBissued Statement of Financial Accounting Standards No. 149 (“SFAS No. 149”),“Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under FASB Statement No. 133.  This statement is effective for contracts entered into ormodified after June 30, 2003 and for hedging relationships designated afterJune 30, 2003.  The adoption of this statement did not havea material impact on Cymer’s financial condition or results of operations.

 

In May 2003, the FASBissued Statement of Financial Accounting Standards No.150 (“SFAS No. 150”),“Accounting for Certain Instruments with Characteristics of Both Liabilitiesand Equity”. The standard establishes how an issuer classifies and measurescertain freestanding financial instruments with characteristics of liabilitiesand equity and requires that such instruments be classified as liabilities. Thestandard is effective for financial instruments entered into or modified afterMay 31, 2003 and is otherwise effective at the beginning of the first interimperiod beginning after June 15, 2003. The adoption of the statement did not have a material impact on Cymer’sconsolidated financial statements.

 

**2.****                     ****ACQUISITION OF ACTIVE CONTROL EXPERTS, INC.**

 

On February 13, 2001, Cymer acquired the Cambridge,Massachusetts based company, Active Control Experts, Inc. (“ACX”) in anall-stock transaction including 689,000 shares of Cymer stock and 336,000 stockoptions. ACX was a leading developer, manufacturer and marketer of hardware,software and firmware solutions for vibrations and nano-motion.  The ACX technology can be physicallyembedded, creating adaptive “smart structures” to intrinsically improve thestability and precision of nano-motion control in next-generation semiconductorcapital equipment. The acquisition was accounted for using the purchase methodof accounting, and the results of operations of ACX are included in Cymer’sconsolidated financial statements from the acquisition date. The totalconsideration for the purchase was approximately $24.8 million which includedcommon stock of $15.0 million, $3.0 million liabilities assumed, $5.9 millionemployee stock options assumed, and $0.9 million capitalized transaction costs.Cymer valued the 689,000 shares of common stock issued to acquire ACX at $21.75per share, which was the average closing price for Cymer’s common stock for theperiod of ten trading days commencing five trading days immediately precedingthe announcement of the transaction on November 20, 2000. ** **Atotal of $12.3 million was recorded as goodwill based on the totalconsideration of $24.8 million less $1.5 million of acquired tangible assets,$1.4 million of acquired identifiable intangible assets, a $5.1 million inprocess research and

 

F-16

----

 

development charge, and $4.5 million of unearnedcompensation recorded related to the assumed stock options.  Had this company been acquired on January 1,2001, Cymer’s net income would have been as follows (in thousands, except pershare data):

 
|                                           |   | **Year ended  December 31, 2001** |       |
|------------------------------------------------|--------|-----------------------------------|------------|
|                                           |   |                              | ** ** |
| Reported net income                            |   | $                                 | 8,485      |   |
|                                           |   |                              |       |
| Adjustments:                                   |   |                              |       |
| Amortization of goodwill and intangible assets |   | (429                              | )          |
| Incremental net loss                           |   | (475                              | )          |
| Tax effect                                     |   | 226                               |       |
| Total                                          |   | (678                              | )          |
|                                           |   |                              |       |
| Adjusted net income                            |   | $                                 | 7,807      |   |
|                                           |   |                              |       |
| Basic earnings per share:                      |   |                              |       |
|                                           |   |                              |       |
| As reported                                    |   | $                                 | .28        |   |
| As adjusted                                    |   | $                                 | .26        |   |
|                                           |   |                              |       |
| Diluted earnings per share:                    |   |                              |       |
|                                           |   |                              |       |
| As reported                                    |   | $                                 | .27        |   |
| As adjusted                                    |   | $                                 | .25        |   |

 

The purchased in-process research and development(“IPR&D”) totaling $5.1 million, which related to one vibration controldevelopment project, was expensed upon acquisition because the application ofACX’s technology to semiconductor manufacturing required further research anddevelopment before reaching technological feasibility and commercialviability.  In valuing the ACXIPR&D, consideration was given to key characteristics of the product underdevelopment, as well as the technology’s life cycle, and the project’s stage ofdevelopment.  A discounted cash flowmodel was used to value the ACX IPR&D which included key assumptionsrelated to ACX’s revenue growth, cost of goods levels, selling, general, andadministrative expenses, research and development expenses, and income taxrates, all over a four year projection period from 2001 through 2004.  The estimated cash flows attributable to thetechnology were converted to present value equivalents using a 20% discountrate.  The value of the ACX IPR&Dwas then calculated by summing the net present value amounts over the four yearprojection period, adding the tax amortization benefit, and applying a 70%percentage of completion factor for the project.

 

Cymer continued to conduct research and developmenton the vibration control project that related to this IPR&D chargefollowing the acquisition in February 2001. The core technology was pursued as both a stand-alone product and onethat could be embedded into Cymer’s future light source system products.  Development of this technology as astand-alone product was conducted through the end of the third quarter2001.  At that time, Cymer and apotential customer for the stand-alone product decided not to pursue thisproduct further.  During the sameperiod, Cymer further developed this same core technology so that it could beembedded in certain core modules of its light source system products.  This ACX technology was successfullyembedded in the NanoLith 7000 light source system, which was introduced in thethird quarter of 2001.  The projectcompletion date was consistent with the Company’s original estimate at the timeof the acquisition.  This technology isalso embedded in several of the core modules of Cymer’s newest light sourcesystem products, the ELS-7000 and the XLA 100 light sources, which werereleased in early 2002 and 2003, respectively. During the period that the core technology was being completed as anapplication in the semiconductor industry, Cymer incurred and expensedadditional costs of approximately $2.5 million, which were consistent with thecosts originally anticipated to complete the project.  The technology as embedded in Cymer’s existing light systemsprojects has been consistent with the sales

 

F-17

----

 

projections used in determining the value of theIPR&D.  As with Cymer’s other coretechnologies, Cymer intends to continue to develop ACX vibration controltechnology so that it can expand the technology’s application further withinCymer’s existing light source system products and include it in newly developedproducts.

 

Given the successful completion of the aboveresearch program and performance of the associated product, Cymer believes theassumptions used to determine the IPR&D charge are reasonable.

 

**3.****                      BALANCESHEET DETAILS**

 

The consolidated balance sheets detail is asfollows as of December 31, 2002 and 2003 (in thousands):

 
|                                           |   | **December 31,** |    |
|------------------------------------------------|--------|------------------|---------|
|                                           |   | **2002**         |    | **2003** |   |
| ACCOUNTS RECEIVABLE:                           |   |             |    |   |   |
| Trade                                          |   | $                | 46,283  |   | $ | 58,514 |   |
| Notes and other                                |   | 7,814            |    | 6,269 |   |
|                                           |   | 54,097           |    | 64,783 |   |
| Less allowance for doubtful accounts and notes |   | (1,756           | )       | (1,964 | ) |
| Total                                          |   | $                | 52,341  |   | $ | 62,819 |   |
|                                           |   |             |    |   |   |
| INVENTORIES:                                   |   |             |    |   |   |
| Raw materials                                  |   | $                | 44,252  |   | $ | 37,393 |   |
| Work-in-progress                               |   | 32,718           |    | 26,949 |   |
| Finished goods                                 |   | 37,849           |    | 40,698 |   |
| Allowance for excess and obsolete inventory    |   | (14,700          | )       | (12,028 | ) |
| Total                                          |   | $                | 100,119 |   | $ | 93,012 |   |
|                                           |   |             |    |   |   |
| PROPERTY AND EQUIPMENT:                        |   |             |    |   |   |
| Land                                           |   | $                | 9,080   |   | $ | 9,080 |   |
| Building                                       |   | 31,178           |    | 88,547 |   |
| Building improvements                          |   | 2,451            |    | 4,280 |   |
| Furniture and equipment                        |   | 77,434           |    | 72,287 |   |
| Capitalized light sources                      |   | 40,850           |    | 33,069 |   |
| Leasehold improvements                         |   | 27,412           |    | 2,860 |   |
| Construction in process                        |   | 17,641           |    | 1,521 |   |
|                                           |   | 206,046          |    | 211,644 |   |
| Less accumulated depreciation and amortization |   | (93,837          | )       | (82,795 | ) |
| Total                                          |   | $                | 112,209 |   | $ | 128,849 |   |

