**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|-------------------------------------------------------------------------------------------|

 

**For the Fiscal Year EndedDecember 31, 2002**

** **

**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 registrant as specified in its charter)

 

| **Nevada**                                                      |   | **33-0175463**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **16750 Via Del Campo Court, San Diego, CA**                    |   | **92127**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |

 

Registrant’stelephone number including area code: **(858)385-7300**

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

| **Title of each class**                                        |   | **Name of each Exchange  on which registered** |
|----------------------------------------------------------------|--------|------------------------------------------------|
| Common Stock, $.001 par value  Preferred Share Purchase Rights |   | Nasdaq National Market  Nasdaq National Market |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý     Noo

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).

Yesý    Noo

 

The aggregate market value of the voting stock heldby non-affiliates of the registrant, based upon the closing price of $35.04 forshares of the registrant’s Common Stock on June 28, 2002 as reported on theNasdaq National Market, was approximately $1,171,382,750.  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.

 

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

 

DOCUMENTS INCORPORATED BY REFERENCE

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

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

 

 

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CYMER, INC.

 

2002 Annual Report on Form 10-K

 

TABLE OF CONTENTS

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

 

*CYMER* and *INSISTON CYMER* are registered trademarks of Cymer, Inc.

 

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

 

PART I

 

### **Item1.  Business**

 

#### **General**

 

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

 

#### **Other Information**

 

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

 

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

 

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

#### ** **

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#### **Productsand Services**

 

Cymer’sproducts primarily consist of photolithography light sources, replacement partsand service.

 

*Photolithography Light Sources*

 

Cymer’s photolithography light sources producenarrow bandwidth pulses of short wavelength light within the DUV spectrum. Thethree DUV wavelengths are measured in fractions of a micron or in nanometers(“nm”) One nanometer equals one billionth of a meter.  The light sources are referred to according to the gases mixed toproduce the light or by the wavelength. Krypton fluoride (“KrF”) gases produce 248 nm light, argon fluoride(“ArF”) gases 193 nm light, and Fluorine (“F2”) gas 157 nm light. The lightsources permit very fine feature resolution for imaging the circuitry on thewafer and high throughput in wafer processing. Cymer has designed its light sources to be highly reliable, easy toinstall and compatible with existing semiconductor manufacturing processes.  Cymer’s light sources are used to patternthe integrated circuits, or “chips”, that power many of today’s advancedconsumer and business electronics.  In2002, Cymer sold 282 light source systems at an average selling price (“ASP”)of $720,000.

 

***248 nm KrF LightSources***

 

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

### ** **

### **6000 Series**- The 6000 Seriesconsists of two light source models that are within Cymer’s cutting-edge 248 nmKrF portfolio and are designed for the production of semiconductor devices downto 130 nm (0.13 micron) design rules:

 

•                  **ELS-6010****-** The ELS-6010 is a 20 watt (“W”) KrFproduction light source that offers a 2.5 kHz repetition rate and is designedfor lithography steppers and scanners with >0.70 numerical aperture (“NA”)lens designs. The ELS-6010 is a key enabler in the production of devices with130 nm and below design rules. The ELS-6010 delivers advanced line-narrowedspectral bandwidth of 0.5 pm full width half maximum (“FWHM”) and 1.4 pm (95%energy integral). The ELS-6010, which is based on the production provenELS-6000TM, also incorporates power and chamber module advances forsuperior dose stability improving critical dimension (“CD”) control and processyield.

 

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

 

### **5000 Series**- With a repetition rateof 1 kHz, this solid-state pulse power light source series is engineered usingmodular construction. Enabling higher device yields by delivering improvedenergy stability, this series is designed specifically for use in themanufacture of semiconductors with 250 nm and smaller design rules.  The 5000 series consists of the followingmodels: ELS-5010, ELS-5005 upgrade, ELS-5000 and EX-5000.

 

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***193 nm ArF Light Sources***

 

**XLA 100** - The XLA 100 isCymer’s new, ultra line-narrowed, high power 4 kHz ArF production light sourcefor next generation lithography tools. Featuring a dual chamber design calledMaster Oscillator Power Amplifier (“MOPA”), the XLA 100 provides outstandingoptical and power performance. MOPA enables the XLA 100 to produce 40 W ofoutput power, which is twice the output power of Cymer’s earlier and previouslymost powerful, single chamber-based ArF models.

 

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

 

**NanoLithTM 7000****-**TheNanoLith 7000, 4 kHz 20W ArF light source for 193 nm step-and-scan toolsprovides leading edge optical performance. With highly line-narrowed bandwidthof £0.5 FWHM and £1.3 pm (95% energy integral), the NanoLith7000 enables high contrast imaging from lithography scanners using lenses withan NA over 0.75. The NanoLith 7000 ArF light source model incorporates newtechnological solutions in the area of pulsed power design, light source discharge chamber, and wavelength stabilization, toenable tight control of exposure dose(<± 0.3%) and light source wavelength (<± 0.03pm).

 

**ELS-6010A****-**TheELS-6010A is a highly line-narrowed, high power 193 nm light source forlithography tools.  The ELS-6010A hasbeen designed to meet resolution image contrast, and wafer throughputrequirements in semiconductor chip production at the <130 nm node.  The shorter wavelength enables chip designto shrink, leading to higher processor speed, more memory per chip, and betteryield per wafer.  The ELS-6010A, 2kHz 10watt ArF production light source for 193 nm step-and-scan tool provides leadingedge optical performance.  With a highlyline-narrowed bandwidth, the ELS-6010A enables high contrast imaging fromlithography scanners using high NA lenses. The ELS-6010A ArF light source model incorporates new technologicalsolutions in the area of light source discharge chamber and wavelengthstabilization, and enables tighter control of exposure dose (<+0.3%).

 

**ELX-5000A****- **With a repetition rate of 1 kHz, this solid-state pulse power lightsource series is engineered using modular construction. Enabling higher deviceyields by delivering improved energy stability, this series is designedspecifically for use in the manufacture of semiconductors with 250 nm and smallerdesign rules.  Designed for steppers andscanners with numerical apertures as high as 0.70, the ELX-5000A provides 5Watts of output power, controls bandwidth to 2.0 pm 95% energy integral, anddelivers an energy dose stability of ±0.6%.

 

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

 

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

 

*Replacement Parts*

 

Certaincomponents and subassemblies included in Cymer’s light sources requirereplacement or refurbishment following extended operation.  For example, the discharge chamber ofCymer’s light sources has an expected life of approximately three to ten billionpulses, depending on the model.

 

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Cymer estimates that a light source used in asemiconductor production environment will require one to two replacementchambers per year, depending upon the level of usage.  Similarly, certain optical components of the light sourcedeteriorate with continued exposure to DUV light and require periodicreplacement.  Cymer provides these andother spare and replacement parts for its photolithography light sources asneeded by its customers.

 

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

 

*Service*

 

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

 

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

 

**Customers and End Users**

 

Cymersells its photolithography light source products to each of the threemanufacturers of DUV photolithography tools:

 
| ASM  Lithography | Canon | Nikon |
|------------------|-------|-------|

 

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

 

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

 

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

 

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Endusers of Cymer’s light sources include the world’s 20 largest semiconductormanufacturers. The following semiconductor manufacturers have purchased one ormore DUV photolithography tools incorporating Cymer’s light sources:

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

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†  Asemiconductor industry consortium.

 

**Backlog**

 

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

 

**Manufacturing**

 

Cymer’smanufacturing activities consist of material management, assembly, integrationand testing.  These activities areperformed in a 124,000 square foot facility in San Diego, California thatincludes approximately 31,000 square feet of Class 10,000 cleanroom manufacturingand test space.  In order to focus itsown resources, capitalize on the expertise of its key suppliers and respondmore efficiently to customer demand, Cymer has outsourced the manufacture ofmany of its subassemblies. Cymer’s outsourcing strategy is exemplified by themodular design of Cymer’s products. Substantially all  manufacturingof the nonproprietary subassemblies have been outsourced. As a result, Cymer isincreasingly dependent upon these outsourced suppliers to meet Cymer’s manufacturingschedules.  The failure by one or moreof these suppliers to supply Cymer on a timely basis with sufficient quantitiesof components or subassemblies that perform to Cymer’s specifications couldaffect Cymer’s ability to deliver completed light sources to its customers onschedule. Cymer believes that the highly outsourced content and manufacturabledesign of its products allows for reduced manufacturing cycle times andincreased output per employee. To improve current production efficiencies,control costs, and manage overall manufacturing capacity, Cymer intends tocontinue to provide additional training to manufacturing

 

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

 

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

 

Duringthe period from 1997 through March 2003, Cymer also had additionalmanufacturing capacity as a result of its contract manufacturing agreement withSeiko Instruments, Inc.  (“Seiko”).  Seiko was qualified as a contract manufacturerof Cymer’s light source systems and began production of its light sources in1997.  Although the original agreement,which was set to expire in 2003, could have been renewed for an additional twoyears, Cymer and Seiko have mutually consented to the termination of thiscontract.  As a result, Seiko will nolonger manufacture light source systems for Cymer effective March 31,2003.  The termination of this agreementis not expected to impact Cymer’s production of light source systems in thefuture.

 

Certain of the components and subassemblies included in Cymer’sproducts are obtained from a single supplier or a limited group ofsuppliers.  For certain opticalcomponents used in its light source systems, Cymer currently utilizes a singlesupplier.  Although Cymer has notaggressively pursued other vendors for these optical components, it hasattempted to qualify one other vendor. To date, this vendor has been unsuccessful in producing these opticalcomponents and has not been qualified by Cymer.  To reduce the risk associated with this single supplier, Cymercarries a two-year supply of these optical components.  This two year supply is based upon currentbusiness activities, so any significant increase in production would likelyresult in a quicker consumption of these optical components. To date Cymer hasbeen able to obtain adequate supplies of the components and subassemblies usedin the production of Cymer’s light source systems in a timely manner fromexisting sources.  If in the futureCymer is unable to obtain sufficient quantities of required materials,components or subassemblies, or if such items do not meet Cymer’s qualitystandards, delays or reductions in product shipments could occur which couldhave a material adverse effect on Cymer’s business, financial condition andresults of operations.

 

**Sales and Marketing**

 

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

 

**Service and Support**

 

Cymerbelieves its success in the semiconductor photolithography market is highlydependent upon after-sales support of both the direct customer and the enduser.  Cymer supports its customers withfield service, technical service engineers and training programs, and in somecases provides ongoing on-site technical support at the customer’smanufacturing facility.  Prior toshipment, Cymer’s support personnel typically assist the customer in sitepreparation and inspection and provide customers with training at Cymer’sfacilities or at the customer’s location. Direct customers and end users arealso provided with a comprehensive set of manuals, including operations,maintenance, service, diagnostic and safety manuals.

 

Cymer’sfield engineers and technical support specialists are based at its San Diegoheadquarters, and at its field service offices located throughout the UnitedStates. Support in Europe,

 

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

 

Cymerbelieves that the need to provide fast and responsive service to thesemiconductor manufacturers using its light sources is critical and that itcannot depend solely on its customers to provide this specialized service.  Therefore, Cymer believes it is essential tomaintain, through its own personnel and trained third-party sources, a rapidresponse capability to service its customers throughout the world.  Accordingly, Cymer has an ongoing effort tocontinuously develop its direct support infrastructure in Japan, Korea, Taiwanand Southeast Asia, Singapore, the People’s Republic of China, Europe and theUnited States.  This task entailsrecruiting and training qualified field service personnel or identifyingqualified independent firms and maintaining effective and highly trained organizationsthat can provide service to customers in various countries in their assignedregions.

 

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

 

#### **Researchand Development**

 

Thesemiconductor industry is subject to rapid technological change and new productintroductions and enhancements.  Cymerbelieves that continued and timely development and introduction of new andenhanced light source products are essential for Cymer to maintain itscompetitive position.  Cymer intends tocontinue to develop its technology and innovative products to meet customerdemands. Current projects include enhancements to Cymer’s KrF and ArF lightsources and the new MOPA platform. Other research and development efforts ofthe next generation of photolithography light sources are currently focused onF2 and extreme ultra violet (“EUV”) technology and product development. Inaddition there are ongoing efforts to improve ongoing products, reducemanufacturing costs, lower the cost of light source operation, enhance lightsource performance, develop new features for existing light sources, andconduct research and development of non-light source products.  In March 2002, Cymer announced an agreementwith a major U.S. chipmaker to provide funding for Cymer’s research anddevelopment efforts on EUV technology.

 

Cymerhas historically devoted a significant portion of its financial resources toresearch and development programs and expects to continue to allocatesignificant resources to these efforts. Research and development expenses for2000, 2001, and 2002 were approximately $45.4 million, $58.4 million, and $73.7million, respectively.

 

Inaddition to funding its own research and development projects, Cymer haspursued a strategy of securing research and development contracts fromcustomers, government agencies and SEMATECH, a semiconductor industryconsortium, in order to develop advanced technology for current and futurelight source systems based on Cymer’s core technology.  Revenues generated from research anddevelopment contracts amounted to approximately $1.2 million, $2.4 million, and$2.2 million during 2000, 2001, and 2002, respectively.

 

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

 

7

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#### **IntellectualProperty Rights**

 

Cymerbelieves that the success of its business depends more on such factors as thetechnical expertise of its employees, as well as their innovative skills andmarketing and customer relations ability, than on patents, copyrights, tradesecrets and other intellectual property rights. Nevertheless, the success ofCymer may depend in part on patents.  Asof December 31, 2002, Cymer owned 165 United States patents covering certainaspects of technology associated with light sources and piezo techniques.  Such patents will expire at various timesduring the period from January 2008 through April 2021.  As of December 31, 2002, Cymer had alsoapplied for 88 additional patents in the United States. As of December 31, 2002,Cymer owned 149 foreign patents and had filed 328 patent applications pendingin various foreign countries.

 

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

 

Othersmay have filed and in the future may file patent applications that are similaror identical to those of Cymer. To determine the priority of inventions, Cymermay have to participate in interference proceedings declared by the UnitedStates Patent and Trademark Office. Such interference proceedings could resultin substantial cost to Cymer.  Suchthird-party patent applications might have priority over patent applicationsfiled by Cymer.

 

Cymeralso relies upon trade secret protection, employee and third-partynondisclosure agreements and other intellectual property protection methods toprotect its confidential and proprietary information.  Despite these efforts, third parties might independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to Cymer’s trade secrets or disclose such technology.  Cymer might not be able to meaningfullyprotect its trade secrets.

 

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

 

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

 

Specifically,Cymer has engaged in discussions with Gigaphoton, a joint venture between Ushioand Komatsu, with respect to certain of Komatsu’s Japanese patents, in thecourse of which Komatsu has also identified to Cymer a number of additionalJapanese and U.S. patents that Komatsu asserts may be infringed by****Cymeror by Cymer’s former Japanese manufacturing partner, Seiko.  Komatsu has also notified one of Cymer’sintegrator customers, Nikon, of its belief that Cymer’s light sources infringeseveral of Komatsu’s Japanese and U.S. patents.  Cymer, in consultation with Japanese patent counsel,

 

8

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hasinitiated oppositions to certain Komatsu Japanese patents and patentapplications in the Japanese Patent Office. Some of these oppositions have beendismissed by the Japanese Patent Office. Litigation might ensue with respect tothe Komatsu Japanese patents or Komatsu U.S. patents.  Also, Komatsu might assert infringement claims under other oradditional patents.  Komatsu hasnotified Seiko that Komatsu intends to enforce its rights under the KomatsuJapanese patents against Seiko if Seiko engages in manufacturing activities forCymer.  In connection with its formermanufacturing agreement with Seiko, Cymer has agreed to indemnify Seiko againstsuch claims under certain circumstances. Cymer and Seiko might not ultimatelyprevail in any such litigation.

 

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

 

Any patent litigationinitiated by Cymer, or initiated by Cymer’s competitors against Cymer, would,at a minimum, be costly.  Litigationcould also divert the efforts and attention of Cymer’s management and technicalpersonnel.  Both could have a materialadverse effect on Cymer’s business, financial condition and results ofoperations.  Furthermore, in the futureother third parties might assert other infringement claims, and customers andend users of Cymer’s products might assert other claims for indemnificationresulting from infringement claims. Such assertions, if proven to be true, might materially adversely affectCymer’s business, financial condition and results of operations. If any suchclaims are asserted against Cymer, Cymer may seek to obtain a license under thethird party’s intellectual property rights. However, such a license might not be available on reasonable terms or atall. Cymer could decide, in the alternative, to resort to litigation tochallenge such claims or to design around the patented technology.  Any of these actions could be costly andwould divert the efforts and attention of Cymer’s management and technicalpersonnel, which would materially adversely affect Cymer’s business, financialcondition and results of operations.

 

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

 

Cymerhas granted Seiko a right of first refusal to fund Cymer’s development of, andreceive a license to, new industrial light source technologies not developedwith funding from other parties.  Inexchange for these rights, Cymer received up-front license fees of $3.0 millionin aggregate during 1992 and 1993. Cymer was also entitled to royalties of 5%on related product sales through September 1999, after which the royalty rateis subject to renegotiation.  Through1999, Cymer earned no royalties under the agreement. The license agreement alsoprovides that product sales between Cymer and Seiko will be at a 15% discountfrom the respective companies’ list prices. The agreement terminates in August 2012.  There has been no Seiko production or sales activity associatedwith this contract to date and this contract does not apply to Cymer’s currentlight source system products.

 

Cymerhas registered the trademark CYMER in the United States and certain othercountries and is seeking additional registrations of other trademarks including“Insist on Cymer” in the United States and in certain other countries.  Cymer uses these and a variety of othermarks in its advertisements and other business activities around theworld.  Based on the use of these orother 

 

9

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

 

**Competition**

 

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

 

Cymercurrently has two significant competitors in the market for light sourcesystems for DUV photolithography applications. Gigaphoton is headquartered in Japan, and Lambda-Physik, which isheadquartered in Germany.  Cymerbelieves that Gigaphoton and Lambda-Physik are aggressively seeking to gainlarger positions in this market.  Cymerbelieves that its three DUV photolithography tool manufacturing customers haveeach purchased products offered by these competitors and that its customershave qualified the competitors’ light sources for use with their products. BothGigaphoton and Lambda-Physik are located in closer proximity to certain ofCymer’s customers than Cymer. Cymer believes that Gigaphoton in particular hasbeen qualified for production use by chipmakers in Japan and elsewhere.  Cymer also believes that Lambda-Physik hasbeen qualified for production use by chipmakers in the U.S. and Europe.  Cymer could lose market share and its growthcould slow or even decline as competitors gain market acceptance.

 

Inthe future, Cymer will likely experience competition from other technologies,such as EUV and electron projection lithography or (“EPL”).  To remain competitive, Cymer believes thatit will need to manufacture and deliver products to customers on a timely basiswithout significant defects and maintain a high level of investment in researchand development and sales and marketing. Cymer might not have sufficientresources to continue to make the investments necessary to maintain its competitiveposition.

 

Largercompetitors with substantially greater financial resources, including othermanufacturers of industrial light sources for advanced lithography, may attemptto enter the market.  Further, othercompetitors may introduce new and enhanced product offerings that customersdeem superior to Cymer’s products. Future competitors may also be attracted to Cymer’s growing installedbase of  light sources and seek toprovide consumables and refurbished parts to that installed base.

 

**Employees**

 

OnDecember 31, 2002, Cymer employed 841 persons worldwide. No employees arecurrently covered by collective bargaining agreements or are members of anylabor organization as far as Cymer is aware. Cymer has not experienced any workstoppages and believes that its employee relations are good.

 

### **Executive Officers**

 

Setforth below is certain information regarding the executive officers of Cymerand their ages as of March 14, 2003.

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

 

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**Robert P.Akins**,****oneof Cymer’s co-founders, has served as its chairman and chief executive officersince its inception in 1986, and also served as president of the company fromits inception until May 2000. He currently serves on the board of directors forboth Extraction Systems Inc. and SEMI North America, and on the council ofadvisors to the Irwin and Joan Jacobs School of Engineering at the Universityof California, San Diego. Mr. Akins received the Ernst & Young Entrepreneurof the Year Award for San Diego County in 1997, and with fellow co-founder RickSandstrom, received the outstanding alumnus award from the University ofCalifornia, San Diego and the prestigious SEMI Award for North America, thehighest honor conferred by Semiconductor Equipment and Materials International,in 1996 for contributions to the field of DUV lithography. Mr. Akins received abachelor’s degree in physics, a bachelor’s degree in literature, and adoctorate in applied physics from the University of California, San Diego.

 

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

 

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

 

**Hugh R.Grinolds**hasserved as executive vice president of the Corporate Processes and Servicesgroup since October 2002. Before that, he served as a senior director of theEUV program, the post he had held since joining the company in May 2002. Priorto joining Cymer, he served as site manager for Agilent Technologies in FortCollins, Colo. from 1999, when Agilent was spun-off from Hewlett Packard, untilMay 2002. Dr. Grinolds began his business career with Hewlett-Packard Co. in 1979,and during his tenure with that company, served in a variety of increasinglyresponsible positions, including managing VLSI design for HP’s internal ASICneeds in Corvallis, Oregon, and serving as manufacturing manager in FortCollins, Colo. for HP’s internal ASICs which included responsibility for theproduction of HP’s PA-RISC processors. He assumed the role of worldwidemanufacturing manager at HP in 1998. Dr. Grinolds has published 21technical articles and papers, and holds one patent. He received bachelor’s,master’s and doctorate degrees in electrical engineering from the University ofMinnesota.

 

**Edward P. (Ted)Holtaway** hasserved as executive vice president of the Lithography System Solutions businessunit since October 2002. He served as senior vice president of operations andbusiness process management from May 2000 until October 2002. He joined Cymerin July 1998 as

 

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

 

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

 

**John Shin** has served as executive vice president ofthe Semiconductor Manufacturing Solutions business unit since October 2002. Heserved as senior vice president, worldwide customer operations from June 2000until October 2002. Previously, he served as vice president, worldwide customeroperations from September 1999 to June 2000, as vice president of worldwidefield operations from April to September 1999, and as vice president,Asia/Pacific Operations from March 1998 to April 1999. He joined Cymer aspresident, Cymer Korea in May 1997. Immediately prior to joining Cymer, Mr.Shin served as president of Tencor Instruments Korea. From early 1993 to late1996 he served as country manager in Korea with Watkins-Johnson Co, salesaccount manager in Korea for Applied Materials, and business developmentmanager with Samsung America. Mr. Shin received a master’s degree in computerscience from Indiana University and a bachelor’s degree in business from HankukUniversity of Foreign Studies, Seoul, Korea.

 

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

 

**Tsunehisa Yamashita**has served aspresident of Cymer Japan since March 2003. Prior to joining Cymer, Mr. Yamashita served for more than four years asgeneral manager of the Japanese Division of Teradyne, Inc., a leading supplierof automatic test equipment for the semiconductor industry. From 1997 to 1998,he served as president of Brooks Automation, Japan where he managed theJapanese operations—including sales and technical support of semiconductorwafer and LCD plate handling automation androbotics.  During the first 24 years ofhis career, he served in a variety of positions with Nikon Corporation,including one year as general manager of business planning and strategicmarketing, and nine years as a senior manager responsible for developingproduct-marketing plans.  During histenure, he also supported overseas sales and marketing activities at variousU.S.- and European-based Nikon subsidiaries. Prior to that, Mr. Yamashita was instrumental in establishing Nikon’sU.S.-based lithography operations in San Bruno, California.  He holds a bachelor’s degree in mechanicalengineering from Hokkaido University in Japan.

 

Executiveofficers serve at the discretion of the Board of Directors.  There are no family relationships betweenany of the directors and executive officers of Cymer.

 

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**Item 2.  Properties**

 

Cymer’scorporate headquarters is located in San Diego, California and includesadministrative, manufacturing, engineering, and R&D facilities.  In addition, Cymer has field service officeslocated throughout the United States and internationally.  Cymer completed construction of arefurbishment facility in Korea at the end of 2002.  This manufacturing facility will be used to refurbish chamberassemblies and was qualified for production at the end of 2002.  In the third quarter of 2002, Cymer beganconstruction of a new company-owned building in San Diego, which will includeadditional manufacturing facilities for Cymer’s new XLA product as well asadditional administrative offices.  Themanufacturing portion of the building is expected to be complete in April2003.  Other sections of this buildingwill complete construction throughout 2003, as required.

 

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

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

 

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

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

 

#### **Item 3.    LegalProceedings**

 

None.

 

**Item 4.    Submissionof Matters to a Vote of Security Holders**

 

Nomatters were submitted to a vote of the security holders of Cymer during thefourth quarter of the fiscal year ended December 31, 2002.

 

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PART II

 

**Item 5.    Marketfor Registrant’s Common Stock and Related Stockholder Matters**

 

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

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

 

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

 

Cymerhas never declared or paid cash dividends on its Common Stock and currentlydoes not anticipate paying cash dividends in the  future.

 

The information required tobe disclosed by Item 201(d) of Regulation S-K *“SecuritiesAuthorized for Issuance Under Equity Compensation Plans”* is includedunder Item 12 of Part III of this Annual Report on Form 10-K.

 

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**Item 6.    SelectedFinancial Data**

 

Thefollowing selected consolidated financial data should be read in conjunctionwith Cymer’s consolidated financial statements and notes thereto and with“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,”  which are includedelsewhere in this report.

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

 

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

 

### **Item 7.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*Statementsin this annual report on Form 10-K that are not strictly historical in natureare forward-looking statements.  Thesestatements include, but are not limited to, references to manufacturingactivities; expected product sales and development; service and support;research and development expenditures; expected product development; expectedinternational product sales, development and revenue; adequacy of capitalresources and investments; effects of business cycles in the semiconductorbusiness; competitive positioning; and continuing relationships withthird-party manufacturers for product manufacturing, and may contain words suchas “believes,” “anticipates,” “expects,” and words of similar import.  These statements are only predictions basedon current information and expectations and involve a number of risks anduncertainties.  The underlying informationand expectations are likely to change over time.  Actual events or results may differ materially from thoseprojected in the forward-looking statements due to various factors, including,but not limited to, those set forth in this Item 7 and under the caption  “Risks and Uncertainties That May AffectResults” and  elsewhere in this annualreport on Form 10-K.*

 

*Thefollowing discussion of the financial condition and results of operations ofCymer should be read in conjunction with Cymer’s consolidated financialstatements and notes thereto included in this annual report on Form 10-K.*

 

### **RESULTS OF OPERATIONS**

 

Thefollowing table sets forth certain items in Cymer’s consolidated statements ofincome as a percentage of total revenues for the periods indicated:

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

 

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

### ** **

### **YEARS ENDED DECEMBER 31,2001 AND 2002**

 

*Revenues*.   Cymer’srevenues consist of product sales, which include sales of light source systems,consumable and spare parts, upgrades, service, service contracts, and training.Other revenues include revenue from funded development activities performed forcustomers and government contracts and license agreements.  Revenue from light source system sales isgenerally recognized at the time of shipment, unless customer agreementscontain inspection, acceptance or other conditions, in which case revenue isrecognized at the time such conditions are satisfied. Revenue from consumablesand spare parts sales is recognized at the point that legal title passes to thecustomer, which is generally upon shipment from the Cymer facility.  Service and training revenue is generallyrecognized at the time that the services are rendered or the training class iscompleted.  Service contracts revenuesare generally recorded to revenue ratably over the life of the contract or perthe specific terms of the agreement. Funded development contracts are accountedfor on the percentage-of-completion method based on the relationship of costsincurred to total estimated costs.  Ifmilestones on funded development contracts require that specific results beachieved or reported by Cymer, revenue is not recognized until that milestoneis completed.

 

Product sales increased 8% from $267.0****millionin 2001 to $288.0****million in 2002, primarily due to a 27% increase in the ASPof Cymer’s light source systems and an increase in consumable and spare parts,service revenue and other non-system products.   A total of 335 light source systems were sold in 2001 at an ASPof $566,000, compared to 282 systems sold in 2002 at an ASP of $720,000.  On a foreign  currency adjusted basis, the ASP for 2001 was $578,000 comparedto $716,000 for 2002.  This increase inforeign currency adjusted ASP from period to period reflects increased sales in2002 of Cymer’s NanoLith-7000 and ELS-7000 series products which have higherASPs compared to the ELS-6000/6010 KrF series products sold in 2001.  Sales of consumable and spare parts andservice products increased 10% from $77.5 million to $84.9 million for theyears ended December 31, 2001 and 2002, respectively.  The increase in this type of product sales was due to slightlyincreased utilization of Cymer’s deep ultraviolet (“DUV”) light sources bychipmakers and an increased installed base in the year ended December 31,2002.  Revenues from funded developmentprojects were $2.4 million and $2.2 million for the years ended December 31,2001 and 2002, respectively.

 

Cymer’sbacklog at December 31, 2001 was $97.1 million as compared to $100.1 million atDecember 31, 2002.  Bookings for theyear ended December 31, 2001 and December 31, 2002 were $216.6 million and$274.2 million, respectively.  Thisincrease was primarily due to bookings of Cymer’s higher priced ELS-7000 andXLA 100 product in 2002.  Cymerinstalled 356 light sources at chipmakers and other end-users during 2001 ascompared to 284 light sources installed during 2002.

 

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Cymer’ssales are generated primarily by shipments to customers in Japan, theNetherlands, and the United States. Approximately 85% and 90% of Cymer’s sales in 2001 and 2002,respectively, were derived from customers outside the United States.  Cymer maintains a wholly-owned Japanesesubsidiary which sells to Cymer’s Japanese customers.  Revenues from Japanese customers, generated primarily by thissubsidiary, accounted for 41% and 43% of revenues in 2001 and 2002,respectively.  The activities of Cymer’sJapanese subsidiary are limited to sales and service of products purchased bythe subsidiary from the parent corporation. Cymer anticipates that international sales will continue to account fora significant portion of its net sales.

 

Salesto Cymer’s three largest customers, ASM Lithography, Canon, and Nikon, amountedto 32%, 15% and 29%, respectively, of total revenue for the year ended December31, 2001, and 32%, 21% and 24%, respectively, of total revenue for the yearended December 31, 2002.

* *

*Cost of Product Sales*.  Costof product sales includes direct material and labor, warranty expenses, licensefees, and manufacturing and service overhead, and foreign exchange gains andlosses on foreign currency forward exchange contracts associated with purchasesof Cymer’s products by its Japanese subsidiary for resale under firmthird-party sales commitments. In accordance with the provisions of Statementof Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting forDerivative Instruments and Hedging Activities”, for those derivativeinstruments that do not qualify for hedge accounting, deferral of the gains orlosses is not allowed and the gains and losses are recorded in other income(expense).  Cymer adopted SFAS 133 onJanuary 1, 2001, but did not qualify for hedge accounting until July 1,2001.  Accordingly, for contractsentered into prior to July 1, 2001, Cymer recorded changes in the fair value ofits foreign currency forward exchange contracts directly through earnings inother income (expense).  For contractsentered into on or after July 1, 2001, Cymer defers effective changes in thefair value of its foreign currency forward exchange contracts into other comprehensiveincome (loss) and subsequently reclassifies the effective changes to cost ofproduct sales in the same period that the related sale is made to the thirdparty.

 

Forthe year ended December 31, 2001, only those foreign currency forward exchangecontracts meeting the transition period requirements under SFAS 133 andcontracts entered into after July 1, 2001 were included in cost of productsales in the consolidated statements of income. For the year ended December 31,2002, Cymer qualified for hedge accounting treatment under SFAS 133 and wasable to record the net effect of gains or losses from foreign currency forwardexchange contracts in cost of product sales in the consolidated statements ofincome as the related sale to the third party was recognized.  Cymer recognized a gain in cost of sales onsuch contracts of $2.3 million and a net loss of $992,000 for the years endedDecember 31, 2001 and 2002, respectively.

 

Although the number of light source systems recognized to revenue waslower in 2002 as compared to 2001, the cost of product sales increased 7% from$151.3 million in 2001 to $162.1 million in 2002.  This increase from period to period is primarily due to thehigher material cost of the ELS-7000 and NanoLith 7000 light source systems andthe higher warranty provisions required for the early shipments of these newermodel light sources in 2002.  Inaddition, net losses in 2002 as compared to net gains in 2001 on the foreigncurrency forward exchange contracts entered into by Cymer’s Japan subsidiarycontributed to this overall cost of sales increase.  These cost of product increases during 2002 were partially offsetby increased manufacturing efficiencies in 2002.

 

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

 

18

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months ended December 31, 2002.

 

*Researchand Development*.  Research and development expenses includecosts of internally-funded and externally-funded projects as well as continuingresearch support expenses which primarily include employee and material costs,depreciation of equipment and other engineering related costs. Research anddevelopment expenses increased 26% from $58.4 million for the year endedDecember 31, 2001 to $73.7 million for the year ended December 31, 2002, dueprimarily to Cymer’s most recent product development effort, the MOPA platform,or XL series.  Cymer shipped the firstlight source system that utilizes the MOPA platform, the XLA 100, in February2003.  Cymer also continued to invest inEUV technology and the continuing engineering of the ELS-7000 and NanoLith-7000products.  As a percentage of totalrevenues, such expenses increased from 21.6% to 25.4%, primarily due to MOPAplatform development effort.  We do notexpect this upward trend to continue and anticipate that R&D spending onDUV systems will begin to decrease in absolute dollars as the productization ofthe XLA 100 approaches completion.

 

*Sales andMarketing*.  Sales and marketing expenses include theexpenses of the sales, marketing and customer support staffs and othermarketing expenses.  Sales and marketingexpenses decreased 13% from $19.6 million for the year ended December 31, 2001to $17.2 million for the year ended December 31, 2002, due primarily toincreased operational efficiencies as well as heightened cost controls madenecessary by the continuing downturn in the semiconductor industry.  As a percentage of total revenues, suchexpenses decreased from 7.3% to 5.9%.

 

*General andAdministrative*.  General and administrative expenses consistprimarily of management and administrative personnel costs, professionalservices and administrative operating costs. General and administrative expenses decreased 4% from $19.0 million forthe year ended December 31, 2001 to $18.2 million for the year ended December31, 2002, due primarily to ongoing improvements in operational efficiencies andincreased cost controls in 2002 necessitated by overall industryconditions.  As  a percentage of total revenues, such expensesdecreased from 7.0% to 6.3%.

 

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

 

*PurchasedIn-Process Research and Development*.  Purchased in-process researchand development  expenses  consist of costs associated with the acquisition of a company and its in-processresearch and development projects. Cymer incurred $5.1 million of such expenses during the year endedDecember 31, 2001 compared to no such expenses for the year ended December 31,2002. These expenses for the year ended December 31, 2001 were due to theacquisition of  ACX and represented thefair value of  ACX development projectsassociated with the application of its technology to the semiconductormarket.  As of the date of the  ACX acquisition, this purchased in-processresearch and development was expensed because the application of thistechnology to the semiconductor market was at a stage of development thatrequired further research and development before reaching technologicalfeasibility and commercial viability.

 

*Other Expense - Net.*  Net other income (expense) consists primarily of interest incomeand expense and foreign currency exchange gains and losses associated with fluctuationsin the value of the Japanese yen against the United States dollar and gains andlosses on foreign currency forward exchange contracts.  Net other expense totaled $1.4 million and$1.9 million for the years ended December 31, 2001 and 2002, respectively.  The increase in net other expense wasprimarily due to increased interest expense and foreign exchange losses duringthe year which were almost completely offset by increased interest income.Although the interest rate on the 2002 Notes is lower than the blended rate onthe 1997 Notes, interest expense was higher in 2002 as compared to 2001 as aresult of additional interest from both the 1997 Notes and 2002 Notes beingoutstanding in early 2002. The increased interest income in 2002 was primarilydue to higher cash balances, which resulted from the bond transactions, whichoccurred in the first quarter of 2002. These transactions included the private placement of the 2002 Notes inFebruary 2002 and the redemption of the 1997 Notes that were not converted tocommon stock prior to the March 25, 2002 redemption date.  Foreign currency exchange gains totaled$877,000, interest income totaled $8.3 million and interest expense totaled$10.6 million for the year ended December 31, 2001, compared to foreigncurrency exchange losses of $723,000, interest income of $10.1 million andinterest expense of $11.2 million for the year ended December 31, 2002.

 

19

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Cymer’s results of operationsare subject to fluctuations in the value of the Japanese yen against the UnitedStates dollar. Sales by Cymer to its Japanese subsidiary are denominated indollars, and sales by the subsidiary to customers in Japan are denominated inyen. Cymer’s Japanese subsidiary manages its exposure to such fluctuations byentering into foreign currency forward exchange contracts to hedge its cashflow exposure to Cymer. From January 1, 2001 through June 30, 2001, gains orlosses resulting from the change in the value of contracts entered into priorto July 1, 2001 were recorded as other income (expense) in the consolidatedstatements of income. Subsequent to June 30, 2001, gains or losses resultingfrom contracts entered into after July 1, 2001 are initially recorded in othercomprehensive income (loss).  The netamount of unrealized effective gain or loss on the date the light source systemis received by Cymer’s Japanese subsidiary is reclassified to cost of sales onthe date that the light source system is sold to the third party. Gains andlosses resulting from foreign currency translation are accumulated as aseparate component of consolidated stockholders’ equity.

* *

*Income Tax Provision*.  Thetax provision of $2.9 million and $2.7 million for the years ended December 31,2001 and 2002, respectively, reflects an annual effective rate of 25% and 16%,respectively.  The decrease in theannual effective tax rate during the year ended December 31, 2002 from 25% to16% is primarily attributable to tax benefits from U.S. export incentive programsand research and development and manufacturing investment credits. The annualeffective tax rates for both periods are less than the U.S. statutory rate of35% primarily as a result of permanent book/tax differences and tax credits.

 

**YEARSENDED DECEMBER 31, 2000 AND 2001**

 

*Revenues. * Product sales decreased 27% from $366.3****million in 2000 to $267.0****millionin 2001, primarily due to decreased sales of light source systems, spares andconsumables and service products. This decrease in sales from period to periodwas due to the downturn in the semiconductor industry which caused both a lowerdemand for light source systems and a decreased demand for consumables andspare parts as a result of lower utilization of Cymer’s installed base of lightsources.  A total of 494 light sourcesystems were sold in 2000 at an ASP of $518,000, compared to 335 systems soldin 2001 at an ASP of $566,000.  Thehigher ASP in 2001 helped to offset the lower quantity of light source systemssold during the year and was the result of Cymer’s continued introduction ofnewer model light sources which command higher prices.  Revenues from funded development projectsincreased from $1.2 million in 2000 to $2.4 million in 2001.  This increase from period to period wasprimarily due to additional government contract revenues generated through theacquisition of  ACX, now known as CymerBoston, during the first quarter of 2001. During 2001, the majority of revenues generated by Cymer Boston werefrom funded development contracts and accounted for $1.9 million of the total$2.4 million funded development projects revenue for the year ended December31, 2001.

 

Approximately81% and 85% of Cymer’s sales for the years ended December 31, 2000 and 2001,respectively, were derived from customers outside the United States.  Revenues from Japanese customers, generatedprimarily by Cymer’s wholly-owned Japanese subsidiary, accounted for 42% and41% of revenues for the years ended December 31, 2000 and 2001, respectively.

 

20

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Salesto Cymer’s three largest customers, ASM Lithography, Canon, and Nikon amountedto 33%, 19% and 28%, respectively, of total revenue for the year ended December31, 2000 and 32%, 15% and 29%, respectively, of total revenue for the yearended December 31, 2001.

 

*Cost of Product Sales. *Cost ofproduct sales decreased 19% from $187.6 million in 2000 to $151.3 million in2001 due primarily to the decrease in sales of products from period to period.The gross margin on these sales decreased from 48.8% in 2000 to 43.3% in 2001.This decrease in gross margin was primarily the result of lower product salesabsorbing both higher fixed manufacturing costs and worldwide field supportinfrastructure costs offset by continued operational efficiencies.

 

For the year ended December31, 2000, net gains or losses from foreign currency forward exchange contractswere included in cost of product sales in the consolidated statements of incomeas the related sales to the third party were recognized.  For the year ended December 31, 2001, onlythose contracts meeting the transition period requirements under SFAS 133 wereincluded in cost of product sales in the consolidated statements of income.  Cymer recognized net gains in cost of saleson such contracts of $3.2 million and $2.3 million for the years ended December31, 2000 and 2001, respectively.

 

*Research and Development. * Research and development expenses increased29% from $45.4 million in 2000 to $58.4 million in 2001, due primarily to increaseddevelopment efforts associated with ArF light source development which includesCymer’s NanoLith7000 light source and development effortsassociated with MOPA product platform and EUV technology. Research andevelopment expenses associated with the NanoLith 7000 light source increasedduring the second half of 2001 as it moved into the production phase andinitial units were shipped to customers during the third quarter of 2001.  Research and development expenses were alsohigher during 2001 due to continued investment in next generation productdevelopment to keep pace with technological change in industry requirements aswell as the additional research and development expenses associated with CymerBoston and its ACX technology. As a percentage of total revenues, such expensesincreased from 12.4% to 21.6% due to both decreased revenues and increasedspending from period to period.

 

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

 

*General and Administrative.*   General and administrative expenses decreased 16% from $22.5 million in2000 to $19.0 million in 2001. This was due primarily to ongoing improvementsin operational efficiencies and increased cost controls for the period due toindustry conditions.  As a percentage oftotal revenues, such expenses increased from 6.2% to 7.0% due to  decreased revenues.

 

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

 

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

 

*Other Income (Expense)- net.*  Netother expense totaled $1.2 million in 2000 compared to $1.4 million in 2001.The increase in net other expense from period to period is primarily due tolower cash and investment balances as well as lower yields on thoseinvestments.  This was offset by gainsassociated with the change in value of foreign currency forward exchangecontracts for Cymer’s contracts that did not qualify for hedge accountingtreatment per SFAS 133 in 2001.  Foreigncurrency

 

21

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exchange losses totaled $1.4 million, interestincome totaled $10.8 million, interest expense totaled $10.6 million, comparedto an exchange gain of $0.9 million, interest income of $8.3 million, interestexpense of $10.6 million in 2001.

 

*Provision for Income Taxes.*   Thetax provision of $26.2 million and $2.9 million for the years ended December31, 2000 and 2001, respectively, reflect an annual effective rate of 29% and25%, respectively.  The annual effectivetax rates for both periods are less than the U.S. statutory rate of 35%primarily as a result of permanent book/tax differences and tax credits.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

As of December 31, 2002,Cymer had approximately $196.6 million in cash and cash equivalents, $71.2million in short-term investments, $159.0 million in long-term investments,and  $351.1 million in working capital.

 

InAugust 1997, Cymer issued $172.5 million in aggregate principal amount in aprivate placement of notes. The 31⁄2% / 71⁄4% Step-Up Convertible Subordinated Notes were due on August 6, 2004 and were convertible at the option of theholder into shares of common stock of Cymer. The conversion rate on the 1997Notes was 21.2766 shares per $1,000 principal amount or an effective conversionprice of $47.00 per share.   The 1997Notes were called for redemption on March 25, 2002.  Immediately prior to the March 25, 2002 redemption date, holdersof $109.3 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.

 

InFebruary 2002, Cymer issued $250.0 million in aggregate principal amount in aprivate placement of notes.  The 2002Notes are due on February 15, 2009 with interest payable semi-annually onFebruary 15 and August 15 of each year at 31⁄2% per annum.  The notes are convertible into shares ofCymer common stock at a conversion rate of 20 shares per $1,000 principalamount or an effective conversion price of $50.00 per share.  Cymer used a portion of the net proceedsfrom this private placement to redeem the 1997 Notes.  The remaining proceeds will be used for Cymer’s future operating,investing and financing activities.

 

Net cash provided by operatingactivities was approximately $55.5 million, $58.4 million, and $25.8 millionfor 2000, 2001, and 2002, respectively. In 2000, net cash provided by operating activities was primarily due toa significant increase in net income. Increases in inventory, accounts receivable, and income taxes payableresulted from increased revenues and bookings in 2000 and were offset byincreases in accounts payable and accrued and other liabilities during theyear.  Net cash provided by operatingactivities during 2001 primarily reflects a significant reduction in net incomedue to the downturn in the semiconductor industry during 2001.  As a result of this downturn and overallreduced business activities during the period, there were significant decreasesin accounts receivable and inventory during the period.  These were offset by decreases in accountspayable, accrued and other liabilities, and income taxes payable during thesame period.  Net cash provided byoperating activities during 2002 primarily reflects increases in net income,accounts payable and other liabilities offset by increases in inventory.  The increase in inventory was primarily dueto the increased bookings and overall business activities in the first threequarters and new raw materials requirements associated with the initialproduction of the XLA 100 in the fourth quarter of 2002.