 

**4.****                     ****INVESTMENTS**

 

Investments at December 31,2002 consist of the following (in thousands):

 
|                      |   | **Amortized  Cost** |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Market  Value** |   |
|---------------------------|--------|---------------------|---------|------------------------------|--------|-------------------------------|--------|-------------------|--------|
| Short-term:               |   |                |    |                         |   |                          |   |              |   |
| Corporate debt securities |   | $                   | 35,762  |                         | $      | 275                           |   | $                 | (135   | ) | $ | 35,902 |   |
| Commercial paper          |   | 13,988              |    | 3                            |   | —                        |   | 13,991            |   |
| U.S. government agencies  |   | 14,994              |    | 98                           |   | —                        |   | 15,092            |   |
| Other                     |   | 6,218               |    | 46                           |   | —                        |   | 6,264             |   |
| Total                     |   | $                   | 70,962  |                         | $      | 422                           |   | $                 | (135   | ) | $ | 71,249 |   |
|                      |   |                |    |                         |   |                          |   |              |   |
| Long-term:                |   |                |    |                         |   |                          |   |              |   |
| Corporate debt securities |   | $                   | 136,247 |                         | $      | 3,200                         |   | $                 | (38    | ) | $ | 139,409 |   |
| U.S. government agencies  |   | 19,259              |    | 361                          |   | —                        |   | 19,620            |   |
| Total                     |   | $                   | 155,506 |                         | $      | 3,561                         |   | $                 | (38    | ) | $ | 159,029 |   |

 

F-18

----

 

Investments at December 31,2003 consist of the following (in thousands):

 
|                      |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |       | **Market  Value** |       |
|---------------------------|--------|---------------------|--------|------------------------------|--------|-------------------------------|------------|-------------------|------------|
|                      |   |                |   |                         |   |                          | ** ** |              | ** ** |
| Short-term:               |   |                |   |                         |   |                          |       |              |       |
| Corporate debt securities |   | $                   | 66,526 |                         | $      | 454                           |       | $                 | —     |   | $ | 66,980 |   |
| Commercial paper          |   | 8,438               |   | —                       |   | —                        |       | 8,438             |       |
| U.S. government agencies  |   | 16,000              |   | 59                           |   | 9                             |       | 16,050            |       |
| Other                     |   | 2,003               |   | 3                            |   | —                        |       | 2,006             |       |
| Total                     |   | $                   | 92,967 |                         | $      | 516                           |       | $                 | 9          |   | $ | 93,474 |   |
|                      |   |                |   |                         |   |                          |       |              |       |
| Long-term:                |   |                |   |                         |   |                          |       |              |       |
| Corporate debt securities |   | 65,337              |   | 1,488                        |   | —                        |       | 66,825            |       |
| U.S. government agencies  |   | 3,154               |   | 89                           |   | —                        |       | 3,243             |       |
| Other                     |   | 7,234               |   | 207                          |   | —                        |       | 7,441             |       |
| Total                     |   | $                   | 75,725 |                         | $      | 1,784                         |       | $                 | —     |   | $ | 77,509 |   |

 

As of December 31, 2003, thecontractual maturities of debt securities were as follows (in thousands):

 
|        |   | **Less than  One Year** |   | **One to  Three Years** |       | **Total** |       |
|-------------|--------|-------------------------|--------|-------------------------|------------|-----------|------------|
|        |   |                    |   |                    | ** ** |      | ** ** |
| Short-term: |   | 93,474                  |   | —                  |       | 93,474    |       |
| Long-term:  |   | —                  |   | 77,509                  |       | 77,509    |       |
|        |   |                    |   |                    |       |      |       |
| Total       |   | 93,474                  |   | 77,509                  |       | 170,983   |       |

 

**5.****                      REPORTINGCOMPREHENSIVE INCOME**

 

Comprehensive income (loss) 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 tablesummarizes the change in each component of accumulated other comprehensiveincome (loss) for the year ended December 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** |   |
|-------------------|--------|--------------------|--------|------------------------------------------|--------|------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|              |   |               |   |                                     |   |                                                                         |   |                                                                                               |   |                                        |   |
| January 1, 2001   |   | Balance            |   | $                                        | (1,797 | )                                                                            | $      | 106                                                                                                |   | $                                           | — |   | $ | (1,691 | ) |
|              |   | Period net change  |   | (3,610                                   | )      | 270                                                                          |   | 1,369                                                                                              |   | (1,971                                      | )      |
| December 31, 2001 |   | Balance            |   | (5,407                                   | )      | 376                                                                          |   | 1,369                                                                                              |   | (3,662                                      | )      |
|              |   | Period  net change |   | 135                                      |   | 1,966                                                                        |   | (1,868                                                                                             | )      | 233                                         |   |
| December 31, 2002 |   | Balance            |   | (5,272                                   | )      | 2,342                                                                        |   | (499                                                                                               | )      | (3,429                                      | )      |
|              |   | Period  net change |   | 799                                      |   | (894                                                                         | )      | (2,210                                                                                             | )      | (2,305                                      | )      |
| December 31, 2003 |   | Balance            |   | $                                        | (4,473 | )                                                                            | $      | 1,448                                                                                              |   | $                                           | (2,709 | ) | $ | (5,734 | ) |

 

F-19

----

 

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

 

As of the date of adoption of SFAS No. 142, onJanuary 1, 2002, Cymer had unamortized goodwill in the amount of $9.8 millionand unamortized identifiable intangible assets, excluding acquired patents, inthe amount of $1.1 million, all of which were subject to the transitionprovisions of SFAS No. 142.

 

Duringthe fourth quarter of 2003, Cymer completed its annual impairment test ofgoodwill and intangible assets, and concluded that no impairment of goodwillexisted.

 

Alsoincluded in intangible assets – net on the accompanying balance sheets areamounts associated with patents which were acquired in 2001 and 2003 (see Note13).  As of December 31, 2002 andDecember 31, 2003, the net carrying amount of these patents was $8.2 millionand $12.7 million, respectively.