 

Net cash used in investingactivities was approximately $54.9 million, $6.2 million, and $166.5 million for2000, 2001, and 2002, respectively.  In2000, cash used in investing activities increased significantly from 1999,primarily due to property acquisitions to accommodate the increased businessactivities in 2000, including the construction of an additional facility at theSan Diego, California location for a total of $27.5 million, the purchase andthe deployment of a new ERP system for a total of $6.3 million, and a purchaseof an additional undeveloped parcel of land adjacent to the San Diego, Californiafacility for $5.0 million.  This parcelof land is the site of  Cymer’s newestfacility which is currently under construction.  In addition, $1.1 million in cash was used in 2000 to acquire the

 

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minority interest in Cymer’sTaiwan subsidiary.  In 2001, the cashused in investing activities was primarily due to the timing of short term andlong term investments maturing and being reinvested during the period offset bya $6.0 million payment made to acquire patents and the purchase of $20.4million in capital equipment.  In 2002, the $166.5 million used in investingactivities primarily reflects short-term and long-term investments made usingthe net proceeds generated by the convertible subordinated note transactions inFebruary and March 2002, and $45.2 million in capital equipment purchases.Included in these capital purchases for 2002 are costs associated with Cymer’snew spare parts refurbishment factory in Korea, which was completed inSeptember 2002, and costs associated with the construction of a newmanufacturing and office facility adjacent to Cymer’s corporate headquarterslocated in San Diego, California.

 

InJuly 2002, Cymer entered into an agreement with a contractor for theconstruction of a 265,000 square foot building adjacent to the corporateheadquarters. This manufacturing and office facility will be completed in twophases, with phase one currently scheduled for completion by April 2003 andphase two, as required throughout 2003. Cymer will self-fund the cost of theconstruction project, which is estimated to be approximately $50.0 million.

 

Netcash used in financing activities was approximately $14.5 million for 2001compared to net cash provided by financing activities of approximately $3.7million and $225.2 million for 2000 and 2002, respectively.  In 2000, the $3.7 million net cash provided by financingactivities was primarily due to $12.7 million in employee stock optionexercises offset by a $8.1 million net payment made during the year on Cymer’srevolving loan.  In 2001, the cash usedin financing activities was attributable to the repurchase of $24.9 million inoutstanding notes and a net payment on the revolving loan of $1.1 million duringthe period, partially offset by the receipt of $11.8 million from the exerciseof employee stock options.  In 2002, the $225.2 million provided byfinancing activities was primarily due to the activity during the first quarterof 2002 related to Cymer’s convertible subordinated notes. The privateplacement of notes that Cymer completed in February 2002 resulted in netproceeds to Cymer of approximately $242.1 million. Of these proceeds, Cymerused $39.6 million to redeem a portion of its outstanding 1997 Notes and payaccrued interest and premiums on those notes. In addition, during 2002 Cymerreceived proceeds of $22.5  million fromthe exercise of employee stock options.

 

During 2001 and 2002, Cymer maintained certain loan agreements with acommercial bank (the “Loan Agreements”) which provided for unsecured revolvingloan facilities allowing for borrowings of $10.0 million and $20.0 millionunder a U.S. line of credit and Japanese line of credit, respectively.  Under the Loan Agreements, Cymer may borrowin U.S. dollars or Japanese yen, and interest accrues on outstanding borrowingsat LIBOR plus 1.75% on U.S. dollar-denominated borrowings and at the yen Costof Funds rate plus 1.5% on yen-denominated borrowings. The Loan Agreementsrequire Cymer to maintain compliance with certain financial and othercovenants, including tangible net worth, quick ratio and profitabilityrequirements.  As of December 31, 2002,Cymer was in compliance with all such covenants. The Loan Agreements expire onJune 16, 2003.  As of December 31, 2001and 2002, respectively, there was $7.7 million and $6.7 million outstanding atannual interest rates of 1.60% and 1.56%, respectively, under the LoanAgreements.

 

Since its initial****publicoffering and a secondary public offering, both in 1996, Cymer has funded itsoperations primarily from cash generated from operations, the proceeds ofconvertible subordinated note offerings in August 1997 and February 2002, bankborrowings, and the proceeds from employee stock option exercises.

 

Cymer requires substantialworking capital to fund its business, particularly to finance inventories andaccounts receivable and for capital expenditures. Cymer’s future capitalrequirements depend on many factors, including Cymer’s manufacturing activity,the timing and extent of spending to support product development efforts,expansion of sales and marketing and field service and support, competitivelabor market compensation requirements, the timing of introductions of newproducts and enhancements to existing products, and the market acceptance ofCymer’s products. Cymer believes that it has sufficient working capital andavailable banking arrangements to sustain operations and provide for the futureexpansion of its business for at least the next 12 months.

 

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The following summarizesCymer’s contractual obligations and other commitments as of December 31, 2002,and the impact such obligations could have on its liquidity and cash flow infuture periods (in thousands):

 
|                           |   | **Amount of  Commitment Expiring by Period** |   |
|--------------------------------|--------|----------------------------------------------|--------|
|                           |   | **2003**                                     |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
|                           |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases payable         |   | $                                            | 45     |   | $ | 45 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases payable       |   | 4,508                                        |   | 4,075 |   | 3,950 |   | 3,948 |   | 4,021 |   | 6,350 |   |
| Convertible subordinated notes |   | —                                       |   | — |   | — |   | — |   | — |   | 250,000 |   |
|                           |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Total commitments              |   | $                                            | 4,553  |   | $ | 4,120 |   | $ | 3,950 |   | $ | 3,948 |   | $ | 4,021 |   | $ | 256,350 |   |

 

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Cymer’s discussion andanalysis of its financial condition and results of operations are based uponCymer’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires Cymer to make estimates and use judgment that mayimpact the reported amounts of assets, liabilities, revenues, expenses, andrelated disclosure of contingent assets and liabilities.  As a part of its on-going internalprocesses, Cymer evaluates its estimates, including those related to inventoryallowances, warranty provisions, revenue recognition, allowances for bad debt,long-lived assets valuation, intangible assets valuation, income taxes, andcontingencies and litigation.  Cymerbases these estimates upon both historical information and other assumptionsthat it believes valid and reasonable under the circumstances.  These assumptions form the basis for makingjudgments and determining the carrying values of assets and liabilities thatare not apparent from other sources. Actual results could vary from those estimates under differentassumptions and conditions.

 

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

 

Cymer maintains an inventoryallowance to record inventory at net realizable value.  The value of this allowance is determined bytaking into consideration certain assumptions related to market conditions andfuture demands for its products which may result in excess or obsoleteinventory.  If actual market conditionsare more or less favorable than projected by management, adjustments to thisinventory allowance may be required.

 

Cymer providesfor the estimated cost of product warranties at the time the related revenue isrecognized. The warranty coverage period and terms vary by light sourcemodel.  In general, the light sourcesystem warranty period ranges from 17 to 26 months after shipment.  Cymer also warrants spare parts sold to itscustomers and the coverage period varies by spare part type as some typesinclude time based warranty periods and others include usage based warrantyperiods.  On average, the warrantyperiod for 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 income and is recorded at the time that the relatedrevenue is recognized.  The warrantyprovision for light source systems is determined by using a financial modelwhich takes into consideration actual historical expenses and potential risksassociated with Cymer’s different light source system models. This financialmodel is then used to calculate the future probable expenses related towarranty and the required level of the warranty provision.  The risk levels used within this model arereviewed and updated as risk levels change by model over its product lifecycle.  The warranty provision forspares is determined by using actual historical data.  Although Cymer engages in product improvement programs andprocesses, its warranty obligation is affected by product failure rates andcosts incurred to correct those product failures at customer sites.  Should actual product failure rates orestimated costs to repair those product failures differ from Cymer’s estimates,revisions to its estimated warranty provision would be required.

 

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**FactorsThat May Affect Financial Condition and Future Results**

 

Cymer participates in anindustry that is very cyclical in nature and subject to rapid technologicalchanges and demands by its customers. The following are important risk factors that could affect actualresults and cause them to differ materially from the projected results in theforward-looking statements in this report:

 

•                  Cymer’s business depends on the semiconductorequipment industry, which is volatile and unpredictable;

•                  Cymer depends on the introduction of newproducts for its success, and is subject to risks associated with rapidtechnological change;

•                  A significant percentage of Cymer’s revenue isderived from sales to a few large customers, and if Cymer is not able to retainthese customers, or they reschedule, reduce or cancel orders, Cymer’s revenueswould be reduced and its financial results would suffer;

•                  A substantial percentage of Cymer’s revenue isderived from the sale of a limited number of primary products;

•                  Economic, political, regulatory and otherevents in geographic areas where Cymer has significant sales or operationscould interfere with Cymer’s business;

•                  Cymer depends on a few key suppliers forpurchasing components and subassemblies that are included in its products;

•                  Cymer faces competition from two othercompanies and may face competition from additional competitors who enter themarket;

•                  Cymer depends on key personnel, especiallymanagement and technical personnel, who may be difficult to attract and retain;

•                  Failure to maintain effectively Cymer’s directfield service and support organization could have a material adverse effect onits business;

•                  Cymer’s ability to compete could bejeopardized if it is unable to protect its intellectual property rights.  These types of claims could seriously harmCymer’s business or require Cymer to incur significant costs;

•                  The parties to whom Cymer provides researchand development services may dispute the ownership of the intellectual propertythat Cymer develops performing these services;

•                  In the future, Cymer may be subject to patentlitigation to enforce patents issued to Cymer and have to defend itself againstclaimed infringement by Cymer’s competitors or any third party;

•                  Trademark infringement claims against Cymer’sregistered and unregistered trademarks would be expensive and Cymer may have tostop using such trademarks and pay damages;

•                  Cymer is exposed to risks related to thefluctuations in the currency exchange rates for the Japanese Yen;

•                  Semiconductor device manufacturers’ prolongeduse of Cymer’s product in high volume productions may not produce the resultsthey desire, and as a result, Cymer’s reputation could be damaged in thesemiconductor industry as well as with Cymer’s customers who supplyphotolithography tools to the semiconductor manufacturers;

•                  Cymer has in the past and may in the futureacquire businesses that will involve numerous risks.  Cymer may not be able to address these risks successfully withoutsubstantial expense, delay or other operational and financial problems;

•                  Cymer must develop and manufactureenhancements to its existing products and introduce new products in order togrow its business.  Cymer may noteffectively manage its growth and integrate these new enhancements andproducts, which could materially harm its business;

•                  Cymer is dependent on its manufacturingfacilities and subcontractors to assemble and test its product;

•                  Cymer’s products aresubject to potential product liability claims if personal injury or deathresult; and

•                  The price of Cymer’s common stock hasfluctuated and may continue to fluctuate widely.

 

At December 31, 2001 and2002, Cymer did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet

 

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arrangements or other contractually narrow orlimited purposes.  In addition, Cymerdid not engage in trading activities involving non-exchange tradedcontracts.  As a result, Cymer is notexposed to any financing, liquidity, market or credit risk that could arise ifit had engaged in such relationships. Cymer does not have relationships and transactions with persons orentities that derive benefits from their non-independent relationship withCymer or its related parties except as disclosed herein.

 

## **RECENT ACCOUNTING PRONOUNCEMENTS**

 

InAugust 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for AssetRetirement Obligations*”*, which addresses financial accountingand reporting for obligations associated with the retirement of tangible long-livedassets and for the associated asset retirement costs.  SFAS 143 applies to tangible long-lived assets that have a legalobligation associated with their retirement that results from the acquisition,construction or development or normal use of the asset.  SFAS 143 requires that the fair value of aliability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made. Thefair value of the liability is added to the carrying amount of the associatedasset and this additional carrying amount is depreciated over the remaininglife of the asset.  The liability isaccreted at the end of each period through charges to operating expense.  Cymer is required to adopt the provisions ofSFAS 143 during the quarter ending March 31, 2003.  It is not anticipated that the impact of this statement will havea material effect on Cymer’s consolidated financial statements.

 

In April 2002, the FASBissued Statement of Financial Accounting Standards No. 145 (“SFAS No. 145”),“Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB StatementNo. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 provides guidance onthe classification of gains and losses from the extinguishment of debt and onthe accounting for certain specified lease transactions. This statement iseffective for fiscal years beginning after May 15, 2002. It is not anticipated that the impact of thisstatement will have a material effect on Cymer’s consolidated financial statements.

 

In July 2002, the FASB issuedStatement of Financial Accounting Standards No. 146 (“SFAS No. 146”),“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS146”). SFAS No. 146 provides guidance on the recognition and measurement ofliabilities associated with exit and disposal activities.  Under SFAS 146, liabilities for costsassociated with exit or disposal activities should be recognized when theliabilities are incurred and measured at fair value. This statement is effective prospectively for exit or disposal activitiesinitiated after December 31, 2002.  Itis not anticipated that the impact of this statement will have a materialeffect on Cymer’s consolidated financial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45 *(“FIN 45”)*,“Guarantor’s**Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness**of Others”.**FIN 45 provides expandedaccounting guidance surrounding liability recognition and disclosure requirementsrelated to guarantees, as defined by this Interpretation.  The disclosure requirements of thisInterpretation are effective for interim or annual periods ending afterDecember 15, 2002.  The recognition andmeasurement provisions of the Interpretation are applicable on a prospectivebasis only to guarantees issued or modified after December 31, 2002.  We adopted the disclosure provisions of FIN45 during the quarter ended December 31, 2002. In the ordinary course of business, we are not subject to potentialobligations under guarantees that fall within the scope FIN 45,

 

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exceptfor standard warranty provisions and intellectual property indemnificationclauses that are contained within many of our customer agreements, and giverise only to the disclosure requirements prescribed by FIN 45.

 

InJanuary 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidationof Variable Interest Entities”.  FIN 46provides guidance on how to identify a variable interest entity (VIE) anddetermines when the assets, liabilities, and results of operations of aVIE  need to be included in a company’sconsolidated financial statements.  FIN46 also requires additional disclosures by primary beneficiaries and othersignificant variable interest holders in a VIE.  The provisions of FIN 46 are effective immediately for all VIEscreated after January 31, 2003.  ForVIEs created before February 1, 2003, the provisions of FIN 46 must be adoptedat the beginning of the first interim or annual reporting period beginningafter June 15, 2003.  While Cymer iscurrently evaluating the potential impact of the adoption of FIN 46, Cymerbelieves that it will not be subject to the consolidation or disclosurerequirements of FIN 46.

 

In November 2002, the Emerging Issues Task Force (“EITF”) issuedEITF Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” EITF Issue No. 00-21 addresses how to determine whether arevenue arrangement involving multiple deliverables contains more than one unitof accounting for the purposes of revenue recognition and how the revenuearrangement consideration should be measured and allocated to the separateunits of accounting. EITF Issue No. 00-21 applies to revenue arrangementsentered into after June 27, 2003. The adoption of this statement is notcurrently anticipated to have a material impact on Cymer’s financial conditionor results of operations.

#### ** **

#### **Risks andUncertainties That May Affect Results**

 

*In this section, references to“we”, “us” or “our” are references to Cymer. Our business faces significant risks. The risks described below may notbe the only risks we face. Additional risks that we do not yet know of or thatwe currently think are immaterial may also impair our business operations.  If any of the events or circumstancesdescribed in the following risks actually occur, our business, financialcondition or results of operations could suffer, and the trading price of ourcommon stock could decline.*

 

Our revenuesand operating results from quarter-to-quarter have varied in the past and ourfuture operating results may continue to fluctuate significantly due to manyfactors including those listed in this section and throughout this annualreport on Form 10-K for the period ending December 31, 2002. These factorsinclude:

 

•                  demand for semiconductors in general and, in particular,for leading edge devices with smaller circuit geometries;

•                  cyclicality in the market for semiconductormanufacturing equipment;

•                  rates at which semiconductor device manufacturers takedelivery of photolithography tools from our customers;

•                  rates at which our customers take delivery of lightsource systems from us;

•                  timing and size of orders from our small base ofcustomers;

•                  mix of light source models, consumable and spare partsand service revenues in our total revenues;

•                  changes in the price and profitability of our products;

•                  our ability to develop and implement new technologiesand introduce new products;

•                  utilization rates of light sources and sales ofconsumable and spare parts and services;

•                  our ability to manage our manufacturing requirements;

•                  foreign currency exchange rate fluctuations, principallywith respect to the Japanese yen (in which sales by our Japanese subsidiary aredenominated);

•                  worldwide political instability;

•                  changing global economic conditions; and

•                  intellectual property protection.

 

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We alsohave historically derived a large portion of our quarterly and annual revenuesfrom selling a small number of light source systems. Because we sell a smallnumber of products, the precise time that we recognize revenue from an ordermay have a significant impact on our total revenue for a particular period. Ourcustomers may cancel or reschedule orders with little or no penalty. Ordersexpected in one quarter could shift to another period due to changes in theanticipated timing of customers’ purchase decisions or rescheduled deliverydates requested by our customers. Our operating results for a particularquarter or year may be adversely affected if our customers, particulary ourthree largest customers, cancel or reschedule orders, or if we cannot fillorders in time due to unexpected delays in manufacturing, testing, shipping,and product acceptance.

 

Wemanage our expense levels based, in large part, on expected future revenues. Asa result, our expenses are relatively fixed for the short term, and if ouractual revenue decreases below the level we expect, our operating results willbe adversely affected.  As a result ofthese or other factors, we could fail to achieve our expectations as to futurerevenue, gross profit and operating income. Our failure to meet the performance expectations set and published byexternal sources could result in a sudden and significant drop in the price ofour stock, particularly on a short-term basis, and could negatively affect thevalue of any investment in our stock.

 

**Our business depends on the semiconductor equipment industry,which is highly volatile and unpredictable.**

 

Thesemiconductor equipment industry is highly cyclical. We derive a substantialpercentage of our revenues from photolithography tool manufacturers (“ourcustomers”). Our customers depend in turn on the demand for theirphotolithography tool products from their customers, the semiconductor devicemanufacturers. The capital equipment expenditures of semiconductormanufacturers depend on the current and anticipated market demand forsemiconductors and products using semiconductors.

 

Thesemiconductor industry is cyclical in nature and historically has experiencedperiodic ups and downs and is currently in a significant and prolongeddownturn. This cyclical nature of the industry in which we operate affects ourability to accurately predict future revenue and, thus future expense levels.When cyclical fluctuations result in lower than expected revenue levels,operating results may be adversely affected and cost reduction measures may benecessary in order for us to remain competitive and financially sound.  During a down cycle, we must be in aposition to adjust our cost and expense structure to prevailing marketconditions and to continue to motivate and retain our key employees.  In addition, during periods of rapid growth,we must be able to increase manufacturing capacity and personnel to meetcustomer demand.  We can provide noassurance that these objectives can be met in a timely manner in response toindustry cycles.

 

Thecurrent downturn has had a severe effect on the demand for semiconductormanufacturing equipment, including photolithography tools that our customersproduce. We are not able to predict when the semiconductor industry willrecover. If overall market conditions continue to deteriorate in the near term,our current operating levels may negatively impact our profitability. Webelieve that downturns in the semiconductor manufacturing industry willperiodically occur, and result in periodic decreases in demand for allsemiconductor manufacturing equipment, including photolithography tools ourcustomers manufacture. As a result, fluctuating levels of investment bysemiconductor device manufacturers and pricing volatility will continue tomaterially affect our aggregate bookings, revenues and operating results. Also,even during periods of reduced revenues we believe we must continue to investin research and development and to maintain extensive ongoing worldwidecustomer service and support capabilities to remain competitive, which maytemporarily harm our financial results. Accordingly, these downturns are likely to continue to adversely affectour business, financial condition and operating results and our operatingresults may fall below the expectations of public market analysts or investorsin some future quarter or quarters. Such failure to meet operating resultexpectations would materially adversely affect the price of our common stock.

 

Ourcustomers try to manage their inventories and production requirements toappropriate levels that best reflect their expected sales to semiconductordevice manufacturers. Market conditions in the

 

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industry and productionefficiency of the photolithography tool manufacturers can cause our customers toexpand or reduce their orders for new light source systems as they try tomanage their inventories and production requirements to these levels. Wecontinue to work with our customers to better understand these issues. However,we cannot guarantee that we will be successful in understanding our customers’inventory management and production requirements or that our customers will notbuild up an excess inventory of light source products. If our customers retainan excess inventory of light source products, our revenue could be reduced infuture periods as the excess inventory is utilized, which would adverselyaffect our operating results, financial condition and cash flows.

 

**We depend on the introduction of new products for oursuccess, and we are subject to risks associated with rapid technologicalchange.**

 

Rapidtechnological changes in semiconductor manufacturing processes subject us toincreased pressure to develop technological advances enabling such processes.We believe that our future success depends in part upon our ability to develop,manufacture and timely introduce new light source products with improvedcapabilities and to continue to enhance our existing light source systems andprocess capabilities.  Due to the risksinherent in transitioning to new products, we must forecast accurate demand fornew products while managing the transition from older products.

 

Ournewest product introduction project consists of a technology change from asingle- discharge-chamber designed excimer light source to adual-discharge-chamber design called MOPA. This MOPA design represents a paradigm shift from current lithographytechnology and is projected to enable higher power, tighter bandwidth and lowercost of operation for future optical lithography applications across all threeDUV wavelengths – 248nm, 193nm and 157nm. There are risks inherent in transitioning to this new technology.  These risks include effective execution ofthe product development plan, adoption of the product by photolithography toolmanufacturers and semiconductor manufacturers, manufacturability and costeffectiveness of the new products and the development of a comparable productby our competitors.

 

Webelieve that semiconductor device manufacturers are currently developing acapability to produce devices that are measured at 0.13 micron or less, andthese efforts are driving the current demand for our light source products forDUV photolithography systems. After semiconductor device manufacturers havethis capability, their demand for our light source products will depend onwhether they want to expand their capacity to manufacture these devices. Thiswill in turn depend on whether their sales forecasts and projectedmanufacturing process yields justify the necessary investments.

 

Futuretechnologies, such as  EUV and EPL, mayrender our excimer light source products obsolete. We must manage producttransitions, as introduction of new products could adversely affect our salesof existing products. If new products are not introduced on time, or havereliability or quality problems, our performance may be impacted by reducedorders, higher manufacturing costs, delays in acceptance of and payment for newproducts, and additional service and warranty expenses. We may not be able todevelop and introduce new products or enhancements to our existing products andprocesses in a timely or cost effective manner that satisfies customer needs orachieves market acceptance. Failure to develop and introduce these new productsand enhancements could materially adversely affect our operating results,financial condition and cash flows.

 

Weexpect to face significant competition from multiple current and futurecompetitors. We believe that other companies are developing systems andproducts that are competitive to ours and are planning to introduce newproducts to this market, which may affect our ability to sell our new products.Furthermore, new products represent significant investments of our resourcesand their success, or lack thereof, could have a material effect on ourfinancial results.

 

 

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**A significant percentage of our revenueis derived from sales to a few large customers, and if we are not able toretain these customers, or they reschedule, reduce or cancel orders, delay ordefault on payments, our revenues would be reduced and our financial conditionand cash flows would suffer.**

 

Threelarge companies, ASM Lithography, Canon and Nikon dominate the photolithographytool business. Collectively, these three companies accounted for the followingpercentage of our total revenue during the periods indicated:

 
|            |   | **Years ended December 31,** |   |
|-----------------|--------|------------------------------|--------|
|            |   | **2000**                     |   | **2001** |   | **2002** |   |
|            |   |                         |   |   |   |   |   |
| ASM Lithography |   | 33                           | %      | 32 | % | 32 | % |
| Canon           |   | 19                           | %      | 15 | % | 21 | % |
| Nikon           |   | 28                           | %      | 29 | % | 24 | % |
|            |   |                         |   |   |   |   |   |
| Total           |   | 80                           | %      | 76 | % | 77 | % |

 

Collectively,these three companies account for the following percentage of our totalaccounts receivable for the periods indicated:

 
|            |   | **December 31,** |   |
|-----------------|--------|------------------|--------|
|            |   | **2001**         |   | **2002** |   |
|            |   |             |   |   |   |
| ASM Lithography |   | 50               | %      | 40 | % |
| Canon           |   | 7                | %      | 12 | % |
| Nikon           |   | 21               | %      | 18 | % |
|            |   |             |   |   |   |
| Total           |   | 78               | %      | 70 | % |

 

Weexpect that sales of our light source products to these three customers willcontinue to account for a substantial majority of our revenue in theforeseeable future. None of our customers are obligated to purchase a minimumnumber of our products in the aggregate or during any particular period. Theloss of any significant business from or production problems for any one ofthese three customers will have a material adverse effect on our business andfinancial condition. Sales to these customers may be affected by many factors,some of which are beyond our control. These factors include:

 

•                  a change in a customer’s competitive position in itsindustry;

•                  a customer experiencing DUV photolithography toolproduction problems;

•                  a decision to purchase light sources from othersuppliers;

•                  changes in economic conditions in the semiconductor orthe photolithography tool industries; and

•                  a decline in a customer’s financial condition.

 

**A substantial percentage of our revenueis derived from the sale of a limited number of primary products.**

 

Ouronly product line is excimer light source systems, which include kryptonfluoride, argon fluoride and fluorine systems, and we expect these primaryproducts to continue to account for a large percentage of our revenues in thenear term. Continued market acceptance of our primary products is, therefore,critical to our future success. The primary market for excimer light sources isin the use of DUV photolithography equipment for manufacturing deep-submicronsemiconductor devices using smaller circuit geometries. The demand for ourproducts depends in part on the rate at which semiconductor devicemanufacturers further adopt excimer light sources as the chosen light sourcefor their photolithography tools. Semiconductor manufacturers may choose not toadopt excimer light sources for a variety of reasons, including:

 

•                  instability of photoresists used in advanced DUVphotolithography; and

•                  potential shortages of specialized materials used in DUVoptics.

 

Wecannot guarantee that these factors can or will be overcome or that the demandfor our excimer light source products will not be materially reduced. Thedemand for our light source products,

 

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and therefore ouroperating results, financial condition and cash flows, could be adverselyaffected by a number of factors, including:

 

•                  a decline in demand for our customers’ DUVphotolithography tools;

•                  a failure to achieve continued market acceptance of ourproducts;

•                  an improved version of products being offered by acompetitor in the market we  participatein;

•                  technological change that we are unable to address withour products; and

•                  a failure to release new enhanced versions of ourproducts on a timely basis.

 

**Economic, political, regulatory andother events in geographic areas where we have significant sales or operationscould interfere with our business.**

 

Weserve an increasingly global market.  Alarge portion of our total revenues is derived from customers located outsideof the United States, particularly in Asian countries.  We expect our international sales tocontinue to account for a very large portion of our total revenues. In order tosupport our foreign customers, we must maintain subsidiaries located in Japan,Korea, Taiwan, Singapore, the People’s Republic of China and the Netherlands,as well as further develop our field service, support, and manufacturingoperations.

 

We maynot be able to manage our operations to address and support our globalcustomers effectively. Further, our investments in these types of activitiesmay not make us competitive in the global market or we may not be able to meetthe service, support, and manufacturing levels required by our globalcustomers.

 

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

 

•                  unexpected changes in regulatory requirements,

•                  fluctuations in exchange rates and currency controls,

•                  political and economic conditions and instability,

•                  imposition of trade barriers and restrictions, includingchanges in tariff and freight rates, foreign customs and duties,

•                  difficulty in coordinating our management and operationsin several different countries,

•                  difficulties in staffing and managing foreign subsidiaryand branch operations,

•                  limited intellectual property protection in somecountries,

•                  potentially adverse tax consequences in some countries,

•                  the possibility of accounts receivable collectiondifficulties,

•                  in the case of Asia, the risk of business interruptionand damage from earthquakes,

•                  the effect of acts of terrorism and war, and

•                  the burdens of complying with a variety of foreign laws.

 

Many ofour major customers and many of the semiconductor device manufacturers who useour light source products in their photolithography systems are located inAsia. Economic problems and currency fluctuations affecting these regions inAsia could create a larger risk for us. Further, even though it has not beendifficult for us to comply with United States export controls, these exportrules could change in the future and make it more difficult or impossible forus to export our products to many countries. Any of these vulnerabilities could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**We must effectively manage changes inour business.**

 

Inorder to respond to the business cycles of the semiconductor industry, in thepast few years we have sharply expanded and contracted the scope of our operationsand the number of employees in many of our departments. As the semiconductorindustry grows and contracts we will need to:

 

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•                  closely manage our global operations;

•                  improve our process and other internal managementsystems;

•                  improve our quality control, order fulfillment, fieldservice and customer support capabilities;

•                  quickly adapt to changing sales and marketing channels;

•                  effectively manage our inventory levels; and

•                  attract, train, retain and manage key personnel.

 

If wefail to effectively manage changes in our business, our operating results,financial condition and cash flows would be adversely affected.

 

**We depend on a few key suppliers forpurchasing components and subassemblies that are included in our products.**

 

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

 

**We face competition from two companies and may facecompetition from additional competitors who enter the market.**

 

We arecurrently aware of two significant competitors that sell light sources for DUVphotolithography applications. These competitors are:

 

•                  Gigaphoton, a joint venture between two large companies,Komatsu and Ushio, which is headquartered in Japan; and

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

 

Webelieve that Gigaphoton and Lambda-Physik are aggressively trying to gainlarger market penetration in the excimer light source industry. We believe thatour customers have purchased products from these two competitors and that ourcustomers have approved these competitors’ light sources for use with theirproducts. We believe that Gigaphoton, in particular, has been approved bychipmakers in Japan and elsewhere for producing excimer light sources.  Also, we believe that Lambda-Physik has beenapproved by chipmakers in the U.S. and Europe for producing excimer lightsource products.

 

Themarket for excimer light sources is still small and immature. Largercompetitors with substantially greater resources, such as other manufacturersof industrial light sources for advanced lithography, may attempt to sellcompetitive products to our customers. Potential competitors may also beattracted to our growing installed base of light sources and may attempt tosupply consumable

 

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products and refurbishedparts to that installed base. If any existing or future competitors gain marketacceptance we could lose market share and our growth could slow or decline,which could have a material adverse effect on our operating results, financialcondition and cash flows.

 

**We depend on key personnel, especially management andtechnical personnel, who may be difficult to attract and retain.**

 

We are highly dependenton the services of many key employees in various areas, including:

 

•                  engineering;

•                  research and development;

•                  sales and marketing;

•                  field service;

•                  manufacturing; and

•                  management.

 

Inparticular, there are a limited number of experts in excimer light sourcetechnology, and we require highly-skilled hardware and software engineers.Competition for qualified personnel is intense and we cannot guarantee that wewill be able to continue to attract and retain qualified personnel asneeded.  We do not have employmentagreements with most of our employees. We believe that our future growth andoperating results will depend on:

 

•                  the continued services of our engineering, research anddevelopment, sales and marketing, manufacturing and field service, andmanagement personnel;

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

•                  the ability of our personnel and key employees tocontinue to expand, train and manage our employee base.

 

If weare unable to hire, train and retain key personnel as required, our operatingresults, financial condition and cash flows could be adversely affected.

 

**Failure to maintain effectively ourdirect field service and support organization could have a material adverseeffect on our business.**

 

Webelieve it is critical for us to provide quick and responsive service directlyto the semiconductor device manufacturers throughout the world that use ourlight source products in their photolithography systems, and that it isessential to maintain our own personnel or trained third-party resources toprovide these services. Accordingly, we have an ongoing effort to develop ourdirect support system with locations in the United States, Japan, Europe,Korea, Singapore, Taiwan and the People’s Republic of China. This requires usto do the following:

 

•                  recruit and train qualified field service personnel;

•                  identify qualified independent firms; and

•                  maintain effective and highly trained organizations thatcan provide service to our customers in various countries.

 

Wemight not be able to attract and train qualified personnel to maintain ourdirect support operations successfully. We may not be able to find and engagequalified third-party resources to supplement and enhance our direct supportoperations. Further, we may incur significant costs in providing these supportservices. Failure to implement our direct support operation effectively couldhave a material adverse effect on our operating results, financial conditionand cash flows.

 

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**Our ability to compete could bejeopardized if we are unable to protect our intellectual property rights. Thesetypes of claims could seriously harm our business or require us to incursignificant costs.**

 

Webelieve our success and ability to compete depend in large part upon protectingour proprietary technology. We rely on a combination of patent, trade secret,copyright and trademark laws, non-disclosure and other contractual agreementsand technical measures to protect our proprietary rights.

 

As ofDecember 31, 2002, we owned 165 United States patents covering certain aspectsof technology related to light sources and piezo techniques. These patents willexpire at various times during the period from January 2008 to April 2021.  As of December 31, 2002, we also had appliedfor 88 additional patents in the United States.  As of December 31, 2002, we owned 149 foreign patents and hadfiled 328 patent applications pending in various foreign countries.

 

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

 

Othercompanies or persons may have filed or may file in the future patentapplications that are similar or identical to ours. We may have to participatein interference proceedings declared by the United States Patent and TrademarkOffice (“USPTO”) in order for the patent office to determine the priority ofinventions. The patent office may determine that these third-party patentapplications have priority over our patent applications. Loss of priority inthese interference proceedings could result in substantial cost to us.

 

We alsorely on the following to protect our confidential information and our otherintellectual property:

 

•                  trade secret protection,

•                  employee nondisclosure agreements,

•                  third-party nondisclosure agreements, and

•                  other intellectual property protection methods.

 

However,we may not be successful in protecting our confidential information andintellectual property, particularly our trade secrets, because third partiesmay:

 

•                  independently develop substantially the same proprietaryinformation and techniques,

•                  gain access to our trade secrets, or

•                  disclose our technology.

 

**The parties to whom we provide research and developmentservices may dispute the ownership of the intellectual property that we developperforming these services.**

 

In thepast, revenues from research and development arrangements with third partieshave been used to pay for a portion of our own research and development expenses.We receive these revenues from government-sponsored programs, customers andfrom SEMATECH, a research consortium, in connection with our designing anddeveloping specific products. Currently, revenues from SEMATECH,photolithography tool manufacturers and semiconductor manufacturers are used tofund a small portion of our development expenses. In providing these researchand development services to these manufacturers and SEMATECH, we try to makeclear who owns the intellectual property that results from the research anddevelopment services we perform. However, disputes over the ownership

 

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or rights to use ormarket this intellectual property may arise between us and the photolithographytool manufacturers and SEMATECH. Any dispute over ownership of the intellectualproperty we develop could restrict our ability to market our products and havea material adverse effect on our business.

 

**In the future, we may be subject to patent litigation to enforcepatents issued to us and defend ourselves against claimed infringement by ourcompetitors or any other third party.**

 

Thirdparties have notified us in the past, and may notify us in the future, that weare infringing their intellectual property rights. Also, we have notified thirdparties in the past, and may notify them in the future, that they may beinfringing our intellectual property rights.

 

Specifically,Komatsu has notified us that we may be infringing some of its Japanese patents.During our discussions with Komatsu, they also asserted that we or our Japanesemanufacturing partner, Seiko, may be infringing on some of Komatsu’s UnitedStates patents and a number of its additional Japanese patents. Komatsu hasalso notified one of our customers, Nikon, of its belief that our light sourcesinfringe several of Komatsu’s Japanese and U.S. patents. As a result, westarted proceedings in the Japanese Patent Office to oppose certain patents andpatent applications of Komatsu. The Japanese Patent Office has dismissed someof our opposition claims. Thus, litigation may result in connection withKomatsu’s Japanese patents or U.S. patents. Also, Komatsu might claim that weinfringe other or additional patents. Komatsu notified Seiko, our manufacturingpartner, that it intends to enforce its rights against Seiko with respect toits Japanese patents if Seiko continues to engage in manufacturing activitiesfor us. In connection with our manufacturing agreement with Seiko, we agree topay Seiko under certain conditions for damages associated with these types ofclaims. Seiko may not prevail in any litigation against Komatsu, and therefore,we may be required to pay Seiko for such damages.

 

We havenotified our competitors and others of our United States patent portfolio.Specifically, we have notified Komatsu that they may be infringing on some ofour U.S. patents. We have discussed with Komatsu our claims against eachother.  Komatsu challenged one of ourU.S. patents in the USPTO but it was subsequently re-issued by the USPTO. Also,Komatsu transferred its lithography light source business to one of ourcompetitors, Gigaphoton. We also have had discussions with Lambda-Physik,another competitor, regarding allegations by each party against the other forpossible patent infringement. Any of these discussions with our competitors maynot be successful and litigation could result.

 

In thefuture, patent litigation may result due to a claim of infringement by ourcompetitors or any other third party or may be necessary to enforce patentsissued to us.  Any such litigation couldresult in substantial cost and diversion of effort by us, which would have anadverse effect on our business, financial condition and operating results. Furthermore,our customers and the end users of our products might assert other claims forindemnification that arise from infringement claims against them. If theseassertions are successful, our business, financial condition and operatingresults may be materially affected. Instead of litigation, we may seek alicense from third parties to use their intellectual property. However, we maynot be able to obtain a license on reasonable terms. In the alternative, we maydesign around the third party’s intellectual property right or we may challengethese claims in legal proceedings. Any adverse determination in a legalproceeding could result in one or more of the following, any of which couldhave a substantial adverse effect on our business, financial condition andoperating results:

 

•                  loss of our proprietary rights,

•                  exposure to significant liabilities by other thirdparties,

•                  requirement that we get a license from third parties onterms that are not favorable, or

•                  restriction from manufacturing or selling our products.

 

Any ofthese actions could be costly and would divert the efforts and attention ofCymer’s management and technical personnel, which would materially adverselyaffect Cymer’s business, financial condition and results of operations.

 

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**Trademark infringement claims againstour registered and unregistered trademarks would be expensive and we may haveto stop using such trademarks and pay damages.**

 

Weregistered the trademark ‘‘CYMER’’ & “INSIST ON CYMER” in the United Statesand in some other countries. We are also trying to register additionaltrademarks in the United States in other countries.  We use these trademarks and many other marks in ouradvertisements and other business materials, which are distributed throughoutthe world. We may be subject to trademark infringement actions for using thesemarks and other marks on a worldwide basis and this would be costly to defend.If a trademark infringement action was successful, we would have to stop usingthe mark and possibly pay damages.

 

**We are dependent on air transport toconduct our business and disruption of domestic and international air transportsystems could adversely affect our business.**

 

Wedepend on regular and reliable air transportation on a worldwide basis for manyof our routine business functions. If civil aviation in the United States orabroad is disrupted by terrorist activities or security responses to the threatof terrorism or for any other reason, our business could be adversely affectedin the following ways:

 

•                  supplies of raw materials and components for themanufacture of our products or our customers’ products may be disrupted;

•                  we may not be able to deliver our products to ourcustomers in a timely manner;

•                  we may not be able to provide timely support ofinstalled light sources for semiconductor device manufacturers; and

•                  our sales and marketing efforts may be disrupted.

 

**We are exposed to risks related to thefluctuations in the currency exchange rates for the Japanese yen.**

 

If wesell products to our Japanese subsidiary, the sale is denominated in U.S.dollars. If our Japanese subsidiary sells our products directly to customers inJapan, the sale is denominated in Japanese yen.  Thus, our results of operations may fluctuate based on thechanging value of the Japanese yen to the U.S. dollar. Our Japanese subsidiarymanages its exposure to these fluctuations through foreign currency forwardexchange contracts to hedge its purchase commitments. We will continue tomonitor our exposure to these currency fluctuations, and, when appropriate, usehedging transactions to minimize the effect of these currency fluctuations.However, exchange rate fluctuations may still have a material adverse effect onour operating results. In the future, we may need to sell our products in otherforeign currencies other than the Japanese yen and the management of morecurrency fluctuations will be more difficult and expose us to greater risks inthis area.

 

**We are subject to many standards and regulations of foreigngovernments and, even though we intend to comply, we may not always be incompliance with these rules, or we may be unable to design or redesign ourproducts to comply with these rules.**

 

Manyforeign government standards and regulations apply to our products. These standardsand regulations are always being amended. Although we intend to meet allforeign standards and regulations, our products may not comply with theseforeign government standards and regulations. Further, it might not be costeffective for us to redesign our products to comply with these foreigngovernment standards and regulations. Our inability to design or redesignproducts to comply with foreign standards therefore could have a materialadverse effect on our business.

 

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**Semiconductor device manufacturers’ prolonged use of ourproducts in high volume productions may not produce the results they desireand, as a result, our reputation and that of our customers who supplyphotolithography tools to the semiconductor manufacturers could be damaged inthe semiconductor industry.**

 

Overtime, our light source products may not meet semiconductor devicemanufacturers’ production specifications or operating cost requirements afterthe light source is used for a long period in high volume production. If anysemiconductor device manufacturer cannot successfully achieve or sustain theirvolume production using our light sources, our reputation could be damaged withthe semiconductor device manufacturers and our customers who are the limitednumber of photolithography tool manufacturers. This would have a materialadverse effect on our business.

 

**We have in the past and may in the future acquire businessthat will involve numerous risks. We may not be able to address these riskssuccessfully without substantial expense, delay or other operational andfinancial problems.**

 

Therisks involved with acquiring a new company include the following:

 

•                  diversion of management’s attention and resources tointegrate the new company,

•                  failure to retain key personnel,

•                  amortization of acquired definite-lived intangibleassets and deferred compensation,

•                  client dissatisfaction or performance problems with theacquired company,

•                  the cost associated with acquisitions and the integrationof acquired operations,

•                  failure to commercialize purchased technologies,

•                  ability of the acquired companies to meet theirfinancial projections, and

•                  assumption of unknown liabilities or other unanticipatedevents or circumstances.

 

Mergersand acquisitions are inherently subject to multiple significant risks, and theinability to effectively manage these risks could have a material adverseeffect on our business.  Any of theserisks could materially harm our business, financial condition and operatingresults. Further, any business that we acquire may not achieve anticipatedrevenues or operating results.

 

**We must develop and manufacture enhancements to our existingproducts and introduce new products in order to continue to grow our business.We may not effectively manage our growth and integrate these new enhancementsand products, which could materially harm our business.**

 

Tocontinue to grow our business, our existing light source products and theirprocess capabilities must be enhanced, and we must develop and manufacture newproducts to serve other semiconductor applications. We cannot guarantee that wewill be able to manage our growth effectively. Nor can we guarantee that wewill be able to accelerate the development of new enhancements to our existingproducts and create new products. Further, we may not be able to effectivelyintegrate new products and applications into our current operations. Any ofthese risks could materially harm our business, financial condition and resultsof operations.

 

## **We are dependent on our manufacturingfacilities and subcontractors to assemble and test our products.**

 

Operationsat our primary manufacturing facility and our subcontractors are subject todisruption for a variety of reasons, including work stoppages, terrorism, fire,earthquake, energy shortages, flooding or other natural disasters.  Such disruptions could cause delays inshipments of our products to our customers. We cannot ensure that alternate production capacity would be availableif a major disruption were to occur or that, if it were available, it could beobtained on favorable terms.  Suchdisruption could result in cancellation of orders or loss of customers whichhave a material adverse effect on our operating results, financial conditionand cash flows.

 

**Our operations are subject toenvironmental and other government regulations that may expose us toliabilities for noncompliance.**

 

We aresubject to federal, state and local regulations, such as regulations related tothe environment, land use, public utility utilization and the fire code, inconnection with the storage, handling,

 

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discharge and disposalof substances that we use in our manufacturing process and on our facilitiesthat we lease. We believe that our activities comply with current governmentregulations that are applicable to our operations and current facilities. Wemay be required to purchase additional capital equipment or other requirementsfor our processes to comply with these government regulations in the future ifthey change. Further, these government regulations may restrict us fromexpanding our operations. Adopting measures to comply with changes in thegovernment regulations, our failure to comply with environmental and land useregulations, or restrictions on our ability to discharge hazardous substances,could subject us to future liability or cause our manufacturing operations tobe reduced or stopped.

 

**Our products are subject to potential product liabilityclaims if personal injury or death result.**

 

We areexposed to significant risks for product liability claims if personal injury ordeath results from the use of our products. We may experience material productliability losses in the future. We maintain insurance against product liabilityclaims. However, our insurance coverage may not continue to be available onterms that we accept. This insurance coverage also may not adequately coverliabilities that we incur. Further, if our products are defective, we may berequired to recall or redesign these products. A successful claim against usthat exceeds our insurance coverage level, or any claim or product recall thatresults in adverse publicity against us, could have a material adverse effecton our business, financial condition and results of operations.

 

**Compliance with changing regulation ofcorporate governance and public disclosure may result in additional expenses***.*

 

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

 

**The price of our common stock has fluctuated and may continueto fluctuate widely.**

 

Theprice of our common stock has fluctuated in the past. The market price of ourcommon stock will continue to be subject to significant fluctuations in thefuture in response to a variety of factors, including the risk factorscontained in this report.

 

Variousfactors may significantly affect the market price of our common stock,including:

 

•                  the cyclical nature of the semiconductor industry,

•                  actual or anticipated fluctuations in our operatingresults,

•                  conditions and trends in the light source device andother technology industries,

•                  announcements of innovations in technology,

•                  new products offered by us or our competitors,

•                  developments of patents or proprietary rights,

•                  changes in financial estimates by securities analysts,

•                  general worldwide political, economic, and marketconditions, and

•                  United States political, economic, and marketconditions.