 

Aggregateamortization expense was $3,148,000, $160,000 and $160,000 for the years endedDecember 31, 2001, 2002, and 2003, respectively.  As of December 31, 2003, future estimated amortization expense isexpected to be as follows (in thousands):

 

|                         |   | **Future  Amortization** |       |
|------------------------------|--------|--------------------------|------------|
|                         |   |                     | ** ** |
| Year ended December 31, 2004 |   | $                        | 160        |   |
| Year ended December 31, 2005 |   | $                        | 20         |   |

 

Thefollowing table summarizes the activity in the carrying amount of goodwill forthe years ended December 31, 2002 and 2003 (in thousands):

 
| Goodwill as of December 31, 2001                                          |   | $      | 9,791  |   |
|---------------------------------------------------------------------------|--------|--------|--------|--------|
| Goodwill acquired for acquisition of 5% minority  interest of Cymer Korea |   | 189    |   |
| Reclassification of assembled workforce to goodwill                       |   | 617    |   |
| Goodwill as of December 31, 2002                                          |   | 10,597 |   |
| Reversal of deferred tax asset valuation allowance  against goodwill      |   | (2,950 | )      |
| Goodwill as of December 31, 2003                                          |   | $      | 7,647  |   |

 

Incomebefore cumulative change in accounting principle, net income and earnings(loss) per share on a pro forma basis, excluding goodwill and intangible assetamortization expense related to intangibles no longer amortized, would havebeen as follows if SFAS 142 had been adopted on January 1, 2001 (in thousands,except per share data):

 
|                                                                     |   | **Year ended  December 31,** |   |
|--------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                     |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                     |   |                         |   |   |   |   |   |
| Reported  income (loss) before cumulative change in accounting principle |   | $                            | 8,855  |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                     |   |                         |   |   |   |   |   |
| Reported  net income (loss)                                              |   | $                            | 8,485  |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                     |   |                         |   |   |   |   |   |
| Adjustments:                                                             |   |                         |   |   |   |   |   |
| Amortization of goodwill and intangible assets                           |   | 3,008                        |   | — |   | — |   |
| Tax effect                                                               |   | (752                         | )      | — |   | — |   |
|                                                                     |   | 2,256                        |   | — |   | — |   |
| Adjusted income (loss) before cumulative change in  accounting principle |   | $                            | 11,111 |   | $ | 13,596 |   | $ | (15,400 | ) |

 

F-20

----

 
|                                                                 |   | **Year ended  December 31,** |   |
|----------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                 |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                 |   |                         |   |   |   |   |   |
| Adjusted net income (loss)                                           |   | $                            | 10,741 |   | $ | 13,596 |   | $ | (15,400 | ) |
|                                                                 |   |                         |   |   |   |   |   |
| Basic earnings (loss) per share:                                     |   |                         |   |   |   |   |   |
| As reported – before cumulative change in accounting  principle |   | $                            | 0.29   |   | $ | 0.41 |   | $ | (0.44 | ) |
| As adjusted – before cumulative change in accounting  principle |   | $                            | 0.36   |   | $ | 0.41 |   | $ | (0.44 | ) |
|                                                                 |   |                         |   |   |   |   |   |
| As reported – net income (loss)                                 |   | $                            | 0.28   |   | $ | 0.41 |   | $ | (0.44 | ) |
| As adjusted – net income (loss)                                 |   | $                            | 0.35   |   | $ | 0.41 |   | $ | (0.44 | ) |
|                                                                 |   |                         |   |   |   |   |   |
| Diluted earnings (loss) per share:                                   |   |                         |   |   |   |   |   |
| As reported – before cumulative change in accounting  principle |   | $                            | 0.28   |   | $ | 0.39 |   | $ | (0.44 | ) |
| As adjusted – before cumulative change in accounting  principle |   | $                            | 0.36   |   | $ | 0.39 |   | $ | (0.44 | ) |
|                                                                 |   |                         |   |   |   |   |   |
| As reported – net income (loss)                                 |   | $                            | 0.27   |   | $ | 0.39 |   | $ | (0.44 | ) |
| As adjusted – net income (loss)                                 |   | $                            | 0.35   |   | $ | 0.39 |   | $ | (0.44 | ) |

 

**7.****                     ****CREDIT FACILITIES**

 

***Revolving LoanAgreements*** – During 2002 and2003, Cymer had certain loan agreements with a commercial bank which providedfor unsecured revolving loan facilities allowing for borrowings of $10.0million and $20.0 million under a U.S. line of credit and Japanese line ofcredit, respectively.  Under the loanagreements, Cymer was able to borrow in U.S. dollars or Japanese yen, andinterest accrued on outstanding borrowings at LIBOR plus 1.75% on U.S.dollar-denominated borrowings and at the yen Cost of Funds rate plus 1.5% onyen-denominated borrowings. The loan agreements required Cymer to maintaincompliance with certain financial and other covenants, including tangible networth, quick ratio and profitability requirements.  The loan agreements expired on June 16, 2003 and were notrenewed.

 

As of December 31, 2002there was $6.7 million outstanding at an annual interest rate of 1.60% underthe aforementioned loan agreements.

 

***Foreign ExchangeFacilities*** –During 2002 and 2003, Cymer maintained foreign exchange facilities with threedifferent banks in the United States and Japan.  See also “Derivative Instruments” in Note 1.  The foreign exchange facilities provided upto $100 million in 2000 and 2001 to be utilized for spot and futures foreignexchange contracts for periods of up to one year. As of December 31, 2002 and2003, $63.8 million and $81.0 million was utilized under the foreign exchangefacilities, respectively. One of these facilities is associated with the RevolvingLoan Agreements discussed above and was subject to the same covenants.

 

**8.****                     ****IMPAIRMENT OR DISPOSAL OFLONG-LIVED ASSETS**

 

The total amount ofimpairment losses incurred in the years ended December 31, 2001, 2002, and 2003was approximately $510,000, $574,000, and $17.7 million , respectively.  For the year ended December 31, 2001, theimpairment loss of $510,000 included write-offs associated with tenantimprovements in Cymer’s San Diego facility, obsolete software used in thecustomer service and support organization and obsolete lasers used withinresearch and development.  The loss of$510,000 was recorded in the research and development, sales and marketing, andgeneral and administrative expenses, as appropriate, in the accompanyingconsolidated statements of operations. For the year ended December 31,2002, the impairment loss of $574,000 included write-offs associated withtenant improvements in Cymer’s San Diego facility and test equipment usedwithin research and development.  Theloss of $574,000 was recorded in the research and development and general andadministrative expenses, as appropriate, in the accompanying 

 

F-21

----

 

consolidated statements of operations.  For the year ended December 31, 2003 theimpairment loss of $17.7 million included write-offs associated with tenantimprovements, $15.6 million of which resulted from the two leased facilities inSan Diego which were vacated in the third quarter of 2003.  In addition, there were impairment lossesassociated with test equipment used within manufacturing and research anddevelopment.  The loss of $17.7 millionwas recorded in general and administrative, cost of product sales and researchand development expenses, as appropriate, in the accompanying consolidatedstatements of operations.

 

**9.****                     ****CONVERTIBLE SUBORDINATEDNOTES**

 

In August 1997, Cymer issued$172.5 million in aggregate principal amount in a private placement of notes.These 31⁄2% / 71⁄4% Step-UpConvertible Subordinated Notes were due onAugust 6, 2004 and were convertible at the option of the holder into shares ofcommon stock of Cymer. The conversion rate on the 1997 Notes was 21.2766 sharesper $1,000 principal amount or an effective conversion price of $47.00 pershare.  In 2001, Cymer repurchased atotal of $24.9 million of the 1997 notes then outstanding.  The redemption resulted in a gain on debtextinguishment of $610,000.  The 1997Notes were called for redemption on March 25, 2002.  Immediately prior to the March 25, 2002 redemption date, holdersof $113.0 million of the outstanding principal amount converted their 1997Notes into shares of Cymer’s common stock. As a result of these conversions, 2,325,542 shares of Cymer common stockwere issued to the note holders and the remaining $38.0 million of theoutstanding principal amount of the 1997 Notes was redeemed.    Cymer used its 2,000,000 shares oftreasury stock as part of the total 2,325,542 shares issued in theconversion.  The redemption resulted ina loss on debt extinguishment of $163,000.

 

In February 2002, Cymerissued $250.0 million in aggregate principal amount in a private placement ofnotes.  The 2002 Notes are due onFebruary 15, 2009 with interest payable semi-annually on February 15 and August15 of each year at 31⁄2% per annum.  These2002 Notes are convertible into shares of Cymer common stock at a conversionrate of 20 shares per $1,000 principal amount or an effective conversion priceof $50.00 per share.  Cymer used aportion of the net proceeds from this private placement to redeem the 1997Notes.  Cymer may redeem the 2002 Noteson or after February 20, 2005, or earlier if the price of its common stockreaches certain levels.  The 2002 Notesare subordinated to Cymer’s existing and future senior indebtedness and effectivelysubordinated to all indebtedness and other liabilities of Cymer’ssubsidiaries.  The remaining proceedsare to be used for Cymer’s future operating, investing and financingactivities.

 

**10.****              ****STOCKHOLDERS’ EQUITY**

 

***Common StockWarrants*** – During fiscal 2001, Cymer issued warrants topurchase 200,000 shares of its common stock at a weighted average purchaseprice of $31.43 per share in conjunction with the acquisition of certainpatents (See Note 13).  During fiscal 2002 and 2003, no warrants weregranted and no warrants were exercised. The warrants expire in May 2006.

 

***Stock Option and Purchase Plans***- Cymer has the following stock option and stock purchase plans:

 

*1996 Stock Option Plan (the “1996Plan”)* – The 1996 Planprovides for the grant of incentive stock options to employees and nonqualifiedstock options to employees, directors and consultants of Cymer.  The exercise price of stock options grantedunder the 1996 Plan must be at least equal to the fair market value of Cymer’scommon stock on the date of grant. Options issued under the 1996 Plan expirefive to ten years after the options are granted and generally vest and becomeexercisable ratably over a four-year period following the date of grant.  A total of 7,900,000 shares of common stockwere reserved for issuance under the 1996 Stock Plan.  Of these shares, options to purchase 4,476,736 shares areoutstanding and 238,946 shares remain available for grants as of December 31,2003.

 

*1996 Employee Stock Purchase Plan(the “ESPP”)*– TheESPP is intended to qualify under Section 423 of the Code.  Under the ESPP, eligible employees maypurchase shares of common 

 

F-22

----

 

stock from Cymer through payroll deductions of up to15% of his or her compensation (as defined in the plan), at a price per shareequal to 85% of the lower of (i) the fair market value of Cymer’s common stockas of the first day of each offering period under the ESPP or (ii) the fairmarket value of the common stock at the end of the purchase period.  This plan was amended in 2001 by theshareholders to establish two year offering periods with six month purchaseperiods and to increase the plan shares issuable from 500,000 to 800,000.  This plan was amended in 2003 to increasethe plan shares issuable to 1.0 million shares.  The amount of shares issuable under this plan as of December 31,2003 was 154,338, and 845,662 shares have been previously issued.

 

*2000 Equity Incentive Plan (the“2000 Plan”)* – OnAugust 16, 2000, Cymer adopted the 2000 Plan which provides for the grant ofoptions to employees or consultants who are neither directors nor officers. Theexercise price of the options granted under the 2000 Plan will equal the quotedmarket value of the common stock at the date of grant.  Options issued under the 2000 Plan expire tenyears after the options are granted and generally vest and become exercisableratably over a four year period following the date of grant.  This plan was amended in 2002 to increasethe shares reserved for issuance under the plan from 1,850,000 to 4,950,000.  Of these shares, options to purchase2,686,970 shares are outstanding and 1,354,594 shares remain available forgrants as of December 31, 2003.

 

*ACX 1993 Stock Option Plan (the “ACX Plan”)*– Cymer assumed the ACX Stock Option Plan uponcompletion of the acquisition of ACX in February 2001.  Outstanding options may be exercised solelyfor shares of Cymer common stock, according to the conversion ratio establishedin the terms of the acquisition.  Theoutstanding ACX options were converted to options to purchase 336,109 Cymershares, at exercise prices ranging from $2.08 to $38.71 per share.  The ACX Plan provides for the grant ofincentive and nonstatutory options to purchase shares of common stock toemployees, directors and consultants at prices not less than 100% of the fairmarket value of common stock on the date the options are granted.  Options issued under the ACX Plan expirefive to ten years after the options were granted and generally vest and becomeexercisable ratably over a four-year period following the date of grant.  No further options will be issued under theACX Stock Option Plan.  As of December31, 2003, 42,069 shares are outstanding under the ACX Stock Option Plan.

 

In1996, Cymer adopted a *1996 Director Option Plan (the “Director OptionPlan”)* whereby 200,000 shares were reserved for Board of Directoroption grants.  There were 80,000options issued under the Director Option Plan in 1997.  The Director Option Plan was dissolved inOctober 1997; however, 20,000 of these options remain outstanding as ofDecember 31, 2003.

 

*1987 Stock Option Plan (the “1987Plan”)* – The 1987Plan provided for the grant of incentive and nonstatutory options to purchaseshares of common stock to employees and consultants at prices that are not lessthan 100% (85% for nonstatutory options) of the fair market value of Cymer’scommon stock on the date the options are granted.  The 1987 Plan also provided for various restrictions regardingoption terms, prices, transferability and other matters.  Options issued under the 1987 Plan expiredfive to ten years after the options were granted and generally vest and becameexercisable ratably over a four-year period following the date of grant.  This plan expired in 1997, and there are noshares outstanding under this plan as of December 31, 2003.

 

F-23

----

 

Stock option transactions are summarized as follows(in thousands, except per share data):

 
|                               |   | **Number of****Shares** |       | **Weighted  Average  Exercise Price****Per Share** |       |
|------------------------------------|--------|-------------------------|------------|----------------------------------------------------|------------|
|                               |   |                    | ** ** |                                               | ** ** |
| Outstanding,  January 1, 2001 |   | 5,737                   |       | $                                                  | 29.56      |   |
| Granted                            |   | 2,601                   |       | 23.98                                              |       |
| Assumed in acquisition of  ACX     |   | 336                     |       | 10.97                                              |       |
| Exercised                          |   | (550                    | )          | 17.45                                              |       |
| Cancelled                          |   | (579                    | )          | 28.60                                              |       |
|                               |   |                    |       |                                               |       |
| Outstanding, December 31,  2001    |   | 7,545                   |       | 27.75                                              |       |
| Granted                            |   | 1,803                   |       | 28.20                                              |       |
| Exercised                          |   | (900                    | )          | 21.94                                              |       |
| Cancelled                          |   | (326                    | )          | 34.81                                              |       |
|                               |   |                    |       |                                               |       |
| Outstanding, December 31,  2002    |   | 8,122                   |       | 28.20                                              |       |
| Granted                            |   | 1,496                   |       | 32.01                                              |       |
| Exercised                          |   | (1,899                  | )          | 23.22                                              |       |
| Cancelled                          |   | (493                    | )          | 27.38                                              |       |
|                               |   |                    |       |                                               |       |
| Outstanding, December 31,  2003    |   | 7,226                   |       | $                                                  | 30.36      |   |
|                               |   |                    |       |                                               |       |
| Exercisable, December 31,  2003    |   | 4,618                   |       | $                                                  | 30.78      |   |
|                                    |        |                         |            |                                                    |            |  |  |

 