 

Inaddition, the stock market has experienced extreme price and volumefluctuations that have particularly affected the market price for many hightechnology companies. Such fluctuations have in some cases been unrelated tothe operating performance of these companies. Severe price fluctuations in acompany’s stock have frequently been followed by securities litigation.  Any such litigation can result insubstantial costs and a diversion of management’s attention and resources andtherefore could have a material adverse effect on Cymer’s business, financialcondition and results of operations.

 

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**We have implemented steps to protect our company from hostiletakeovers.**

 

Nevadalaw and our articles of incorporation contain provisions that discourage aproxy contest and provisions that make an acquisition of a substantial block ofour common stock more difficult. In addition, our board of directors isauthorized to issue, without stockholder approval, shares of preferred stock.Such shares of preferred stock may have voting, conversion and other rights andpreferences that may be superior to those of the common stock and this couldadversely affect the voting power or other rights of holders of common stock.Our board can use the issuance of the preferred stock or rights to purchase thepreferred stock to discourage any unsolicited acquisition proposal or attempt.

 

#### **Item 7A. Quantitative and Qualitative Disclosures About Market Risk**

 

# **Foreign Currency Risk**

 

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

 

As of December 31, 2002,Cymer had outstanding foreign currency forward exchange contracts to buy US$63.8 million for 7.7 billion yen under foreign currency exchange facilitieswith contract rates ranging from 115.5 yen to 132.9****yen per U.S. dollar.  These contracts expire on various datesthrough November 2003.

# ** **

# **Investment and DebtRisk**

 

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

 

In February 2002, Cymerissued $250.0 million principal amount of unsecured fixed rate 31⁄2% ConvertibleSubordinated Notes due February 15, 2009 (“2002 Notes”).  Interest on the 2002 Notes is payable onFebruary 15 and August 15 of each year, commencing August 15, 2002.  The 2002 Notes are convertible into sharesof Cymer’s common stock at a conversion rate of 20 shares per $1,000 principalamount subject to adjustment under certain conditions. Cymer may redeem the2002 Notes on or after February 20, 2005, or earlier if the price of its commonstock reaches certain levels.  The 2002Notes are subordinated to Cymer’s existing and future senior indebtedness andeffectively subordinated to all indebtedness and other liabilities of Cymer’ssubsidiaries. A portion of the net proceeds of this private placement was usedto redeem Cymer’s outstanding 1997 Notes. Because the interest rate is fixed, we believe there is no risk ofincreased interest expense.

 

#### **Item 8. Financial Statements and Supplementary Data**

 

The information required bythis Item is included in Part IV Items 14(a)(1) and (2) of this AnnualReport on Form 10-K.

 

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**Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

None.

 

##### PART III

 

**Item 10. Directors and Executive Officers of the Registrant.**

 

The information regarding theidentification and business experience of Cymer’s directors under the caption“Proposal 1 - Election of Directors” in Cymer’s Proxy Statement for the annualmeeting of stockholders to be held on May 22, 2003 to be filed with theSecurities and Exchange Commission within 120 days after the end of Cymer’sfiscal year ended December 31, 2002, is incorporated herein by thisreference.  For information regardingthe identification and business experience of Cymer’s executive officers, see“Executive Officers” at the end of Item 1 in Part I of this Annual Report onForm 10-K. Information concerning filing requirements applicable to Cymer’sexecutive officers and directors under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” in Cymer’s Proxy Statement is incorporatedherein by reference.

 

**Item 11. Executive Compensation**

 

The information under thecaption “Executive Compensation” in Cymer’s Proxy Statement is incorporatedherein by reference.

 

**Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**

 

The information under thecaption “Security Ownership of Certain Beneficial Owners and Management”  in Cymer’s Proxy Statement is incorporatedherein by this reference.  The remaininginformation called for by this item relating to “Securities Authorized forIssuance under Equity Compensation Plans” is incorporated herein by referenceto Cymer’s Proxy Statement.

 

### **Item13.  Certain Relationships and RelatedTransactions**

 

The information under thecaption “Certain Transactions” in Cymer’s Proxy Statement is incorporatedherein by reference.

 

Withthe exception of the information specifically incorporated by reference fromCymer’s Proxy Statement in this Annual Report on Form 10-K, Cymer’s ProxyStatement shall not be deemed to be filed as part of this Report.  Without limiting the foregoing, theinformation under the captions “Report of the Audit Committee of the Board ofDirectors,”  “Report of the CompensationCommittee of the Board of Directors” and “Performance Measurement Comparison”in Cymer’s Proxy Statement is not incorporated by reference in this AnnualReport on Form 10-K.

 

#### **Item14.  Controls and Procedures**

 

*Evaluation of disclosure controlsand procedures*.  Cymer’schief executive officer and its chief financial officer, after evaluating theeffectiveness of Cymer’s disclosure controls and procedures (as defined inExchange Act Rule 13a-14) as of a date within 90 days of the filing date ofthis annual report on Form 10-K (the “Evaluation Date”), have concluded that asof such date, Cymer’s disclosure controls and procedures were adequate andsufficient to ensure that information required to be disclosed by Cymer in thereports that it files under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time period specified in theCommission’s rules and forms.

 

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*Changes in internal controls*. There have beenno significant changes in Cymer’s internal controls since the EvaluationDate.  Cymer is not aware of anysignificant change in any other factor that could significantly affect itsinternal controls subsequent to the Evaluation Date.

 

PARTIV

 

### **Item 15**.  Exhibits, Financial Statement Schedules, andReports on Form 8-K

 

(a)           The following documents are filed aspart of, or incorporated by reference into, this Annual Report on Form 10-K:

 

(1)(2)       Financial Statements and FinancialStatement Schedule. The following Consolidated Financial Statements ofCymer, Inc., Financial Statement Schedules and Independent Auditors’ Report areincluded in a separate section of this Annual Report on Form 10-K beginning onpage F-1:

 
|                                                                                                        |
|-------------------------------------------------------------------------------------------------------------|
| Independent Auditors’  Report                                                                          |
| Consolidated Balance Sheets  as of December 31, 2001 and 2002                                               |
| Consolidated  Statements of Income for the Years Ended December 31, 2000, 2001 and 2002                     |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31, 2000,  2001 and 2002 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002                 |
| Notes to  Consolidated Financial Statements                                                                 |
| Financial  Statement Schedule:                                                                              |
| Schedule II – Valuation  and Qualifying Accounts and Reserves                                          |

 

Allother financial statement schedules have been omitted because the requiredinformation is not applicable or not present in amounts sufficient to requiresubmission of the schedule, or because the information required is included inthe consolidated financial statements or the notes thereto.

(3)           Exhibits.  The exhibits listed under Item 15(c) hereofare filed with, or incorporated by reference into, this Annual Report on Form10-K.  Each management contract orcompensatory plan or arrangement is identified separately in item 15(c) hereof.

 

(b)           Reports on Form 8-K.  No reports on Form 8-K were filed byRegistrant during the fourth quarter of the fiscal year ended December 31,2002.

 

(c)           Exhibits.  The following exhibits are filed as part of,or incorporated by reference into, this Annual Report on Form 10-K:

 
| 3.1    |   | Amended and Restated Articles of Incorporation of Cymer (incorporated  herein by reference to Exhibit 3.1 to Cymer’s Registration Statement on Form  S-1, Reg. No. 333-08383).                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                      |   |
| 3.2    |   | Certificate of Designations of Rights, Preferences and Privileges of  Series A Participating Preferred Stock of Cymer (incorporated herein by  reference to Exhibit 1 to Cymer’s Form 8-A, dated February 20, 1998). |
|   |   |                                                                                                                                                                                                                      |   |
| 3.3    |   | Bylaws of Cymer, as amended and restated (incorporated herein by  reference to Exhibit 3.3 to Cymer’s Annual Report on Form 10-K for the year  ended December 31, 2000).                                   |

 

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| 4.1    |   | Preferred Shares Rights Agreement, dated as of February 13, 1998  between Cymer and ChaseMellon Shareholder Services, L.L.C. (now Mellon  Investor Services L.L.C.) (incorporated herein by reference to Exhibit 1 to  Cymer’s Form 8-A, dated February 20, 1998).                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 4.2    |   | Agreement of Substitution and Amendment of Preferred Share Rights  Agreement, dated January 13, 2003, between Cymer and American Stock Transfer  and Trust Company.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 4.3    |   | Purchase  Agreement, dated as of February 12, 2002, among Cymer, Credit Suisse First  Boston Corporation and Merrill Lynch Pierce Fenner and Smith Incorporated  (incorporated herein by reference to Exhibit 4.1 to Cymer’s Quarterly Report  on Form 10-Q for the quarter ended March 31, 2002).                     |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 4.4    |   | Indenture,  dated as of February 15, 2002, between Cymer and State Street Bank and Trust  Company of California, N.A., as Trustee (incorporated herein by reference to  Exhibit 4.2 to Cymer’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2002).                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 4.5    |   | Registration  Rights Agreement, dated as of February 15, 2002, among Cymer, Credit Suisse  First Boston Corporation and Merrill Lynch Pierce Fenner and Smith  Incorporated (incorporated herein by reference to Exhibit 4.3 to Cymer’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).          |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 10.1#  |   | Form of Indemnification Agreement with Directors and Officers  (incorporated herein by reference to Exhibit 10.1 to Cymer’s Registration  Statement on Form S-1, Reg. No. 333-08383).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 10.2   |   | Standard Industrial Lease – Multi-Tenant,  dated August 19, 1991, by and between Lepercq Corporate Income  Fund L.P. and Cymer****(originally between Frankris****Corporation  and Cymer) (incorporated herein by reference to Exhibit 10.15 to Cymer’s  Registration Statement on Form S-1, Reg. No. 333-08383). |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 10.3   |   | Single-Tenant  Industrial Lease, dated December 19, 1996, by and between AEW/LBA Acquisition  Co. II, LLC and Cymer (incorporated herein by reference to Exhibit 10.20 to  Cymer’s Annual Report on Form 10-K filed for the year ended December 31,  1996).                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 10.4   |   | Standard  Form of Agreement between owner (Cymer, Inc.) and contractor (Hensel-Phelps  Construction Company) dated July 22, 2002 (incorporated herein by reference  to Exhibit 10.1 to Cymer’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2002).                                               |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
| 10.5   |   | Contract  Manufacturing Agreement – Lithography Laser, dated August 28, 1992, by and  between Cymer and Seiko Instruments Inc. (the “Seiko Agreement”)  (incorporated herein by reference to Exhibit 10.16 to Cymer’s Registration  Statement on Form S-1, Reg. No. 333-08383).                         |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
|   |   | Addendum No.  2 to the Seiko Agreement, dated February 21, 2000 (incorporated herein by  reference to Exhibit 10.5 to Cymer’s Annual Report on Form 10-K for the year  ended December 31, 1999).                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                        |   |
|   |   | Termination of Seiko Contract Manufacturing Agreement - Lithography  Laser, dated March 31, 2003.                                                                                                                                                                                                                           |

 

42

----

 
| 10.6#  |   | 1996 Stock  Option Plan, as amended (incorporated herein by reference to Exhibit 99.1 to  Cymer’s Registration Statement on Form S-8, Registration No. 333-69736).                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                         |   |
| 10.7#  |   | 1996  Employee Stock Purchase Plan, as amended (incorporated herein by reference to  Exhibit 99.3 to Cymer’s Registration Statement on Form S-8, Registration No.  333-69736).                                                          |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.8#  |   | 1996  Director Option Plan (incorporated herein by reference to Exhibit 10.5 to  Cymer’s Registration Statement on Form S-1, Reg. No. 333-08383).                                                                                       |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.9#  |   | Employment  Agreement, effective as of April 1, 2002, by and between Robert P. Akins and  Cymer (incorporated herein by reference to Exhibit 10.1 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended March 31, 2002).      |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.10# |   | Employment  Agreement, effective as of April 1, 2002, by and between Nancy J. Baker and  Cymer (incorporated herein by reference to Exhibit 10.2 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended March 31, 2002).       |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.11# |   | Employment  Agreement, effective as of April 1, 2002, by and between Albert P. Cefalo and  Cymer (incorporated herein by reference to Exhibit 10.4 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended March 31, 2002).     |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.12# |   | Employment  Agreement, effective as of April 1, 2002, by and between Pascal Didier and  Cymer (incorporated herein by reference to Exhibit 10.5 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended March 31, 2002).        |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.13# |   | Employment  Agreement, effective as of April 1, 2002, by and between Edward P. Holtaway  and Cymer (incorporated herein by reference to Exhibit 10.6 to Cymer’s  Quarterly report on Form 10-Q for the quarter ended March 31, 2002).   |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.14# |   | Employment  Agreement, effective as of April 1, 2002, by and between Brian C. Klene and  Cymer (incorporated herein by reference to Exhibit 10.7 to Cymer’s Quarterly  report on Form 10-Q for the quarter ended March 31, 2002).       |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.15# |   | Employment  Agreement, effective as of April 1, 2002, by and between Jung Ho (John) Shin  and Cymer (incorporated herein by reference to Exhibit 10.12 to Cymer’s  Quarterly report on Form 10-Q for the quarter ended March 31, 2002). |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.16# |   | Description  of Cymer Management Incentive Plan (incorporated herein by reference to  Exhibit 10.15 to Cymer’s Annual Report on Form 10-K for the year ended  December 31, 1999).                                                       |
|   |   |                                                                                                                                                                                                                                         |   |
| 10.17# |   | Cymer  Deferred Compensation Plan, as amended and restated (incorporated herein by  reference to Exhibit 10.1 to Cymer’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 2000).                                          |

 

43

----

 
| 10.18# |   | 2000 Equity  Incentive Plan (formerly known as the 2000 Nonstatutory Stock Option Plan and  incorporated herein by reference to Exhibit 99.4 to Cymer’s Registration  Statement on Form S-8, Registration No. 333-69736).                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 10.19  |   | Credit Agreement,  dated as of June 28, 2001, by and between Cymer, Inc. and Wells Fargo HSBC  Trade Bank (incorporated herein by reference to Exhibit 10.1 to Cymer’s  Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).                                           |
|   |   |                                                                                                                                                                                                                                                                                            |   |
|   |   | Amendment  No. 1, dated June 7, 2002, by and between Cymer, Inc. and Wells Fargo HSBC  Bank, N.A.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 10.20* |   | Patent  License Agreement, dated May 14, 2001, by and among Cymer, Inc., Linda B.  Jacob, Joseph A. Mangano, and Science Research Laboratory, Inc. (incorporated  herein by reference to Exhibit 10.2 to Cymer’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 2001). |
|   |   |                                                                                                                                                                                                                                                                                            |   |
|   |   | Patent  Sublicense Agreement, dated May 14, 2001, by and between Science Research  Laboratory, Inc. and Cymer, Inc. (incorporated herein by reference to Exhibit  10.2 to Cymer’s Quarterly Report on Form 10-Q for the quarter ended September  30, 2001).                                |
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 10.21# |   | Form of  Stock Option Agreement used in connection with the 1996 Stock Option Plan, as  amended (incorporated herein by reference to Exhibit 99.2 to Cymer’s  Registration Statement on Form S-8, Registration No. 333-69736).                                                             |
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 10.22# |   | Form of Stock Option Agreement used in connection with  the 2000 Equity Incentive Plan (incorporated herein by reference to Exhibit  99.5 to Cymer’s Registration Statement on Form S-8, Registration No.  333-69736).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                            |
| 10.23# |   | Reduction in  Force Benefits Plan, as amended.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 10.24# |   | Executive  Option and Group Health Coverage, Extension Program (incorporated herein by  reference to Exhibit 10.22 to Cymer's Annual Report on Form 10-K for the year  ended December 31, 2001).                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 10.25  |   | Credit  Agreement, dated October 30, 2001, by and between Cymer Japan, Inc. and Wells  Fargo HSBC Trade Bank, N.A.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                            |   |
|   |   | Parent  Guarantee, dated October 30, 2001, by Cymer, Inc. with respect to Credit  Agreement between Wells Fargo HSBC Trade Bank, N.A. and Cymer Japan, Inc.                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                            |   |
|   |   | Amendment  No. 1, dated June 7, 2002, by and between Cymer Japan, Inc. and Wells Fargo  HSBC Bank, N.A.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 10.26# |   | Description  of President/COO Bonus Plan                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 21.1   |   | Subsidiaries of Cymer.                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                            |   |
| 23.1   |   | Independent Auditors’ Report on Schedule and Consent                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                            |
| 99.1   |   | Certification of Chief Executive Officer Pursuant to Section 906 of  the Sarbanes-Oxley Act.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                            |
| 99.2   |   | Certification of Chief Financial Officer Pursuant to Section 906 of  the Sarbanes-Oxley Act.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                            |
|        |
|   |   | #  Indicates management  contract or compensatory plan or arrangement.                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                            |   |
|   |   | *                                                                                                                                                                                                                                                                                               | Confidential treatment was requested with respect to certain portions  of this exhibit. Omitted portions were filed separately with the Securities  and Exchange Commission. |
|        |        |                                                                                                                                                                                                                                                                                                 |  |  |

 

(d)           FinancialStatement Schedules.  See item 15,paragraph (a) (2), above.

 

44

----

 

SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                   |   | CYMER, INC.                                          |   |
|------------------------|--------|------------------------------------------------------|--------|
|                   |   |                                                 |   |
| Dated:  March 24, 2003 | By:    | /s/  ROBERT P. AKINS                                 |   |
|                   |   | Robert  P. Akins,                                    |
|                   |   | Chief  Executive Officer,  and Chairman of the Board |
|                        |        |                                                      |        |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the date indicated.

 
| /s/ ROBERT P. AKINS    |   | Chief  Executive Officer,              | March  24, 2003 |
|------------------------|--------|----------------------------------------|-----------------|
| Robert P. Akins        |   | and  Chairman of the Board             |            |
|                   |   | (*Principal  Executive Officer*)       |            |
|                   |   |                                   |            |
|                   |   |                                   |            |
| /s/ NANCY J. BAKER     |   | Senior  Vice President                 | March  24, 2003 |
| Nancy J. Baker         |   | and  Chief Financial Officer           |            |
|                   |   | (*Principal  Financial  Officer*) |            |
|                   |   |                                   |            |
|                   |   |                                   |            |
| /s/ RAE ANN WERNER     |   | Vice  President, Controller            | March  24, 2003 |
| Rae Ann Werner         |   | and  Chief Accounting Officer          |            |
|                   |   | (*Principal  Accounting Officer*)      |            |
|                   |   |                                   |            |
|                   |   |                                   |            |
| /s/ CHARLES J. ABBE    |   | Director                               | March  24, 2003 |
| Charles J. Abbe        |   |                                   |            |
|                   |   |                                   |            |
|                   |   |                                   |            |
| /s/ RICHARD P. ABRAHAM |   | Director                               | March  24, 2003 |
| Richard P. Abraham     |   |                                   |            |
|                   |   |                                   |            |
|                   |   |                                   |            |
| /s/ MICHAEL R. GAULKE  |   | Director                               | March  24, 2003 |
| Michael R. Gaulke      |   |                                   |            |
|                   |   |                                   |            |
|                   |   |                                   |            |
| /s/ WILLIAM G. OLDHAM  |   | Director                               | March  24, 2003 |
| William G. Oldham      |   |                                   |            |
|                   |   |                                   |            |
|                   |   |                                   |            |
| /s/ PETER J. SIMONE    |   | Director                               | March  24, 2003 |
| Peter J. Simone        |   |                                   |            |
|                   |   |                                   |            |
|                   |   |                                   |            |
| /s/ JON D. TOMPKINS    |   | Director                               | March  24, 2003 |
| Jon D. Tompkins        |   |                                   |            |

 

45

----

 

**CERTIFICATION**

 

I,Robert P. Akins, certify that:

 
| 1.     |   | I  have reviewed this annual report on Form 10-K of Cymer, Inc.;                                                                                                                                                                                                                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 2.     |   | Based  on my knowledge, this annual report does not contain any untrue statement of  a material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this annual  report;                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.     |   | Based  on my knowledge, the financial statements, and other financial information  included in this annual report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this annual report;                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.     |   | The  registrant’s other certifying officer and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| a)     |   | designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this annual report is being prepared;                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| b)     |   | evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this annual report (the  “Evaluation Date”); and                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| c)     |   | presented  in this annual report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the  Evaluation Date;                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 5.     |   | The  registrant’s other certifying officer and I have disclosed, based on our most  recent evaluation, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or persons performing the equivalent  functions):                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| a)     |   | all  significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| b)     |   | any  fraud, whether or not material, that involves management or other employees  who have a significant role in the registrant’s internal controls; and                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 6.     |   | The  registrant’s other certifying officer and I have indicated in this annual  report whether there were significant changes in internal controls or in  other factors that could significantly affect internal controls subsequent to  the date of our most recent evaluation, including any corrective actions with  regard to significant deficiencies and material weaknesses. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | Date:  March 27, 2003                                                                                                                                                                                                                                                                                                                                                               |

 

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

 

46

----

 

**CERTIFICATION**

 

I,Nancy J. Baker, certify that:

 
| 1.     |   | I  have reviewed this annual report on Form 10-K of Cymer, Inc.;                                                                                                                                                                                                                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 2.     |   | Based  on my knowledge, this annual report does not contain any untrue statement of  a material fact or omit to state a material fact necessary to make the  statements made, in light of the circumstances under which such statements  were made, not misleading with respect to the period covered by this annual  report;                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 3.     |   | Based  on my knowledge, the financial statements, and other financial information  included in this annual report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this annual report;                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.     |   | The  registrant’s other certifying officer and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| a)     |   | designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this annual report is being prepared;                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| b)     |   | evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this annual report (the  “Evaluation Date”); and                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| c)     |   | presented  in this annual report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the  Evaluation Date;                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 5.     |   | The  registrant’s other certifying officer and I have disclosed, based on our most  recent evaluation, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or persons performing the equivalent  functions):                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| a)     |   | all  significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| b)     |   | any  fraud, whether or not material, that involves management or other employees  who have a significant role in the registrant’s internal controls; and                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 6.     |   | The  registrant’s other certifying officer and I have indicated in this annual  report whether there were significant changes in internal controls or in  other factors that could significantly affect internal controls subsequent to  the date of our most recent evaluation, including any corrective actions with  regard to significant deficiencies and material weaknesses. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | Date:  March 27, 2003                                                                                                                                                                                                                                                                                                                                                               |

 

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

 

47

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

 

TheBoard of Directors 

Cymer,Inc.:

 

Wehave audited the accompanying consolidated balance sheets of Cymer, Inc. andsubsidiaries as of December 31, 2001 and 2002, and the relatedconsolidated statements of income, stockholders’ equity and cash flows for eachof the years in the three-year period ended December 31, 2002.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our auditsin accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Cymer, Inc. andsubsidiaries as of December 31, 2001 and 2002, and the results of their operationsand their cash flows for each of the years in the three-year period endedDecember 31, 2002, in conformity with accounting principles generally acceptedin the United States of America.