The following table summarizes information as ofDecember 31, 2003 concerning currently outstanding and exercisable options(number of shares in thousands):

 
| **Options Outstanding**                |   | **Options Exercisable** |   |
|----------------------------------------|--------|-------------------------|--------|
| **Range of  Exercise Prices**          |   | **Number  Outstanding** |   | **Weighted Average  Remaining  Contractual Life  (years)** |   | **Weighted  AverageExercise Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise Price** |   |
|                                   |   |                    |   |   |   |   |   |   |   |   | ** ** |
| $   2.08 - $  2.08 |   | 4                       |   | 2.18 |   | $ | 2.08 |   | 3 |   | $ | 2.08 |   |
| $ 10.41 - $14.91                       |   | 53                      |   | 3.37 |   | $ | 12.29 |   | 42 |   | $ | 12.47 |   |
| $ 16.32 - $23.76                       |   | 2,257                   |   | 6.98 |   | $ | 20.53 |   | 1,378 |   | $ | 20.04 |   |
| $ 23.87 - $30.69                       |   | 1,214                   |   | 7.68 |   | $ | 26.84 |   | 867 |   | $ | 26.59 |   |
| $ 30.97 - $39.81                       |   | 2,998                   |   | 7.31 |   | $ | 35.63 |   | 1,791 |   | $ | 36.47 |   |
| $ 40.19 - $60.00                       |   | 700                     |   | 7.54 |   | $ | 47.05 |   | 537 |   | $ | 47.70 |   |
| $   2.08 - $60.00            |   | 7,226                   |   | 7.26 |   | $ | 30.36 |   | 4,618 |   | $ | 30.78 |   |

 

***Stockholder Rights Plan***-  In the event of hostile takeover attempts, including the accumulation ofshares in the open market or through private transactions, the rights planenhances the ability of Cymer’s board of directors to negotiate with apotential acquirer for a fair price to all of the stockholders. Under therights plan, rights were distributed as a dividend at the rate of one right (a“Cymer right”) for each share of common stock held by stockholders of record asof the close of business on March 2, 1998. After March 2, 1998, each holder ofshares of common stock is entitled to a Cymer right in respect of each shareheld by the stockholder. The Cymer rights will expire on February 13, 2008.Under the rights plan, each Cymer right initially entitles stockholders to buyone one-thousandth of a share of preferred stock for $100, subject tosubsequent adjustment. The Cymer rights will be exercisable only if a person orgroup acquires beneficial ownership of 15% or more of Cymer common stock orcommences a tender or exchange offer upon consummation of which the person orgroup would beneficially own 15% or more of Cymer’s common stock.

 

F-24

----

 

If any person becomes thebeneficial owner of 15% or more of Cymer’s common stock, other than pursuant toa tender offer for all outstanding shares approved by a majority of Cymer’sdirectors not affiliated with the person, then each Cymer right not owned bythe acquiring person or related parties will entitle its holder to purchase, atthe Cymer right’s then current exercise price, shares of Cymer’s common stockhaving a value of twice the Cymer right’s then current exercise price (or, incertain circumstances as determined by Cymer’s board of directors, cash, otherproperty or other securities in lieu of purchasing preferred shares). If afterany person has become a 15% stockholder, Cymer is involved in a merger or otherbusiness combination transaction with another person in which Cymer is not thesurviving entity or in which Cymer’s common stock is changed or exchanged, orif Cymer sells 50% or more of its assets or earning power to another person,each Cymer right will entitle its holder to purchase, at the Cymer right’s thencurrent exercise price, shares of common stock of the other person having avalue of twice the Cymer right’s then current exercise price.

 

Prior to their expiration, Cymer is generallyentitled to redeem the Cymer rights at $0.01 per Cymer right at any time priorto a public announcement that a 15% position has been acquired.

 

**11.****              ****INCOME TAXES**

 

Total income taxes forthe years ended December 31, 2001, 2002 and 2003 were allocated as follows (inthousands):

 
|                                       |   | **Years  ended December 31,** |   |     |
|--------------------------------------------|--------|-------------------------------|--------|----------|
|                                       |   | **2001**                      |   | **2002** |   | **2003** |   |   |
|                                       |   |                          |   |     |   |   |   |   |
| To income on  continuing operations        |   | $                             | 2,871  |     | $ | 2,706 |   | $ | (21,464 | ) |
| To stockholder’s  equity and goodwill |   | 532                           |   | (6,683   | ) | (13,005 | ) |   |
| Total income  taxes                        |   | $                             | 3,403  |     | $ | (3,977 | ) | $ | (34,469 | ) |
|                                            |        |                               |        |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

The components of theprovision (benefit) for income taxes are summarized as follows:

 
|                            |   | **Years ended December 31,** |   |
|---------------------------------|--------|------------------------------|--------|
|                            |   | **2001**                     |   | **2002** |   | **2003** |   |
|                            |   | **(in thousands)**           |   |
| Current income taxes:           |   |                         |   |   |   |   |   |
| Federal                         |   | $                            | 1,560  |   | $ | 8,320 |   | $ | (4,082 | ) |
| State                           |   | (3,432                       | )      | 371 |   | (714 | ) |
| Foreign                         |   | 3,017                        |   | 4,262 |   | 3,989 |   |
|                            |   |                         |   |   |   |   |   |
| Total                           |   | 1,145                        |   | 12,953 |   | (807 | ) |
|                            |   |                         |   |   |   |   |   |
| Deferred income taxes:          |   |                         |   |   |   |   |   |
| Federal                         |   | (118                         | )      | (6,874 | ) | (14,904 | ) |
| State                           |   | 1,844                        |   | (3,373 | ) | (4,418 | ) |
| Foreign                         |   | —                       |   | — |   | (1,335 | ) |
|                            |   |                         |   |   |   |   |   |
| Total                           |   | 1,726                        |   | (10,247 | ) | (20,657 | ) |
|                            |   |                         |   |   |   |   |   |
| Income tax provision  (benefit) |   | $                            | 2,871  |   | $ | 2,706 |   | $ | (21,464 | ) |

 

F-25

----

 

The income tax provision (benefit) is different fromthat which would be obtained by applying the statutory Federal income tax rate(35%) to income before income tax expense. The items causing this difference for the period are as follows:

 
|                                                                             |   | **Years ended December 31,** |   |
|----------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                             |   | **2001**                     |   | **2002** |   | **2003** |   |
|                                                                             |   | **(in thousands)**           |   |
|                                                                             |   |                         |   |   |   |   |   |
| Provision at statutory rate                                                      |   | $                            | 4,020  |   | $ | 5,919 |   | $ | (12,520 | ) |
| Foreign provision in excess  of federal statutory rate                           |   | 412                          |   | 1,756 |   | 312 |   |
| State income taxes, net of  federal benefit                                      |   | (1,032                       | )      | (730 | ) | (2,903 | ) |
| EIE benefit                                                                      |   | (787                         | )      | (2,848 | ) | (4,108 | ) |
| Federal tax credits                                                              |   | (2,509                       | )      | (1,990 | ) | (2,123 | ) |
| Tax exempt interest, net of  disallowed expenses                                 |   | (38                          | )      | — |   | — |   |
| Non-deductible amortization  of goodwill and in-process research and development |   | 2,869                        |   | 56 |   | 56 |   |
| Other                                                                            |   | (64                          | )      | 543 |   | (178 | ) |
|                                                                             |   |                         |   |   |   |   |   |
| Provision (benefit) at  effective tax rate                                       |   | $                            | 2,871  |   | $ | 2,706 |   | $ | (21,464 | ) |

 

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income taxpurposes.  Significant components ofCymer’s net deferred tax assets are as follows:

 
|                                                                           |   | **December 31,**   |   |
|--------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                           |   | **2002**           |   | **2003** |   |
|                                                                           |   | **(in thousands)** |   |
|                                                                           |   |               |   |   |   |
| Deferred tax assets:                                                           |   |               |   |   |   |
| Reserves and accruals not  currently deductible                                |   | $                  | 16,084 |   | $ | 15,250 |   |
| Difference between book and  tax basis of inventory and property and equipment |   | 6,156              |   | 4,606 |   |
| Tax carryforwards                                                              |   | 15,089             |   | 59,049 |   |
| Tax effect of foreign  transactions                                            |   | 6,726              |   | 7,169 |   |
| Foreign deferred tax assets                                                    |   | 732                |   | 2,067 |   |
| Total gross deferred tax  assets                                               |   | 44,787             |   | 88,141 |   |
| Valuation allowance                                                            |   | (2,951             | )      | — |   |
| Net deferred tax assets                                                        |   | 41,836             |   | 88,141 |   |
| Deferred tax liabilities                                                       |   | (1,242             | )      | (6,023 | ) |
| Net deferred tax assets                                                        |   | $                  | 40,594 |   | $ | 82,118 |   |

 

Inassessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. Based upon the level of historical taxable incomeand projections for future taxable income, management provided a valuationallowance of $3 million for the year ended December 31, 2002 related to theacquisition of ACX net operating loss and credit carryforwards.  The valuation allowance was released in 2003due to the merger of ACX into Cymer. The release of the valuation allowance generated a benefit to goodwilland had no impact on the tax rate.  Management believes that it is more likelythan not that the results of future operations will generate sufficient taxableincome to realize the deferred tax assets for which a valuation allowance hasnot been provided.

 

AtDecember 31, 2003, Cymer had federal and state tax loss carryforwards of $106.6million and $25.5 million, respectively, which begin to expire in 2018 and2014, respectively.  At December 31,

 

F-26

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2003,Cymer had federal and state tax credit carryforwards of $12.2 million and $10.3million, respectively, which begin to expire in 2018 and 2010, respectively.

 

It is Cymer’s intention to reinvest undistributedearnings of its foreign subsidiaries and thereby indefinitely postpone theirremittance.  Accordingly, no provisionhas been made for foreign withholding taxes or United States income taxes whichmay become payable if undistributed earnings of foreign subsidiaries were paidas dividends to Cymer.

 

Cymer benefits from a tax holiday in Korea where itmanufactures certain products.  The taxholiday is scheduled to expire in nine years. The effect of the tax holiday has not had a material impact on theCompany’s net income and net income per share over the past year.

 

**12.****              ****CONTINGENCIES AND COMMITMENTS**

 

***Leases*** – Cymer leases certain facilities undernon-cancelable operating leases.  Thelease terms on these facilities are through January 1, 2010 and provide forcertain rent abatements and minimum annual increases and options to extend theterms.  In addition, Cymer has a landlease in Korea with a lease term through December 2020.  This land lease is currently exempt fromlease payments because the building meets certain investment and operationalcriteria of the Korean government. Cymer also leases certain equipment under capital and short-termoperating lease agreements.  The capitalleases expire on various dates through 2004.

 

Rent expense under operating leases is recognized ona straight-line basis over the life of the related leases and totaledapproximately $5,052,000, $4,545,000 and $4,773,000 for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

The net book value of assetsunder capital leases at December 31, 2002 and 2003 was approximately$112,000 and $61,000, which are net of accumulated amortization ofapproximately $187,000 and $86,000, respectively.

 

Total future minimum leasecommitments under operating and capital leases are as follows (in thousands):

 
| **Years  ending December 31,**              |   | **Operating** |   | **Capital** |   |
|---------------------------------------------|--------|---------------|--------|-------------|--------|
|                                        |   |          |   |        |   |
| 2004                                        |   | $             | 4,507  |        | $      | 45 |   |
| 2005                                        |   | 3,809         |   | —      |   |
| 2006                                        |   | 3,787         |   | —      |   |
| 2007                                        |   | 3,782         |   | —      |   |
| 2008                                        |   | 3,236         |   | —      |   |
| Thereafter                                  |   | 3,329         |   | —      |   |
| Total                                       |   | $             | 22,450 |        | 45     |   |
|                                        |   |          |   |        |   |
| Less amount representing  interest          |   |          |   | —      |   |
|                                        |   |          |   |        |   |
| Present value of minimum  lease payments    |   |          |   | 45          |   |
| Less current portion                        |   |          |   | (45         | )      |
|                                        |   |          |   |        |   |
| Long term obligations under  capital leases |   |          |   | $           | — |   |

 

***Patent LicenseAgreement*** – Cymerhas a patent license agreement for a non-exclusive worldwide license to certainpatented light source technology.  Underthe terms of the agreement, Cymer is required to pay royalties ranging from0.25% to 5.0% of gross sales and leases as defined depending on the totalamounts attained subject to an annual maximum of $100,000.  Royalty fees totaled $100,000 in each of theyears ended December 31, 2001, 2002 and 2003.

 

F-27

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***Employee SavingsPlan*** – Cymer has a401(k) plan that allows participating employees to contribute a percentage oftheir salary, subject to annual limits. The Plan is available to substantially all full-time United Statesemployees.  Effective January 1, 1997through December 31, 1999, Cymer matched 100% of each eligible employee’scontributions, up to $500 per year.  ThePlan was amended effective January 1, 2000 to include a matching contributionof up to 4% of each participating employee’s compensation, not to exceed $4,000per year.  Under the Plan, Cymercontributed $1,504,000, $1,438,000, and $1,558,000 for the years ended December31, 2001, 2002, and 2003, respectively. Effective January 1, 2004, the 401(k) plan was amended to increase theemployer matching contribution of up to 5% of each participating employee’scompensation, not to exceed $5,000 per year.

 

***Executive DeferredCompensation Plan***– Cymer has an executive deferred compensation plan for certain officers andkey executives.  Beginning in 2001,Cymer used corporate owned life insurance to finance the plan.  Compensation expense under this plan totaled$684,000, $367,000 and $391,000 for the years ended December 31, 2001, 2002 and2003, respectively.  Cymer’s liabilityfor deferred compensation totaled $1,691,000 and $2,250,000 as of December 31,2002 and December 31, 2003, respectively, and is included in otherliabilities.  The cash surrender valueof the life insurance policies totaled $487,000 and $869,000 as of December 31,2002 and 2003, respectively, and is included in other assets.

 

***Executive Optionand Group Health Coverage Extension Program*** – Cymer has an executive option and healthcoverage extension program for eligible executives who meet certain minimumservice and age requirements.  Thisprogram is designed to provide extended benefits to eligible executives whoretire and cease to serve Cymer on a full-time basis.  Under the terms of the plan, the executive acts as a consultantto Cymer for a term of four years.  Inreturn for these services, the program allows the executive to continue vestingin his or her stock options after the retirement separation date.  The program also provides the executiveswith specified health insurance continuation benefits.  As of December 31, 2002, there were noexecutives active in this program.  In2003 one former executive was participating in this program.  The cost for this program was not materialin 2003.