 

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

 

 
|                   |   |   | /s/ KPMG LLP |   |
|------------------------|--------|--------|--------------|--------|
|                   |   |   |         |   |
| San  Diego, California |   |   |         |   |
| January  27, 2003      |   |   |         |   |

 

F-1

----

 

**CYMER, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                                                                                                                                 |   | **December  31,  2001** |    | **December  31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                                                                                                                                           |   |                    |    |                    |   |
|                                                                                                                                                                                                                                 |   |                    |    |                    |   |
| CURRENT ASSETS:                                                                                                                                                                                                                      |   |                    |    |                    |   |
| Cash and cash equivalents                                                                                                                                                                                                            |   | $                       | 111,195 |                    | $      | 196,643 |   |
| Short-term investments                                                                                                                                                                                                               |   | 82,988                  |    | 71,249                  |   |
| Accounts receivable – net                                                                                                                                                                                                       |   | 50,056                  |    | 52,341                  |   |
| Foreign currency forward exchange contracts                                                                                                                                                                                          |   | 3,197                   |    | —                  |   |
| Inventories                                                                                                                                                                                                                          |   | 61,784                  |    | 100,119                 |   |
| Deferred income taxes                                                                                                                                                                                                                |   | 16,935                  |    | 20,041                  |   |
| Income taxes receivable                                                                                                                                                                                                              |   | 3,039                   |    | —                  |   |
| Prepaid expenses and other assets                                                                                                                                                                                                    |   | 3,308                   |    | 6,029                   |   |
| Total current assets                                                                                                                                                                                                                 |   | 332,502                 |    | 446,422                 |   |
|                                                                                                                                                                                                                                 |   |                    |    |                    |   |
| PROPERTY AND EQUIPMENT –  NET                                                                                                                                                                                                   |   | 90,419                  |    | 112,209                 |   |
| LONG-TERM INVESTMENTS                                                                                                                                                                                                                |   | 23,015                  |    | 159,029                 |   |
| DEFERRED INCOME TAXES                                                                                                                                                                                                                |   | 12,269                  |    | 20,553                  |   |
| GOODWILL – NET                                                                                                                                                                                                                  |   | 9,791                   |    | 10,597                  |   |
| INTANGIBLE ASSETS – NET                                                                                                                                                                                                         |   | 10,633                  |    | 8,565                   |   |
| OTHER ASSETS                                                                                                                                                                                                                         |   | 4,717                   |    | 9,512                   |   |
|                                                                                                                                                                                                                                 |   |                    |    |                    |   |
| TOTAL ASSETS                                                                                                                                                                                                                         |   | $                       | 483,346 |                    | $      | 766,887 |   |
|                                                                                                                                                                                                                                 |   |                    |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                        |   |                    |    |                    |   |
|                                                                                                                                                                                                                                 |   |                    |    |                    |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                                 |   |                    |    |                    |   |
| Accounts payable                                                                                                                                                                                                                     |   | $                       | 15,687  |                    | $      | 26,344 |   |
| Accounts payable – related party                                                                                                                                                                                                |   | 42                      |    | 155                     |   |
| Accrued warranty and installation                                                                                                                                                                                                    |   | 27,908                  |    | 30,078                  |   |
| Accrued payroll and benefits                                                                                                                                                                                                         |   | 6,628                   |    | 7,334                   |   |
| Accrued patents, royalties and other fees                                                                                                                                                                                            |   | 3,708                   |    | 6,806                   |   |
| Foreign currency forward exchange contracts                                                                                                                                                                                          |   | —                  |    | 907                     |   |
| Accrued interest                                                                                                                                                                                                                     |   | 10,397                  |    | 3,300                   |   |
| Income taxes payable                                                                                                                                                                                                                 |   | —                  |    | 11,321                  |   |
| Revolving loan                                                                                                                                                                                                                       |   | 7,652                   |    | 6,667                   |   |
| Accrued and other current liabilities                                                                                                                                                                                                |   | 2,629                   |    | 2,383                   |   |
| Total current liabilities                                                                                                                                                                                                            |   | 74,651                  |    | 95,295                  |   |
|                                                                                                                                                                                                                                 |   |                    |    |                    |   |
| CONVERTIBLE SUBORDINATED NOTES                                                                                                                                                                                                       |   | 147,335                 |    | 250,000                 |   |
| OTHER LIABILITIES                                                                                                                                                                                                                    |   | 4,437                   |    | 5,154                   |   |
| MINORITY INTEREST                                                                                                                                                                                                                    |   | 2,109                   |    | 4,104                   |   |
|                                                                                                                                                                                                                                 |   |                    |    |                    |   |
| 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;  50,000,000 and 100,000,000 shares authorized at December 31, 2001 and 2002,  respectively; 30,848,000 and 34,227,000 shares outstanding at December 31,  2001 and 2002, respectively |   | 31                      |    | 34                      |   |
| Additional paid-in capital                                                                                                                                                                                                           |   | 184,794                 |    | 302,501                 |   |
| Treasury stock, at cost (2,000,000 common shares)                                                                                                                                                                                    |   | (24,871                 | )       | —                  |   |
| Unearned compensation                                                                                                                                                                                                                |   | (3,468                  | )       | (2,358                  | )      |
| Accumulated other comprehensive loss                                                                                                                                                                                                 |   | (3,662                  | )       | (3,429                  | )      |
| Retained earnings                                                                                                                                                                                                                    |   | 101,990                 |    | 115,586                 |   |
| Total stockholders’ equity                                                                                                                                                                                                      |   | 254,814                 |    | 412,334                 |   |
|                                                                                                                                                                                                                                 |   |                    |    |                    |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                      |   | $                       | 483,346 |                    | $      | 766,887 |   |

 

See Notes to Consolidated FinancialStatements.

 

F-2

----

 

**CYMER, INC.**

**CONSOLIDATED STATEMENTS OFINCOME**

**(in thousands, except per share data)**

 
|                                                                            |   | **Years  ended  December 31,** |    |
|---------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                            |   | **2000**                            |    | **2001** |   | **2002** |   |
|                                                                            |   |                                |    |   |   |   |   |
| REVENUES:                                                                       |   |                                |    |   |   |   |   |
| Product sales                                                                   |   | $                                   | 366,280 |   | $ | 267,003 |   | $ | 287,995 |   |
| Other                                                                           |   | 1,180                               |    | 2,441 |   | 2,165 |   |
| Total revenues                                                                  |   | 367,460                             |    | 269,444 |   | 290,160 |   |
|                                                                            |   |                                |    |   |   |   |   |
| COSTS AND EXPENSES:                                                             |   |                                |    |   |   |   |   |
| Cost of product sales                                                           |   | 187,579                             |    | 151,340 |   | 162,095 |   |
| Research and development                                                        |   | 45,433                              |    | 58,368 |   | 73,714 |   |
| Sales and marketing                                                             |   | 20,098                              |    | 19,617 |   | 17,153 |   |
| General and administrative                                                      |   | 22,510                              |    | 18,990 |   | 18,212 |   |
| Amortization of goodwill and intangible assets                                  |   | 108                                 |    | 3,148 |   | 160 |   |
| Purchased in-process research and development                                   |   | —                              |    | 5,050 |   | — |   |
|                                                                            |   |                                |    |   |   |   |   |
| Total costs and expenses                                                        |   | 275,728                             |    | 256,513 |   | 271,334 |   |
|                                                                            |   |                                |    |   |   |   |   |
| OPERATING INCOME                                                                |   | 91,732                              |    | 12,931 |   | 18,826 |   |
|                                                                            |   |                                |    |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                         |   |                                |    |   |   |   |   |
| Foreign currency exchange gain (loss) – net                                |   | (1,379                              | )       | 877 |   | (723 | ) |
| Interest and other income                                                       |   | 10,785                              |    | 8,290 |   | 10,055 |   |
| Interest and other expense                                                      |   | (10,636                             | )       | (10,614 | ) | (11,246 | ) |
|                                                                            |   |                                |    |   |   |   |   |
| Total other expense – net                                                  |   | (1,230                              | )       | (1,447 | ) | (1,914 | ) |
|                                                                            |   |                                |    |   |   |   |   |
| INCOME BEFORE INCOME TAX PROVISION  AND MINORITY INTEREST                  |   | 90,502                              |    | 11,484 |   | 16,912 |   |
|                                                                            |   |                                |    |   |   |   |   |
| INCOME TAX   PROVISION                                                     |   | 26,246                              |    | 2,871 |   | 2,706 |   |
| MINORITY INTEREST                                                               |   | (484                                | )       | (368 | ) | (447 | ) |
|                                                                            |   |                                |    |   |   |   |   |
| INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE  CHANGE IN ACCOUNTING PRINCIPLE |   | 63,772                              |    | 8,245 |   | 13,759 |   |
|                                                                            |   |                                |    |   |   |   |   |
| Extraordinary gain (loss) on debt extinguishment,  net of taxes                 |   | —                              |    | 610 |   | (163 | ) |
| Cumulative change in accounting principle, net of  taxes                        |   | —                              |    | (370 | ) | — |   |
|                                                                            |   |                                |    |   |   |   |   |
| NET INCOME                                                                      |   | $                                   | 63,772  |   | $ | 8,485 |   | $ | 13,596 |   |
|                                                                            |   |                                |    |   |   |   |   |
| EARNINGS PER SHARE:                                                             |   |                                |    |   |   |   |   |
| Basic earnings per share:                                                       |   |                                |    |   |   |   |   |
| Before extraordinary item and cumulative change in  accounting principle        |   | $                                   | 2.19    |   | $ | 0.27 |   | $ | 0.41 |   |
| Extraordinary gain on debt extinguishment                                       |   | —                              |    | 0.02 |   | — |   |
| Cumulative change in accounting principle                                       |   | —                              |    | (0.01 | ) | — |   |
| Basic earnings per share                                                        |   | $                                   | 2.19    |   | $ | 0.28 |   | $ | 0.41 |   |
| Weighted average common shares outstanding                                      |   | 29,113                              |    | 30,474 |   | 33,317 |   |
|                                                                            |   |                                |    |   |   |   |   |
| Diluted earnings per share:                                                     |   |                                |    |   |   |   |   |
| Before extraordinary item and cumulative change in  accounting principle        |   | $                                   | 2.07    |   | $ | 0.26 |   | $ | 0.39 |   |
| Extraordinary gain on debt extinguishment                                       |   | —                              |    | 0.02 |   | — |   |
| Cumulative change in accounting principle                                       |   | —                              |    | (0.01 | ) | — |   |
| Diluted earnings per share                                                      |   | $                                   | 2.07    |   | $ | 0.27 |   | $ | 0.39 |   |
| Weighted average common and dilutive potential  common shares outstanding       |   | 30,758                              |    | 31,108 |   | 34,712 |   |

 

See Notes to Consolidated FinancialStatements.

 

F-3

----

 

**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** |       |
|--------------------------------------------------------------------|--------|------------|------------|----------------------------------|------------|---------------------|------------|----------------------------|------------|---------------------------------------------|-------------|--------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|
|                                                               |
| **Common Stock**                                                   |
| **Shares**                                                         |   | **Amount** |
| **BALANCE, JANUARY 1, 2000**                                       |   | **28,435** | ** ** | **$**                            | **28**     | ** **          | **$**      | **125,623**                | ** ** | **$**                                       | **(24,871** | **)**                          | **$**      | **—**                                    | ** ** | **$**                            | **(3,620** | **)** | **$** | **29,733** | ** ** | **$** | **126,893** | ** ** |   |   |
|                                                               |   |       |       |                             |       |                |       |                       |       |                                        |        |                           |       |                                          |       |                             |       |   |   |
| Exercise of common stock  options and warrants                     |   | 992        |       | 1                                |       | 11,046              |       |                       |       |                                        |        |                           |       |                                          |       | 11,047                           |       |   |   |
| Issuance of employee  stock purchase plan shares                   |   | 65         |       |                             |       | 1,634               |       |                       |       |                                        |        |                           |       |                                          |       | 1,634                            |       |   |   |
| Conversion of notes to  equity                                     |   | 4          |       |                             |       | 165                 |       |                       |       |                                        |        |                           |       |                                          |       | 165                              |       |   |   |
| Income tax benefit from  stock options exercised                   |   |       |       |                             |       | 7,528               |       |                       |       |                                        |        |                           |       |                                          |       | 7,528                            |       |   |   |
| Net income                                                         |   |       |       |                             |       |                |       |                       |       |                                        |        |                           |       | 63,772                                        |       | $                                | 63,772     |   | $ | 63,772 |   |
| Other comprehensive income:                                        |   |       |       |                             |       |                |       |                       |       |                                        |        |                           |       |                                          |       |                             |       |   |   |
| Translation adjustment, net of  tax                           |   |       |       |                             |       |                |       |                       |       |                                        |        | 1,784                          |       |                                          |       | 1,784                            |       | 1,784 |   |
| Net unrealized gain on available-for-sale  investments, net of tax |   |       |       |                             |       |                |       |                       |       |                                        |        | 145                            |       |                                          |       | 145                              |       | 145 |   |
| Total comprehensive income                                         |   |       | ** ** |                             | ** ** |                | ** ** |                       | ** ** |                                        | ** **  |                           | ** ** |                                          | ** ** |                             | ** ** | **$** | **65,701** |   |
|                                                               |   |       | ** ** |                             | ** ** |                | ** ** |                       | ** ** |                                        | ** **  |                           | ** ** |                                          | ** ** |                             | ** ** |   |   |
| **BALANCE, DECEMBER 31, 2000**                                     |   | **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-cash stock-based compensation                                  |   |       |       |                             |       | 183                 |       |                       |       |                                        |        |                           |       |                                          |       | 183                              |       |   |   |
| 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** | ** ** |   |   |
|                                                                    |        |            |            |                                  |            |                     |            |                            |            |                                             |             |                                |            |                                               |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to Consolidated FinancialStatements.

 

F-4

----

 

**CYMER, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
|                                                                               |   | **Years ended  December 31,** |       |
|------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                               |   | **2000**                      |       | **2001** |   | **2002** |   |
|                                                                               |   |                          |       |   |   |   |   |
| OPERATING ACTIVITIES:                                                              |   |                          |       |   |   |   |   |
| Net income                                                                         |   | $                             | 63,772     |   | $ | 8,485 |   | $ | 13,596 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                          |       |   |   |   |   |
| Cumulative change in accounting principle                                          |   | —                        |       | 370 |   | — |   |
| Extraordinary (gain) loss on debt extinguishment                                   |   | —                        |       | (610 | ) | 163 |   |
| Depreciation and amortization                                                      |   | 19,197                        |       | 25,699 |   | 25,492 |   |
| Non-cash stock-based compensation                                                  |   | —                        |       | — |   | 183 |   |
| Amortization of unearned compensation                                              |   | —                        |       | 971 |   | 1,110 |   |
| Minority interest                                                                  |   | 484                           |       | 368 |   | 447 |   |
| Purchased in-process research and development                                      |   | —                        |       | 5,050 |   | — |   |
| Provision for deferred income taxes                                                |   | 493                           |       | (386 | ) | (31 | ) |
| Loss on disposal and impairment of property and  equipment                         |   | 2,192                         |       | 505 |   | 675 |   |
| Change in assets and liabilities - net of  acquisition in 2001:                    |   |                          |       |   |   |   |   |
| Accounts receivable - net                                                          |   | (21,686                       | )          | 35,969 |   | (2,285 | ) |
| Income taxes receivable                                                            |   | —                        |       | (3,039 | ) | 3,153 |   |
| Foreign currency forward exchange contracts                                        |   | (5,259                        | )          | 1,417 |   | 939 |   |
| Inventories                                                                        |   | (27,641                       | )          | 15,179 |   | (38,335 | ) |
| Prepaid expenses and other assets                                                  |   | (1,057                        | )          | 615 |   | (2,538 | ) |
| Accounts payable                                                                   |   | 3,059                         |       | (8,146 | ) | 10,770 |   |
| Accrued and other liabilities                                                      |   | 16,792                        |       | (16,322 | ) | 5,813 |   |
| Income taxes payable                                                               |   | 5,130                         |       | (7,741 | ) | 6,651 |   |
|                                                                               |   |                          |       |   |   |   |   |
| Net cash provided by operating activities                                          |   | 55,476                        |       | 58,384 |   | 25,803 |   |
|                                                                               |   |                          |       |   |   |   |   |
| INVESTING ACTIVITIES:                                                              |   |                          |       |   |   |   |   |
| Acquisition of property and equipment                                              |   | (55,269                       | )          | (20,405 | ) | (45,217 | ) |
| Purchases of investments                                                           |   | (173,044                      | )          | (164,302 | ) | (284,352 | ) |
| Proceeds from sold or matured investments                                          |   | 174,548                       |       | 184,759 |   | 163,410 |   |
| Acquisition of Active Control eXperts, Inc., net of  cash acquired                 |   | —                        |       | (279 | ) | — |   |
| Acquisition of patents                                                             |   | —                        |       | (6,000 | ) | — |   |
| Acquisition of minority interest                                                   |   | (1,104                        | )          | — |   | (360 | ) |
|                                                                               |   |                          |       |   |   |   |   |
| Net cash used in investing activities                                              |   | (54,869                       | )          | (6,227 | ) | (166,519 | ) |
|                                                                               |   |                          |       |   |   |   |   |
| FINANCING ACTIVITIES:                                                              |   |                          |       |   |   |   |   |
| Net borrowings under revolving loan agreements                                     |   | (8,146                        | )          | (1,093 | ) | (1,672 | ) |
| Proceeds from issuance of common stock                                             |   | 12,681                        |       | 11,781 |   | 22,547 |   |
| Redemption of convertible subordinated notes                                       |   | —                        |       | (24,930 | ) | (39,598 | ) |
| Issuance of convertible subordinated notes                                         |   |                          |       | — |   | 250,000 |   |
| Offering costs from issuance of convertible  subordinated notes                    |   |                          |       | — |   | (7,873 | ) |
| Minority interest investment in subsidiary                                         |   | (183                          | )          | — |   | 1,900 |   |
| Payments on capital lease obligations                                              |   | (621                          | )          | (281 | ) | (56 | ) |
|                                                                               |   |                          |       |   |   |   |   |
| Net cash provided by (used in) financing activities                                |   | 3,731                         |       | (14,523 | ) | 225,248 |   |
|                                                                               |   |                          |       |   |   |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND   CASH EQUIVALENTS                     |   | (425                          | )          | (6,117 | ) | 916 |   |
|                                                                               |   |                          |       |   |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |   | 3,913                         |       | 31,517 |   | 85,448 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING  OF YEAR                               |   | 75,765                        |       | 79,678 |   | 111,195 |   |
|                                                                               |   |                          |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                           |   | $                             | 79,678     |   | $ | 111,195 |   | $ | 196,643 |   |
|                                                                               |   |                          | ** ** |   | ** ** |   | ** ** |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |   |                          |       |   |   |   |   |
| Interest paid                                                                      |   | $                             | 6,942      |   | $ | 7,778 |   | $ | 10,473 |   |
| Income taxes paid (refunded), net                                                  |   | $                             | 17,987     |   | $ | 13,982 |   | $ | (7,821 | ) |
|                                                                               |   |                          |       |   |   |   |   |
| 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                                         |   | $                             | 165        |   | — |   | $ | 112,998 |   |

 

See Notes to Consolidated Financial Statements.

 

F-5

----

 

**CYMER, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

1.                                       **SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

***Nature of Operations*** - Cymer, Inc. and its wholly-owned and majority-ownedsubsidiaries (collectively, “Cymer” or the Company), are engaged primarily inthe development, manufacturing and marketing of excimer light sources for saleto manufacturers of photolithography tools in the semiconductor equipmentindustry.  Cymer sells its product tocustomers primarily in Japan, Asia, the Netherlands and the United States.

 

***Principles of Consolidation*** - The consolidated financial statementsinclude the accounts of Cymer, Inc., its wholly-owned subsidiaries - CymerJapan, Inc. (“Cymer Japan”), Cymer Singapore Pte Ltd. (“Cymer Singapore”),Cymer B.V. in the Netherlands (“Cymer B.V.”), Cymer Southeast Asia, Inc., inTaiwan (“Cymer SEA”), Cymer Semiconductor Equipment Shanghai Co., Ltd, in thePeople’s Republic of China (“Cymer PRC”), Cymer Boston (formerly known asActive Control eXperts, Inc. or ACX) and its majority-owned subsidiary, CymerKorea, Inc. (“Cymer Korea”).  Cymer,Inc. owns 75% of Cymer Korea.  Cymersells its excimer light sources in Japan primarily through Cymer Japan. CymerSEA, Cymer PRC, Cymer Singapore and Cymer B.V. are field service offices forcustomers in those respective regions. Cymer Korea includes manufacturing refurbishment, field service, andadministrative activities for that region. All significant intercompany balances have been eliminated inconsolidation.

 

***Accounting Estimates*** - The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results may differ from thoseestimates.

*** ***

***Cash Equivalents***- Cash equivalents consist of money marketinstruments, commercial paper and other highly liquid investments purchasedwith an original maturity of three months or less.

*** ***

***Investments –*** Cymer maintains an investment portfolioconsisting primarily of government and corporate fixed income securities,certificates of deposit and commercial paper. While it is Cymer’s general intent to hold such securities until maturity,management will occasionally sell certain securities for cash flowpurposes.  Therefore, Cymer’sinvestments are classified as available-for-sale and are carried on the balancesheet at fair value, with unrealized gains and losses reported within stockholder’sequity. Realized gains and losses are recorded based on the specificidentification method.

 

***Inventories*** - Inventories are carried at the lower ofstandard 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 as such inventory is identified.