 

***Retirement Plan*** – Cymer Japan has a retirement benefit planfor all Cymer Japan employees and Japanese directors.  The plan consists of a multi-employer retirement plan coveringall employees and life insurance policies covering all employees and Japanesedirectors. The multi-employer retirement plan was established under the Smalland Medium-Size Enterprise Retirement Benefits Cooperative Law.  Cymer Japan also has a Retirement Allowanceand Pension Plan.  Expense under theseplans totaled $492,000, $247,000, and $526,000 for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

***Korea CustomsInvestigation*****–**The****customs agency in Korea has asserted thatparts being imported into Korea from Cymer’s corporate office in San Diego wereclassified improperly and some used items which were returned to San Diego werevalued improperly during the period from 1997 through July 2003.  Although Cymer does not agree with theseassertions, Korean customs has begun to assess and require payment from Cymeron additional duties related to shipments during this time period.  As a result of these assertions anddiscussions that Cymer has had to date with the customs agencies in Korea,Cymer accrued a liability of $4.7 million of which $2.5 million was paid toKorean customs through December 31, 2003. The remaining accrual is included in accrued patents, royalties andother fees in the accompanying consolidated balance sheets.  The expense resulting from this recordedliability was included in cost of product sales in the accompanyingconsolidated statements of operations as they pertain to potential costsassociated with the shipment of Cymer’s product.

 

***Contingencies****–* Cymer is party to legal actions in thenormal course of business.  Based inpart on the advice of legal counsel, management does not expect the outcome oflegal action in the normal course of business to have a material impact on thefinancial position or results of operations of Cymer.

 

F-28

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Cymer’s former Japanese manufacturing partner,Seiko, and one of Cymer’s Japanese customers have been notified that Cymer’slight source systems in Japan may infringe certain Japanese patents held byanother Japanese company.  Cymer hasagreed to indemnify its former Japanese manufacturing partner and its customersagainst patent infringement claims under certain circumstances, even after thetermination 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.

 

**13.****              ****PATENT LICENSE AGREEMENTS**

 

In May2001, Cymer acquired certain patents for use in its DUV light sourceapplications.  The total considerationfor this transaction was $10.3 million, which included a $6.0 million cashpayment and the issuance of 200,000 warrants valued at $4.3 million. Thewarrants were valued on the date of issuance using the Black-Scholes pricingmodel using the following assumptions: 87% volatility, 5.0% risk-free interestrate and 4.6 years expected life.  Thetotal value of these patents are being amortized over eight years whichrepresents the remaining life of the patents purchased under the agreement.  The amortization of these patents isincluded in cost of product sales on the accompanying statements of operationssince they are used in products which are currently being shipped to customers.

 

InNovember 2003, Cymer acquired the rights to the same list of patents as in theMay 2001 agreement but for a different field of use, for a total amount of $6.0million in cash.  Instead of DUV lightsource applications for the patents, this license agreement allows Cymer to usethe patents for EUV and other future applications.  The total value of these patents are being amortized over aperiod of 5.5 years which represents the remaining life of the patentspurchased under the agreement. The amortization of these patents is included inresearch and development expenses on the accompanying statements of operationssince the field of use involves applications which are still in the researchand development stages.  As of December31, 2002 and December 31, 2003, the net carrying amount of these patents was $8.2million and $12.7 million, respectively.

 

F-29

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**14.****              ****RELATED PARTY TRANSACTIONS**

 

***CollaborativeArrangement*** –Cymer has a collaborative arrangement with a Japanese company that was also astockholder of Cymer until 2000.  Thearrangement, entered into in August 1992, includes a product license agreementand contract manufacturing agreement. The general provisions of these agreements are as follows:

 

*Product License Agreement*– Cymer granted to the stockholder the exclusive right in Japan and thenon-exclusive right outside Japan to manufacture and sell one of Cymer’sproducts and subsequent enhancements thereto. Cymer also granted thestockholder the right of first refusal to license and fund the development ofnew technologies not developed with funding from other parties.  In exchange for these rights, Cymer receivedup-front license fees and was entitled to royalties of 5% on related productsales through September 1999, after which the royalty rate was subject torenegotiation.  The license agreementalso provides that product sales between Cymer and the stockholder will be at a15% discount from the respective companies’ list price. The agreementterminates in August 2012.  There was noactivity under this agreement in 2001, 2002 and 2003.

 

*Contract Manufacturing Agreement*– The stockholder agreed to manufacture for Cymer certain products and Cymerwas required to purchase a specified percentage of its total annual product, asdefined, from the stockholder.  Cymerand this stockholder mutually agreed to the termination of this contract effectiveMarch 31, 2003.

 

Cymer made $3.1 million, $2.0 million and $351,000 inpurchases under this agreement in 2001, 2002 and 2003, respectively.  In addition, Cymer had payables due underthis agreement of $155,000 at December 31, 2002 and no payables due at December31, 2003.

 

**15.****              ****SEGMENT INFORMATION**

 

Cymer designs, manufactures and sells excimer lightsource systems, replacement parts, and support services for use inphotolithography systems used in the manufacture of semiconductors withcritical features sizes.  In accordancewith Statement of Financial Accounting Standards No. 131, “Disclosure aboutSegments of an Enterprise and Related Information”,  Cymer currently considers its business to consist of onereportable operating segment.

 

**GeographicInformation**

 

Presented below is information regarding sales tounaffiliated customers, operating income (loss) from operations, long-livedassets, all other identifiable assets and total identifiable assets, classifiedby operations located in the United States, Japan, Korea, Taiwan, Singapore,the People’s Republic of China (“China”), and the Netherlands.  Long-lived assets includes net property,plant and equipment by geographic area. Cymer sells its excimer light sources in Japan through Cymer Japan.  Intercompany sales to the subsidiaries aregenerally priced between 90% to 95% of the price of products sold to outsidecustomers.  All significant intercompanybalances are eliminated in consolidation. The majority of corporate costs and expenses are incurred in the UnitedStates and are reflected in the operating loss from the United Statesoperations.

 

F-30

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|                            |   | **Year ended December 31, 2001** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **(in thousands)**               |    |
|                            |   | **United States**                |    | **Japan** |   | **Korea, Taiwan,  Singapore, China,  and the Netherlands** |   | **Consolidated** |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Sales to unaffiliated customers |   | $                                | 124,325 |   | $ | 111,407 |   | $ | 33,712 |   | $ | 269,444 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Operating income (loss)         |   | (57,531                          | )       | 57,545 |   | 13,527 |   | 13,541 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Long-lived assets               |   | 85,707                           |    | 2,939 |   | 1,773 |   | 90,419 |   |
| All other identifiable assets   |   | 333,793                          |    | 29,866 |   | 29,268 |   | 392,927 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Total identifiable assets       |   | $                                | 419,500 |   | $ | 32,805 |   | $ | 31,041 |   | $ | 483,346 |   |

 
|                            |   | **Year ended December 31, 2002** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **(in thousands)**               |    |
|                            |   | **United States**                |    | **Japan** |   | **Korea, Taiwan,  Singapore, China,  and the Netherlands** |   | **Consolidated** |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Sales to unaffiliated customers |   | $                                | 119,708 |   | $ | 122,917 |   | $ | 47,535 |   | $ | 290,160 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Operating income (loss)         |   | (62,033                          | )       | 61,990 |   | 18,706 |   | 18,663 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Long-lived assets               |   | 102,695                          |    | 3,231 |   | 6,283 |   | 112,209 |   |
| All other identifiable assets   |   | 585,539                          |    | 36,312 |   | 32,827 |   | 654,678 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Total identifiable assets       |   | $                                | 688,234 |   | $ | 39,543 |   | $ | 39,110 |   | $ | 766,887 |   |

 
|                            |   | **Year ended December 31, 2003** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **(in thousands)**               |    |
|                            |   | **United States**                |    | **Japan** |   | **Korea, Taiwan,  Singapore, China,  and the Netherlands** |   | **Consolidated** |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Sales to unaffiliated customers |   | $                                | 92,608  |   | $ | 116,531 |   | $ | 58,357 |   | $ | 267,496 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Operating income (loss)         |   | (109,800                         | )       | 46,831 |   | 28,335 |   | (34,634 | ) |
|                            |   |                             |    |   |   |   |   |   |   |
| Long-lived assets               |   | 120,452                          |    | 1,918 |   | 6,479 |   | 128,849 |   |
| All other identifiable assets   |   | 581,929                          |    | 46,650 |   | 45,793 |   | 674,372 |   |
|                            |   |                             |    |   |   |   |   |   |   |
| Total identifiable assets       |   | $                                | 702,381 |   | $ | 48,568 |   | $ | 52,272 |   | $ | 803,221 |   |