*** ***

***Property andEquipment*** - Property and equipment are stated at cost.  Equipment acquired under capital leases is stated at the present valueof the future minimum lease payments. Additions and improvements arecapitalized and maintenance and repairs are expensed when incurred.  Depreciation is provided using the straight-line methodover the estimated useful lives of the assets (generally three to fiveyears).  The Cymer owned buildings aredepreciated over a useful life of twenty years. Leasehold improvements areamortized using the straight-line method over the shorter of the life of theimprovement or the remaining lease term. Amortization of equipment obtainedunder capital leases is included in depreciation expense in the accompanyingconsolidated financial 

 

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statements. Light sources built for internal useare capitalized and depreciatedusing 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, “IntangibleAssets”, and discontinued the amortization of goodwill and intangible assetswith indefinite 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 will conduct an annual impairment test of goodwill in the fourth quarterof each fiscal year, or whenever events or circumstances occur indicatingpotential impairment.

 

Intangibleassets consist primarily of acquired patents, acquired workforce, and purchasedtechnology. Intangible assets with definite lives are recorded at cost and areamortized using the straight-line method over their expected useful lives fromfour to eight years. Cymer reviews the carrying value and remaining useful lifeof intangibles for impairment whenever events or circumstances indicate thatthe 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 of Long-Lived Assets andLong-Lived Assets to Be Disposed Of –*** Cymeradopted Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for**the Impairment or Disposal of Long-Lived Assets”, whichaddresses financial accounting and reporting for the impairment or disposal oflong-lived assets.  While SFAS 144supersedes SFAS 121, it retains many of the fundamental provisions of SFAS 121,including the recognition and measurement of the impairment of long-lived assetsto be held and used, and the measurement of long-lived assets to be disposed ofby sale. Long-lived assets andcertain identifiable intangibles are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. 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 of Financial Instruments*** – The following methods and assumptions wereused to estimate the fair value of each class of financial instruments forwhich it is practicable to estimate that value:

 

Cash and cash equivalents,accounts receivable, income taxes receivable*,*accounts payable, accounts payable –related party, accrued warranty and installation, accrued payroll and benefits,accrued patents, royalties and other fees, accrued interest, income tax payableand accrued and other current liabilities – The carrying amount reported in theconsolidated balance sheets for cash and cash equivalents, accounts receivable,income taxes receivable, accounts payable, accounts payable – related party,accrued warranty and installation, accrued payroll and benefits, 

 

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accrued patents, royaltiesand other fees, accrued interest, income tax payable  and accrued and other current liabilities approximates fair valuebecause of the short maturity of these instruments.

 

Investments – Investments arecarried at fair value which is based on quoted market prices for suchsecurities.

 

Foreign Currency ForwardExchange Contracts – The fair value of foreign currency forward exchangecontracts is determined using the quoted exchange rate (see “DerivativeInstruments” below).

 

Convertible SubordinatedNotes – Convertible Subordinated Notes are recorded at face value of $147.3million and $250.0 million at December 31, 2001 and 2002, respectively.  The fair value of such debt, based on quotedmarket prices at December 31, 2001 and 2002 was $153.4 million and $245.9million, respectively.

 

Revolving Loan – The carryingamount reported for Cymer’s revolving loan approximates its fair value because theunderlying instrument bears interest at rates comparable to current ratesoffered to Cymer for instruments of similar terms and risk.

 

***Guarantees –***In November 2002, theFASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. * * FIN 45 provides expanded accounting guidance surrounding liabilityrecognition and disclosure requirements related to guarantees, as defined bythis Interpretation. The disclosure requirements of this Interpretation areeffective for interim or annual periods ending after December 15, 2002.  The recognition and measurement provisionsof the Interpretation are applicable on a prospective basis only to guarantees issuedor modified after December 31, 2002. Cymer adopted the disclosure provisions of FIN 45 during the quarterended December 31, 2002 and will adopt the recognition and measurementprovisions as required after December 31, 2002.

 

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 within Cymer’s customer agreements are generallyconsistent with those prevalent in the semiconductor equipment industry. Thewarranty period and terms vary by light source model.  In general, the light source system warrantyperiod ranges from 17 to 26 months after shipment.  Cymer also warrants spare parts sold to its customers and thecoverage period varies by spare part type as some types include time basedwarranty periods and others include usage based warranty periods.  On average, the warranty period for spareparts is approximately 6 months from the date of shipment.  Cymer records a provision for warranty forall products which is included in cost of product sales in the consolidatedstatements of income and is recorded at the time that the related revenue isrecognized. The warranty provision for light source systems is determined byusing a financial model which takes into consideration actual historicalexpenses and potential risks associated with Cymer’s different light sourcesystem models. This financial model is then used to calculate the futureprobable expenses related to warranty and the required level of the warrantyprovision.  The risk levels used withinthis model are reviewed and updated as risk levels change by model over itsproduct life cycle. The warranty provision for spares is determined by usingactual historical data.  For both lightsource systems and spares, if actual warranty expenditures differ substantiallyfrom Cymer’s estimates, revisions to the warranty provision would berequired.  Actual warranty expendituresare recorded against the warranty provision as they are incurred.

 

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The followingtable summarizes information related to Cymer’s warranty provision for the yearended December 31, 2002 (in thousands):

 
| Balance, January 1, 2002                                                                       |   | $       | 26,750 |   |
|------------------------------------------------------------------------------------------------|--------|---------|--------|--------|
| Liabilities accrued for warranties issued  during the year, net of adjustments and expirations |   | 17,125  |   |
| Warranty expenditures recorded during the  year                                                |   | (14,275 | )      |
| Balance, December 31, 2002                                                                     |   | $       | 29,600 |   |

 

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 Lithograph, Canon, and Nikon.  Ingeneral, these indemnification provisions provide that Cymer will defend itscustomers against any infringement claims that arise related to Cymer’spatents.  Under the indemnificationclauses, Cymer will pay all costs and damages, including attorney’s fees,associated with such settlements or defenses, provided that the customerfollows specific procedures for notifying Cymer of such claims and allows Cymerto manage the settlement proceedings. Due to the nature of theseindemnification provisions, they are indefinite and extend beyond the term ofthe actual customer agreements.

 

Anindemnification provision is also included in the contract manufacturingagreement with Seiko, which will be terminated effective March 31, 2003.  As with Cymer’s indemnification provisionson intellectual property, Cymer will continue to honor this indemnificationclause within the agreement even after its termination at the end of March 2003.Seiko and at least one Japanese customer have been notified that Cymer’s lightsource systems 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 onSubsidiary Debt – Currently, Cymer is party to a Parent Guarantee associatedwith a revolving Loan Agreement held by Cymer Japan. This guarantee is betweena commercial bank in the United States and Cymer.  The Parent Guarantee was entered into in 2001 in order toestablish a banking relationship between this commercial bank and CymerJapan.  Per the terms of the ParentGuarantee, Cymer guarantees payment of any obligations under the revolving loanagreement in the event that Cymer Japan cannot make such payments due ordefaults on the loan.  The maximumamount that Cymer Japan can borrow under this revolving loan agreement is theyen-denominated equivalent of U.S. $20 million. To date, Cymer Japan has madeall payments per the terms of the Loan Agreement and thus, Cymer has notincurred 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 is included in the consolidated balance sheets. As of December 31,2001 and 2002, the outstanding balances on the revolving loan were $6.7 millionand $7.7 million, respectively.

 

***Comprehensive Income –***Comprehensive income includes net income,effective unrealized gains and losses on foreign currency forward exchangecontracts, foreign currency translation adjustments, and unrealized gains andlosses on available-for-sale securities, which are recorded as short-term and long-term investments in the accompanyingconsolidated balance sheet.

 

***Revenue Recognition*** – Cymer recognizes revenue when allfour revenue recognition criteria have been met.  These four criteria are as follows: persuasive evidence of anarrangement exists; delivery has occurred or services have been rendered;seller’s price to buyer is fixed or determinable; and collectibility isreasonably assured. Cymer revenue is generated from product sales, whichincludes light source systems, consumables and spare parts, upgrades, service,service contracts and training.  Inaddition, Cymer generates other revenue which primarily represents revenueearned from funded 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 

 

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haveacceptance provisions, the revenue is recognized once legal title passes to thecustomer.  As the shipping terms vary bycustomer, this title will transfer based upon the shipping terms specific tothat 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.

 

Revenueclassified as “other revenue” in Cymer’s statements of income is recorded asrevenue on a basis consistent with the performance requirement of the fundeddevelopment or license agreement. Revenue from funded development contracts isgenerally recognized on the percentage-of-completion method based on the relationshipof costs incurred to total estimated costs. If milestones on funded development contracts require that specificresults be achieved or reported by Cymer, revenue is not recognized until thatmilestone is completed.  Paymentsreceived in advance of performance are recorded as deferred revenue.

 

***Warranty Expense*–**Cymer warrants its new light source products against defects in design,materials, and workmanship. The warranty period and terms vary by light sourcemodel.  In general, the light source systemwarranty period ranges from 17 to 26 months after shipment.  Cymer also warrants spare parts sold to itscustomers and the coverage period varies by spare part type as some typesinclude time based warranty periods and others include usage based warrantyperiods.  On average, the warrantyperiod for 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 income and is recorded at the time that the relatedrevenue is recognized.  The warrantyprovision for light source systems is determined by using a financial modelwhich takes into consideration actual historical expenses and potential risksassociated with Cymer’s different light source system models. This financialmodel is then used to calculate the future probable expenses related towarranty and the required level of the warranty provision.  The risk levels used within this model arereviewed and updated as risk levels change by model over its product lifecycle.  The warranty provision forspares is determined by using actual historical data.  For both light source systems and spares, if actual warrantyexpenses differ substantially from Cymer’s estimates, revisions to the warrantyprovision would be required.  Actualwarranty expenditures are recorded against the warranty provision as they areincurred.

 

***Research and Development Costs*****–**Research and development costs are expensed in the period incurred.

 

***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 are measured using enacted tax ratesexpected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date.

 

**Stock*****-******Based Compensation*** - Cymerapplies the intrinsic value-based method of accounting prescribed by AccountingPrinciples Board (APB) Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related interpretations includingFinancial Accounting Standards Board (“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, compensationexpense is measured on the date of grant only if the then current market priceof the underlying stock exceeded the exercise price and is recorded on astraight-line basis over the applicable vesting period.  SFAS No. 123, “Accounting for Stock-Based Compensation”*,* established 

 

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accountingand disclosure requirements using a fair value-based method of accounting forstock-based employee compensation plans. As allowed by SFAS No. 123, Cymer has elected to continue to applythe intrinsic value-based method of accounting described above, and has adoptedthe disclosure requirements of SFAS No. 123, as amended by SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure”*.*During the quarter ended December 31,2002, Cymer adopted SFAS No. 148 whichamended SFAS No. 123 by permitting two additional transition methods forentities that choose to adopt the provisions of SFAS No. 123 as their method ofaccounting for stock-based employee compensation and by requiring newdisclosures about the effect of stock-based employee compensation on reportedresults.

 

As Cymer accounts for itsstock-based employee compensation plans under the recognition and measurementprinciples of APB Opinion No. 25, and related interpretations, no stock-based employee compensation cost is reflectedin net income, as all options granted under the plans had an exercise priceequal to the market value of the underlying common stock on the date of grant.

 

The following table compares net income per share as reported by Cymerto the pro forma amounts that would be reported had compensation expense beenrecognized for the Cymer’s stock-based compensation plans in accordance withSFAS No. 123, as amended by SFAS No. 148 (in thousands, except per shareamounts):

 
|                                                                                                                                              |   | **Year ended  December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                              |   | **2000**                     |   | **2001** |   | **2002** |   |
|                                                                                                                                              |   |                         |   |   |   |   |   |
| Net income, as reported                                                                                                                           |   | $                            | 63,772 |   | $ | 8,485 |   | $ | 13,596 |   |
|                                                                                                                                              |   |                         |   |   |   |   |   |
| Deduct: Total stock-based employee compensation  expense determined Under the fair value based method for all awards, net of  related tax effects |   | (27,251                      | )      | (32,139 | ) | (33,585 | ) |
|                                                                                                                                              |   |                         |   |   |   |   |   |
| Pro forma net income (loss)                                                                                                                       |   | $                            | 36,521 |   | $ | (23,654 | ) | $ | (19,989 | ) |
|                                                                                                                                              |   |                         |   |   |   |   |   |
| Earnings (loss) per share:                                                                                                                        |   |                         |   |   |   |   |   |
| Basic – as reported                                                                                                                          |   | $                            | 2.19   |   | $ | .28 |   | $ | .41 |   |
| Basic – pro forma                                                                                                                            |   | $                            | 1.25   |   | $ | (.78 | ) | $ | (.60 | ) |
|                                                                                                                                              |   |                         |   |   |   |   |   |
| Diluted – as reported                                                                                                                        |   | $                            | 2.07   |   | $ | .27 |   | $ | .39 |   |
| Diluted – pro forma                                                                                                                          |   | $                            | 1.19   |   | $ | (.78 | ) | $ | (.60 | ) |

 

Under SFAS No. 123, the weighted average per share fairvalue of the options granted during 2000, 2001 and 2002 was $27.86, $14.36 and$17.45, respectively, on the date of grant. Fair value under SFAS No. 123 is determined using the Black-Scholesoption-pricing model with the following assumptions:

 
|                                       |   | **2000** |   | **2001** |   | **2002** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                       |   |     |   |     |   |     |   |
| Dividend yield                             |   | None     |   | None     |   | None     |   |
| Volatility rate                            |   | 87       | %      | 84       | %      | 83       | %      |
| Weighted average risk free interest rates: |   |     |   |     |   |     |   |
| Options                                    |   | 6.27     | %      | 4.42     | %      | 3.34     | %      |
| ESPP                                       |   | 6.15     | %      | 4.20     | %      | 3.60     | %      |
| Assumed forfeiture rate                    |   | 5        | %      | 5        | %      | 5        | %      |
| Expected life:                             |   |     |   |     |   |     |   |
| Options                                    |   | 7 years  |   | 6 years  |   | 6 years  |   |
| ESPP                                       |   | .5 years |   | .5 years |   | .5 years |   |

 

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***Foreign Currency Translation*** -  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 ofincome.

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***Derivative Instruments*****- Cymerconducts business in several international currencies through its globaloperations. Due to the large volume of business Cymer conducts in Japan, the Japaneseoperation poses the greatest foreign currency risk.  Cymer uses financial instruments, principally forward exchangecontracts, in Japan to manage its foreign currency exposures. Cymer enters intoforeign currency forward exchange contracts in order to reduce the impact ofcurrency fluctuations related to purchases of Cymer’s inventories by CymerJapan for resale under firm third-party sales commitments.  Cymer does not enter into forward exchangecontracts for trading purposes.

 

Under Statement of FinancialAccounting Standards, No. 133 (“SFAS 133”), as amended, derivative instrumentsare recognized in the balance sheet at their fair value. Changes in fair valueare recognized immediately in earnings unless the derivatives qualify as hedgesof future cash flows. For derivatives qualifying as hedges of future cashflows, the effective portion of changes in fair value is recorded temporarilyin accumulated other comprehensive income (loss), thenrecognized in earnings along with the related effects of the hedgeditems after the transaction occurs. Any ineffective portion of a hedge isreported in earnings as it occurs. The criteria for hedge accounting includesan assessment of offsetting changes in the cash flows for the risk beinghedged, supported by a demonstrated historical pattern of effectiveness, andrequired documentation. Required documentation includes, but is not limited to,the hedging relationship at inception of the hedge, the effectiveness of thehedge, the processes used to determine fair value, and the calculation of thederivative’s effectiveness and ineffectiveness.

 

Cymer’s derivativeinstruments are designated as cash flow hedging instruments. Cymer adopted SFAS133 on January 1, 2001 but did not qualify for cash flow hedge accounting treatmentuntil July 1, 2001 due to the extensive documentation and administrativerequirements. Accordingly, for contracts which Cymer entered into from January1, 2001 to June 30, 2001, Cymer recorded changes in the fair value of theseforeign currency forward exchange contracts directly through earnings in otherincome (expense) in the period that such changes occurred.  For contracts entered into on or after July1, 2001, Cymer defers effective changes in the fair value of its foreigncurrency forward exchange contracts into other comprehensive income andsubsequently reclassifies the effective changes to cost of product sales in thesame period that the related sale is made to the third party. Prior to theadoption of SFAS 133, Cymer accounted for all such gains and losses throughcost of product sales in the same period as the related sale was made to thethird party.

 

***Concentration of Credit Risk*** - Financialinstruments, which potentially subject Cymer to concentrations of credit risk,consist principally of cash and accounts receivable.

 

*Cash and cash equivalents* - Cymer invests its excess cash in an effortto preserve capital, provide liquidity, maintain diversification and generatereturns relative to Cymer’s corporate investment policy and prevailing marketconditions.  Cymer has not experiencedany material losses on its cash and investment accounts.  Attimes, cash balances held in financial institutions are in excess of federallyinsured limits. Cymer performs periodic evaluations of the relative creditstanding of financial institutions and limits the amount of risk by selectingfinancial institutions with a strong relative credit standing.  At December 31, 2001 and 2002, Cymer had$111.1 million and $196.6 million respectively, in deposits with majorfinancial institutions that exceeded the federally insured limit of $100,000.

 

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*Accounts receivable* - Cymer maintains an allowance for doubtful accounts for estimated losses resulting fromthe inability of its customers to make required payments, which results in baddebt expense.  Management periodicallydetermines the adequacy of this allowance by continually evaluating individualcustomer receivables considering the customer’s financial condition, securitydeposits, and current economic conditions.  Credit losses to date have been minimal.

 

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

 
|            |   | **Year ended  December 31,** |       |
|-----------------|--------|------------------------------|------------|
|            |   | **2000**                     |       | **2001** |   | **2002** |   |
|            |   | **(in  thousands )**         | ** ** |
| **Customer**    |   |                         |       |   |   |   |   |
| ASM Lithography |   | $                            | 120,744    |   | $ | 85,758 |   | $ | 92,286 |   |
| Canon           |   | 67,992                       |       | 41,698 |   | 61,709 |   |
| Nikon           |   | 103,551                      |       | 77,490 |   | 68,358 |   |
|                 |        |                              |            |  |  |  |  |  |  |  |

 

Accounts receivable balancesfor these same major customers are detailed as follows:

 

|            |   | **December  31,**      |   |
|-----------------|--------|------------------------|--------|
|            |   | **2001**               |   | **2002** |   |
|            |   | **(in thousands****)** |   |
| **Customer**    |   |                   |   |   |   |
| ASM Lithography |   | $                      | 25,071 |   | $ | 20,729 |   |
| Canon           |   | 3,510                  |   | 6,290 |   |
| Nikon           |   | 10,480                 |   | 9,262 |   |
|                 |        |                        |        |  |  |  |  |

 

Revenues from Japanesecustomers, generated primarily by Cymer Japan, accounted for 42%, 41% and 43%of revenues for the years ended December 31, 2000, 2001, and 2002,respectively. Revenues from ASM Lithography in the Netherlands accounted for30%, 32% and 32% of revenues for the years ended December 31, 2000, 2001,and 2002, respectively.

 

The loss of business of anyof these major customers would have a material adverse effect on our operatingresults, financial condition, and cash flows.

 

***Earnings Per*****Share******–** Basicearnings per share (“EPS”) excludes dilution and is computed by dividing netincome or loss attributable to common stockholders by the weighted-average ofcommon shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock (convertible subordinatednotes, warrants to purchase common stock and common stock options using thetreasury stock method) were exercised or converted into common stock.  Potential dilutive securities are excludedfrom the diluted EPS computation in loss periods as their effect would beanti-dilutive.

 

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The following table sets forth the computation of diluted weightedaverage common and potential common shares outstanding for the years endedDecember 31, 2000, 2001 and 2002, respectively:

 
|                                                                     |   | **Year ended  December 31,** |       |
|--------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                     |   | **2000**                     |       | **2001** |   | **2002** |   |
|                                                                     |   | **(in  thousands )**         | ** ** |
|                                                                     |   |                         |       |   |   |   |   |
| Basic weighted average common shares outstanding                         |   | 29,113                       |       | 30,474 |   | 33,317 |   |
|                                                                     |   |                         |       |   |   |   |   |
| Effect of dilutive securities:                                           |   |                         |       |   |   |   |   |
| Warrants                                                                 |   | 19                           |       | — |   | 19 |   |
| Options                                                                  |   | 1,626                        |       | 634 |   | 1,376 |   |
|                                                                     |   |                         |       |   |   |   |   |
| Diluted weighted average common and potential  common shares outstanding |   | 30,758                       |       | 31,108 |   | 34,712 |   |

 

For the years ended December31, 2000, 2001, and 2002, weighted average options and warrants to purchase388,000, 3,614,000 and 2,489,000 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, 2000, 2001, and 2002, weightedaverage common shares attributable to convertible subordinated notes of3,667,000, 3,387,000 and 5,077,000, respectively, were not included in thecomputation of diluted earnings per share as their effect was alsoanti-dilutive.