 

F-31

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**16.****              ****SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**

 
|                              |   | **QUARTERLY RESULTS OF OPERATIONS**           |   |
|-----------------------------------|--------|-----------------------------------------------|--------|
|                              |   | **(in thousands, except for per share data)** |   |
|                              |   | **Years ended December 31, 2002**             |   |
|                              |   | **1st**                                       |   | **2nd** |   | **3rd** |   | **4th** |   |
|                              |   |                                          |   |   |   |   |   |   |   |
| Revenues                          |   | $                                             | 61,983 |   | $ | 73,669 |   | $ | 84,484 |   | $ | 70,024 |   |
|                              |   |                                          |   |   |   |   |   |   |   |
| Operating income (loss)           |   | $                                             | 6,944  |   | $ | 9,265 |   | $ | 6,571 |   | $ | (4,117 | ) |
|                              |   |                                          |   |   |   |   |   |   |   |
| Net income (loss)                 |   | $                                             | 4,088  |   | $ | 6,550 |   | $ | 6,855 |   | $ | (3,897 | ) |
|                              |   |                                          |   |   |   |   |   |   |   |
| Basic earnings (loss) per share   |   | $                                             | 0.13   |   | $ | 0.19 |   | $ | 0.20 |   | $ | (0.11 | ) |
|                              |   |                                          |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share |   | $                                             | 0.12   |   | $ | 0.18 |   | $ | 0.20 |   | $ | (0.11 | ) |

 
|                              |   | **Years ended December 31, 2003** |   |
|-----------------------------------|--------|-----------------------------------|--------|
|                              |   | **1st**                           |   | **2nd** |   | **3rd** |   | **4th** |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Revenues                          |   | $                                 | 67,599 |   | $ | 62,416 |   | $ | 64,437 |   | $ | 73,044 |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Operating income (loss)           |   | $                                 | (2,702 | ) | $ | (16,974 | ) | $ | (20,160 | ) | $ | 5,202 |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Net income (loss)                 |   | $                                 | (3,362 | ) | $ | (5,193 | ) | $ | (8,519 | ) | $ | 1,674 |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Basic earnings (loss) per share   |   | $                                 | (0.10  | ) | $ | (0.15 | ) | $ | (0.24 | ) | $ | 0.05 |   |
|                              |   |                              |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share |   | $                                 | (0.10  | ) | $ | (0.15 | ) | $ | (0.24 | ) | $ | 0.04 |   |

 

**17.****              ****SUBSEQUENT EVENTS**

 

On January 26, 2004, Cymer signed a research anddevelopment agreement with Intel Corporation (“Intel”).  Total funding under the agreement is $20.0million and will provide Cymer with funding over the next three years toaccelerate the development of production-worthy EUV lithography lightsources.  The funding to be receivedfrom Intel under this agreement is milestone based and will be netted againstCymer’s total research and development expenses in the period that themilestone is completed.

 

Aspart of the research and development agreement signed with Intel, Cymer alsoagreed to provide Intel with indemnity against any infringement of theintellectual property rights of any third party arising from Intel’s purchase and/oruse of EUV source systems, such indemnity to be negotiated as part of thepurchase agreement.

 

On February 2, 2004, Cymer acquired 6% of theremaining 25% minority interest in its majority-owned subsidiary, CymerKorea.  Cymer paid a total of $2.0 millionfor this 6% interest and recorded $1.3 million of the $2.0 million as anadditional investment in Cymer Korea and the remaining $711,000 asgoodwill.  This transaction increasedCymer’s total interest in Cymer Korea from 75% to 81%.

 

On February 4, 2004, Cymer signed an intellectualproperty license agreement with Intel for the use of certain Intel patents andtrade secrets related to the EUV technology. Under the terms of this agreement, Cymer will pay license fees to Intelif Cymer is successful in commercializing an EUV 

 

F-32

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lithography light source capable of high volumemanufacturing by the end of the second quarter of 2008.  The license payments under this agreementare triggered in the quarter in which Cymer successfully ships the first completehigh volume manufacturing EUV source system. Upon shipment of this first unit, Cymer is to pay Intel $1.25 million inlicense fees per quarter for a period of sixteen quarters.  The quarterly license amounts paid to Intelwill be related to Cymer’s sale of EUV light source systems and, as a result,will be recorded as cost of sales in the period that the payment is made toIntel.

 

F-33

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**CYMER, INC.**

**SCHEDULE II**

**VALUATIONAND QUALIFYING ACCOUNTS**

**Years EndedDecember 31, 2001, 2002 and 2003**

**(in thousands)**

 
|                                |   | **Balance at  Beginning of Year** |   | **Additions (net)****(1)** |   | **Deductions** |   | **Balance at  End of Year** |   |
|-------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|----------------|--------|-----------------------------|--------|
|                                |   |                              |   |                       |   |           |   |                        |   |
| **Allowance for Doubtful Accounts** |   |                              |   |                       |   |           |   |                        |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| Year ended December 31, 2001        |   | $                                 | 2,078  |                       | $      | 182            |   | $                           | (63    | ) | $ | 2,197 |   |
| Year ended December 31, 2002        |   | $                                 | 2,197  |                       | $      | (399           | )      | $                           | (42    | ) | $ | 1,756 |   |
| Year ended December 31, 2003        |   | $                                 | 1,756  |                       | $      | 250            |   | $                           | (42    | ) | $ | 1,964 |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| **Inventory Allowance**             |   |                              |   |                       |   |           |   |                        |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| Year ended December 31, 2001        |   | $                                 | 15,000 |                       | $      | 6,047          |   | $                           | (7,519 | ) | $ | 13,528 |   |
| Year ended December 31, 2002        |   | $                                 | 13,528 |                       | $      | 6,658          |   | $                           | (5,486 | ) | $ | 14,700 |   |
| Year ended December 31, 2003        |   | $                                 | 14,700 |                       | $      | 4,324          |   | $                           | (6,996 | ) | $ | 12,028 |   |

 

----

(1)                                  Includes reversals of allowance amounts asdeemed necessary.

 

 

See accompanying independent auditors’ report.

 

S-1

----

 

(b)  Exhibit Index
| 23.1   |   | Consent of KPMG LLP,  Independent Auditors                                                  |
|--------|--------|---------------------------------------------------------------------------------------------|
|   |   |                                                                                        |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act |
|   |   |                                                                                        |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act |
|   |   |                                                                                        |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act |
|   |   |                                                                                        |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act |

.

 

----

 

 

 

SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused this Amendment No. 1 on Form 10-K/A tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|                  |   | CYMER, INC.                                         |
|-----------------------|--------|-----------------------------------------------------|
|                  |   |
|                  |   |
| Dated: March 16, 2004 | By:    | /s/                                                 | ROBERT P. AKINS |   |
|                  |   | Robert P. Akins,                                    |
|                  |   | Chief Executive Officer,  and Chairman of the Board |
|                       |        |                                                     |  |  |  |

 

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