 

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

 

**2.****                                     ****ACQUISITION**

 

On February 13, 2001, Cymer acquired the Cambridge, Massachusetts basedcompany now known as Cymer Boston in an all-stock transaction including 689,000shares of Cymer stock and 336,000 stock options.  The acquisition was accounted for using the purchase method ofaccounting, and the results of operations of Cymer Boston are included inCymer’s consolidated 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 $0.8 million capitalized transaction costs.   A total of $12.3 million was recorded togoodwill based on the total consideration of $24.8 million less $1.5 million ofacquired tangible assets, $1.4 million of acquired identifiable intangibleassets, a $5.1 million in process research and development charge, and $4.4million of unearned compensation recorded related to the assumed stockoptions.  The unearned compensation of$4.4 million is being amortized to compensation expense on a straight-linebasis over the four year vesting period of the options.  Had this company been acquired on January 1,2001, Cymer’s net income would have been as follows (in thousands, except pershare data):

 

F-14

----

 
|                                            |   | **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    |   |

 

F-15

----

 

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

 

The consolidated balance sheets detail is as follows as of December 31,2001 and 2002 (in thousands):

 
|                                            |   | **December  31,**    |       |
|-------------------------------------------------|--------|----------------------|------------|
|                                            |   | **2001**             |       | **2002** |   |
|                                            |   | **(in  thousands )** | ** ** |
| ACCOUNTS RECEIVABLE:                            |   |                 |       |   |   |
| Trade                                           |   | $                    | 46,478     |   | $ | 46,283 |   |
| Notes and other                                 |   | 5,775                |       | 7,814 |   |
|                                            |   | 52,253               |       | 54,097 |   |
| Less allowance for doubtful accounts and  notes |   | (2,197               | )          | (1,756 | ) |
| Total                                           |   | $                    | 50,056     |   | $ | 52,341 |   |
|                                            |   |                 |       |   |   |
| INVENTORIES:                                    |   |                 |       |   |   |
| Raw materials                                   |   | $                    | 26,294     |   | $ | 44,252 |   |
| Work-in-progress                                |   | 22,211               |       | 32,718 |   |
| Finished goods                                  |   | 26,807               |       | 37,849 |   |
| Allowance for excess and obsolete inventory     |   | (13,528              | )          | (14,700 | ) |
| Total                                           |   | $                    | 61,784     |   | $ | 100,119 |   |
|                                            |   |                 |       |   |   |
| PROPERTY AND EQUIPMENT:                         |   |                 |       |   |   |
| Land                                            |   | $                    | 9,080      |   | $ | 9,080 |   |
| Building                                        |   | 27,528               |       | 31,178 |   |
| Building improvements                           |   | 1,146                |       | 2,451 |   |
| Furniture and equipment                         |   | 71,568               |       | 77,434 |   |
| Capitalized light sources                       |   | 31,833               |       | 40,850 |   |
| Leasehold improvements                          |   | 25,932               |       | 27,412 |   |
| Construction in process                         |   | 1,461                |       | 17,641 |   |
|                                            |   | 168,548              |       | 206,046 |   |
| Less accumulated depreciation and  amortization |   | (78,129              | )          | (93,837 | ) |
| Total                                           |   | $                    | 90,419     |   | $ | 112,209 |   |

 

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

 

Investments at December 31, 2001 consist of the following (in thousands):

 
|                       |   | **Amortized  Cost** |       | **Gross  Unrealized  Gains** |       | **Gross  Unrealized  Losses** |       | **Market  Value** |       |
|----------------------------|--------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-------------------|------------|
|                       |   |                | ** ** |                         | ** ** |                          | ** ** |              | ** ** |
| Short-term:                |   |                |       |                         |       |                          |       |              |       |
| Corporate  debt securities |   | $                   | 48,570     |                         | $          | 260                           |       | $                 | (34        | ) | $ | 48,796 |   |
| Commercial  paper          |   | 22,975              |       | 171                          |       | (2                            | )          | 23,144            |       |
| U.S.  government agencies  |   | 2,505               |       | 20                           |       | —                        |       | 2,525             |       |
| Other                      |   | 8,454               |       | 69                           |       | —                        |       | 8,523             |       |
| Total                      |   | $                   | 82,504     |                         | $          | 520                           |       | $                 | (36        | ) | $ | 82,988 |   |
|                       |   |                |       |                         |       |                          |       |              |       |
| Long-term:                 |   |                |       |                         |       |                          |       |              |       |
| Corporate  debt securities |   | $                   | 6,268      |                         | $          | 30                            |       | $                 | (41        | ) | $ | 6,257 |   |
| Commercial  Paper          |   | 10,389              |       | —                       |       | (56                           | )          | 10,333            |       |
| Other                      |   | 6,413               |       | 12                           |       | —                        |       | 6,425             |       |
| Total                      |   | $                   | 23,070     |                         | $          | 42                            |       | $                 | (97        | ) | $ | 23,015 |   |

 

F-16

----

 

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 |   |

 

**5.****                                      REPORTING****COMPREHENSIVE****INCOME**

 

Comprehensive income includes net income, effectiveunrealized gains and losses on foreign currency forward exchange contracts,foreign currency translation adjustments, and unrealized gains and losses onavailable-for-sale securities, which are recorded as short-term and long-term investments in theaccompanying consolidated balance sheets.

 

The following table summarizes the change in each component ofaccumulated other comprehensive loss for the year ended December 31, 2002 (inthousands):

 
|               |   |              |   | **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,  2000   |   | Balance           |   | $                                        | (3,581 | )                                                                             | $      | (39                                                                                                 | )      | $                                           | — |   | $ | (3,620 | ) |
|               |   | Period net change |   | 1,784                                    |   | 145                                                                           |   | —                                                                                              |   | 1,929                                       |   |
| December 31,  2000 |   | 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 | ) |
|                    |        |                   |        |                                          |        |                                                                               |        |                                                                                                     |        |                                             |        |  |  |  |  |  |  |  |  |

 

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

 

As of the date of adoption of SFAS No. 142 on January 1, 2002, Cymerhad unamortized goodwill in the amount of $9.8 million and unamortizedidentifiable intangible assets, excluding acquired patents, in the amount of$1.1 million, all of which were subject to the transition provisions of SFAS No142.

 

During the fourth quarter of 2002, Cymer completed its annualimpairment test of goodwill and intangible assets and concluded that noimpairment of goodwill existed as of December 31, 2002.

 

As of December31, 2001 and 2002, the components of intangible assets acquired in priorpurchase business combinations were as follows (in thousands):

 

F-17

----

 
|                                   |   | **December 31, 2001**      |   | **December 31, 2002**         |   |
|----------------------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                                   |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                                   |   |                       |   |                          |   |   |   |   |   |
| Amortized  intangible assets:          |   |                       |   |                          |   |   |   |   |   |
| Existing  technology - ACX acquisition |   | $                          | 640    |                          | $      | 140 |   | $ | 640 |   | $ | 300 |   |
|                                   |   |                       |   |                          |   |   |   |   |   |
| Unamortized  intangible assets:        |   |                       |   |                          |   |   |   |   |   |
| Goodwill                               |   | $                          | 12,734 |                          | $      | 2,943 |   | $ | 13,713 |   | $ | 3,116 |   |
| Assembled  workforce - ACX acquisition |   | 790                        |   | 173                           |   | — |   | — |   |
|                                   |   | $                          | 13,524 |                          | $      | 3,116 |   | $ | 13,713 |   | $ | 3,116 |   |

 

The abovetable only includes intangible assets associated with prior purchase businesscombinations.  Also included inintangible assets – net on the accompanying balance sheets are amountsassociated with patents which were acquired in 2001.  As of December 31, 2001 and December 31, 2002, the net carryingamount of these patents was $9.5 million and $8.2 million, respectively.

 

Aggregateamortization expense was $108,000, $3,148,000 and $160,000 for the years endedDecember 31, 2000, 2001, and 2002, respectively.  As of December 31, 2002, future estimated amortization expense isexpected to be as follows (in thousands):

 

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

 

The changes inthe carrying amount of goodwill for the year ended December 31, 2002 are asfollows (in thousands):

 

| Goodwill, as of December 31, 2001                    |   | $   | 9,791  |   |
|------------------------------------------------------|--------|-----|--------|--------|
| Goodwill  acquired                                   |   | 189 |   |
| Reclassification  of assembled workforce to goodwill |   | 617 |   |
| Goodwill as  of December 31, 2002                    |   | $   | 10,597 |   |

 

Income beforeextraordinary item and cumulative change in accounting principle, net incomeand earnings per share on a pro forma basis, excluding goodwill and intangibleasset amortization expense related to intangibles no longer amortized, wouldhave been as follows if SFAS 142 had been adopted on January 1, 2001 (inthousands, except per share data):

 
|                                                                                      |   | **Year ended December 31,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                      |   | **2001**                    |   | **2002** |   |
|                                                                                      |   |                        |   |   |   |
| Reported  income before extraordinary item and cumulative change in accounting  principle |   | $                           | 8,245  |   | $ | 13,759 |   |
|                                                                                      |   |                        |   |   |   |
| Reported net  income                                                                      |   | $                           | 8,485  |   | $ | 13,596 |   |
|                                                                                      |   |                        |   |   |   |
| Adjustments:                                                                              |   |                        |   |   |   |
| Amortization  of goodwill and intangible assets                                           |   | 3,008                       |   | — |   |
| Tax effect                                                                                |   | (752                        | )      | — |   |
|                                                                                      |   | 2,256                       |   | — |   |
| Adjusted  income before extraordinary item and cumulative change in accounting  principle |   | $                           | 10,501 |   | $ | 13,759 |   |

 

F-18

----

 
|                                                                                               |   | **Year ended December 31,** |   |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                               |   | **2001**                    |   | **2002** |   |
|                                                                                               |   |                        |   |   |   |
| Adjusted net  income                                                                               |   | $                           | 10,741 |   | $ | 13,596 |   |
|                                                                                               |   |                        |   |   |   |
| Basic  earnings per share:                                                                         |   |                        |   |   |   |
| As reported  – before extraordinary item and cumulative change in accounting principle        |   | $                           | 0.27   |   | $ | 0.41 |   |
| As adjusted  – before extraordinary item and cumulative change in accounting principle        |   | $                           | 0.34   |   | $ | 0.41 |   |
|                                                                                               |   |                        |   |   |   |
| As reported  – net income                                                                     |   | $                           | 0.28   |   | $ | 0.41 |   |
| As adjusted  – net income                                                                     |   | $                           | 0.35   |   | $ | 0.41 |   |
|                                                                                               |   |                        |   |   |   |
| Diluted  earnings per share:                                                                       |   |                        |   |   |   |
|                                                                                               |   |                        |   |   |   |
| As reported  – before extraordinary item and cumulative change in accounting principle        |   | $                           | 0.26   |   | $ | 0.39 |   |
| As adjusted  – before extraordinary item and   cumulative change in accounting principle |   | $                           | 0.34   |   | $ | 0.39 |   |
|                                                                                               |   |                        |   |   |   |
| As reported  – net income                                                                     |   | $                           | 0.27   |   | $ | 0.39 |   |
| As adjusted  – net income                                                                     |   | $                           | 0.35   |   | $ | 0.39 |   |

 

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

*** ***

***Revolving Loan Agreements*** – During 2001 and 2002, Cymer maintained certain Loan Agreements with acommercial bank (the “Loan Agreements”) which provided for unsecured revolvingloan facilities allowing for borrowings of $10.0 million and $20.0 millionunder a U.S. line of credit and Japanese line of credit, respectively.  Under the Loan Agreements, Cymer may borrowin U.S. dollars or Japanese yen, and interest accrues on outstanding borrowingsat LIBOR plus 1.75% on U.S. dollar-denominated borrowings and at the yen costof funds rate plus 1.5% on yen-denominated borrowings. The Japanese line ofcredit has a commitment fee of 0.2% per annum based on the daily unused amountof the credit line.  This commitment feeis due and payable quarterly.  The LoanAgreements require Cymer to maintain compliance with certain financial andother covenants, including tangible net worth, quick ratio and profitabilityrequirements.  As of December 31, 2002,Cymer was in compliance with all such covenants. The Loan Agreements expire onJune 16, 2003.

 

As of December 31, 2001 and 2002, respectively, there was $7.7 millionand $6.7 million outstanding at annual interest rates of 1.60% and 1.56%, underthe Loan Agreements.

 

***Foreign Exchange Facilities*** – During 2001 and 2002, Cymer maintainedforeign exchange facilities with three different banks in the United States andJapan.  See also “DerivativeInstruments” in Note 1.  The foreignexchange facilities provided up to $100 million in 2000 and 2001 to be utilizedfor spot and futures foreign exchange contracts for periods of up to one year.As of December 31, 2001 and 2002, $44.4 million and $63.8 million was utilizedunder the foreign exchange facilities, respectively. One of these facilities isassociated with the Revolving Loan Agreements discussed above and is subject tothe same covenants.

 

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

 

The total amount ofimpairment losses incurred in the years ended December 31, 2000, 2001, and 2002were approximately $2.0 million, $510,000, and $574,000 , respectively. Theimpairment loss recorded in the year ended December 31, 2000 was primarilyrelated to the write-off of certain tenant improvements in Cymer’s existingfacilities as Cymer moved to a new facility in 2000, and the write-off ofcomputer systems made obsolete by Cymer’s new ERP system which was implementedin 2000.  The loss of $2.0 million wasrecorded in general and administrative expenses in the 

 

F-19

----

 

consolidated statements of income.  For the year ended December 31, 2001, theimpairment loss of $510,000 included write-offs associated with tenantimprovements in its San Diego facility, obsolete software used in Cymer’scustomer 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 income. For the year ended December 31, 2002,the impairment loss of $574,000 included write-offs associated with tenantimprovements in its San Diego facility and test equipment used within researchand development.  The loss of $574,000was recorded in the research and development and general and administrativeexpenses, as appropriate, in the accompanying consolidated statements ofincome.

 

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

 

In August 1997, Cymer issued $172.5 million aggregate principal amountin a private placement of notes. These 31⁄2% / 71⁄4% Step-Up ConvertibleSubordinated Notes (“1997 Notes”) were due August 6, 2004 and were convertibleat the option of the holder into shares of common stock of Cymer. Theconversion rate on the notes was 21.2766 shares per $1,000 principal amount.

 

These 1997 Notes were called for redemption on March 25, 2002.  Immediately prior to the March 25, 2002redemption date, holders of $109.3 million of the outstanding principal amountconverted their 1997 Notes into shares of Cymer common stock. As a result of these conversions, 2,325,542shares of Cymer’s common stock were issued to holders of the 1997 Notes.  Cymer used its 2,000,000 shares of treasurystock as part of the total 2,325,542 shares issued in the conversion.  The remaining $38.0 million of theoutstanding principal amount of the 1997 Notes was redeemed.  The redemption price was 104.111% ofthe principal amount of the 1997 Notes, plus accrued and unpaid interest to theredemption date.  The redemptionresulted in an extraordinary loss on debt extinguishment of $163,000, net oftax.

 

In February 2002, Cymer issued $250.0 million principal amount ofunsecured 31⁄2% Convertible Subordinated Notes due February 15, 2009 ( “2002Notes”).  Interest on the 2002 Notes ispayable on February 15 and August 15 of each year, commencing August 15,2002.  The 2002 Notes are convertibleinto shares of Cymer’s common stock at a conversion rate of 20 shares per$1,000 principal amount subject to adjustment under certain conditions. Cymermay redeem the 2002 Notes on or after February 20, 2005, or earlier if theprice of its common stock reaches certain levels.  The 2002 Notes are subordinated to Cymer’s existing and futuresenior indebtedness and effectively subordinated to all indebtedness and otherliabilities of Cymer’s subsidiaries. A portion of the net proceeds of thisprivate placement were used to redeem Cymer’s outstanding 1997 Notes.

 

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

 

***Common Stock Warrants*** – During fiscal 2001, Cymer issued warrantsto purchase 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 12).  No warrants weregranted in 2002, and no warrants were exercised in 2001 or 2002.  The warrants expire in May 2006.

 

***Stock Option andPurchase Plans*** - Cymer has the following stockoption and stock purchase plans:

* *

*1996 Stock Option Plan (the “1996 Stock Plan”)*– The 1996 Stock Plan provides for the grant of incentive stock options  to employees and nonqualified stock optionsto employees, directors and consultants of Cymer.  The exercise price of stock options granted under the 1996  Plan must be at least equal to the fairmarket value of Cymer’s common stock on the date of grant. Options issued underthe 1996 Plan expire five to ten years after the options are granted andgenerally vest and become exercisable ratably over a four-year period followingthe date of grant.  A total of 7,900,000

 

F-20

----

 

shares of common stock were reserved for issuance under the 1996 StockPlan.  Of these shares, options topurchase 5,064,938 shares are outstanding and 656,979 shares remain availablefor grants as of December 31, 2002.

 

*1996 Employee Stock Purchase Plan (the “ESPP”) –* The ESPP isintended to qualify under Section 423 of the Code.  Under the ESPP, eligible employees may purchase shares of commonstock from Cymer through payroll deductions of up to 15% of his or her basecompensation (excluding bonuses, overtime and sales commissions), at a priceper share equal to 85% of the lower of (i) the fair market value of Cymer’scommon stock as of the first day of each offering period under the ESPP or (ii)the fair market value of the common stock at the end of the purchaseperiod.  This plan was amended in 2001by the shareholders to establish two year offering periods with six monthpurchase periods and to increase the plan shares issuable from 500,000 to800,000.  The amount of shares issuableunder this plan as of December 31, 2002 was 171,389, and 628,611 shares havebeen previously issued.

* *

*2000 Equity Incentive Plan ( the “2000 Plan” )* – On August 16, 2000, Cymer adopted the 2000Plan which provides for the grant of options to employees or consultants whoare neither directors nor officers. The exercise price of the options grantedunder the 2000 Plan will equal the quoted market value of the common stock atthe date of grant.  Options issued underthe 2000 Plan expire ten years after the options are granted and generally vestand become exercisable ratably over a four year period following the date ofgrant.  This plan was amended in 2002 toincrease the shares reserved for issuance under the plan from 1,850,000 to4,950,000.  Of these shares, options topurchase 2,817,958 shares are outstanding and 1,993,393 shares remain availablefor grants as of December 31, 2002.

* *

*ACX 1993 Stock Option 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 acquisition.  The outstanding ACXoptions were converted to options to purchase 336,109 Cymer shares, at exerciseprices ranging from $2.08 to $38.71 per share. No further options will be issued under the ACX Stock Option Plan.  As of December 31, 2002, 204,272 shares areoutstanding under the ACX Stock Option Plan.

 

In 1996, Cymer adopted a *1996 Director Option Plan (the“Director Option Plan”)* whereby 200,000 shares were reserved forBoard of Director option grants.  Therewere 80,000 options issued under the Director Option Plan in 1997.  The Director Option Plan was dissolved inOctober 1997; however, 35,000 of these options remain outstanding as ofDecember 31, 2002.

 

*1987 Stock Option Plan (the “1987 Plan”)* – The 1987 Planprovided for the grant of incentive and nonstatutory options to purchase sharesof common stock to employees and consultants at prices that are not less than100% (85% for nonstatutory options) of the fair market value of Cymer’s commonstock on the date the options are granted. The 1987 Plan also provided for various restrictions regarding optionterms, prices, transferability and other matters.  Options issued under the 1987 Plan expired five to ten yearsafter the options were granted and generally vest and became exercisableratably 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, 2002.

 

F-21

----

 

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

 
|                            |   | **Number of  Shares** |   | **Weighted  Average  Exercise Price  Per Share** |   |
|---------------------------------|--------|-----------------------|--------|--------------------------------------------------|--------|
|                            |   |                  |   |                                             |   |
| Outstanding, January 1, 2000    |   | 4,769                 |   | $                                                | 21.47  |   |
| Granted                         |   | 2,244                 |   | 38.46                                            |   |
| Exercised                       |   | (974                  | )      | 11.26                                            |   |
| Cancelled                       |   | (302                  | )      | 26.68                                            |   |
|                            |   |                  |   |                                             |   |
| Outstanding, December 31, 2000  |   | 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  |   |
|                            |   |                  |   |                                             |   |
| Exercisable, December 31,  2002 |   | 4,941                 |   | $                                                | 27.52  |   |

 

The followingtable summarizes information as of December 31, 2002 concerning currentlyoutstanding and exercisable options (number of shares in thousands):

 
| **Options  Outstanding**           |   | **Options  Exercisable** |   |
|------------------------------------|--------|--------------------------|--------|
|                               |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining  Contractual Life  (years)** |   | **Weighted  Average  Exercise Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise Price** |   |
|                               |   |                     |   |   |   |   |
| **Range of  Exercise Prices**      |   |                     |   |   |   |   |
|                               |   |                     |   |   |   |
|                               |   |                     |   |   |   |   |   |   |   |   |   |
| $    2.08 - $  2.08 |   | 21                       |   | 3.26 |   | $ | 2.08 |   | 13 |   | $ | 2.08 |   |
| $    9.13 - $11.65       |   | 169                      |   | 3.92 |   | $ | 11.60 |   | 83 |   | $ | 11.54 |   |
| $ 12.25 - $17.31                   |   | 695                      |   | 7.82 |   | $ | 16.30 |   | 638 |   | $ | 16.34 |   |
| $ 17.50 - $25.76                   |   | 2,981                    |   | 7.64 |   | $ | 21.63 |   | 1,776 |   | $ | 22.31 |   |
| $ 25.86 - $38.63                   |   | 3,610                    |   | 8.02 |   | $ | 33.43 |   | 2,144 |   | $ | 33.42 |   |
| $ 38.88 - $57.00                   |   | 636                      |   | 8.03 |   | $ | 47.13 |   | 280 |   | $ | 45.90 |   |
| $ 60.00 - $60.00                   |   | 10                       |   | 7.16 |   | $ | 60.00 |   | 7 |   | $ | 60.00 |   |
| $    2.08 - $60.00       |   | 8,122                    |   | 7.76 |   | $ | 28.20 |   | 4,941 |   | $ | 27.52 |   |
|                                    |        |                          |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Stockholder RightsPlan*** – In the event of hostile takeover attempts,including the accumulation of shares in the open market or through privatetransactions, the rights plan enhances the ability of Cymer’s board ofdirectors to negotiate with a potential acquirer for a fair price to all of thestockholders. Under the rights plan, rights were distributed as a dividend atthe rate of one right (a "Cymer right") for each share of common stockheld by stockholders of record as of the close of business on March 2,1998.  After March 2, 1998, each holderof shares 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.

 

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 theirexpiration, Cymer is generally entitled to redeem the Cymer rights at $0.01 perCymer right at any time prior to a public announcement that a 15% position hasbeen acquired. 

 

F-22

----

 

 

 

**11.**                               INCOME TAXES

 

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

 
|                   |   | **Year ended  December 31,** |   |
|------------------------|--------|------------------------------|--------|
|                   |   | **2000**                     |   | **2001** |   | **2002** |   |
|                   |   | **(in  thousands)**          |   |
| Current income taxes:  |   |                         |   |   |   |   |   |
| Federal                |   | $                            | 19,962 |   | $ | 1,560 |   | $ | 8,320 |   |
| State                  |   | 4,457                        |   | (3,432 | ) | 371 |   |
| Foreign                |   | 7,808                        |   | 3,017 |   | 4,262 |   |
|                   |   |                         |   |   |   |   |   |
| Total                  |   | 32,227                       |   | 1,145 |   | 12,953 |   |
|                   |   |                         |   |   |   |   |   |
| Deferred income taxes: |   |                         |   |   |   |   |   |
| Federal                |   | (3,071                       | )      | (118 | ) | (6,874 | ) |
| State                  |   | (2,910                       | )      | 1,844 |   | (3,373 | ) |
| Foreign                |   | —                       |   | — |   | — |   |
|                   |   |                         |   |   |   |   |   |
| Total                  |   | (5,981                       | )      | 1,726 |   | (10,247 | ) |
|                   |   |                         |   |   |   |   |   |
| Income tax provision   |   | $                            | 26,246 |   | $ | 2,871 |   | $ | 2,706 |   |

 

The income taxprovision is different from that which would be obtained by applying thestatutory Federal income tax rate (35%) to income before income taxexpense.  The items causing thisdifference for the period are as follows:

 
|                                                                             |   | **Year ended December 31,** |   |
|----------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                             |   | **2000**                    |   | **2001** |   | **2002** |   |
|                                                                             |   | **(in thousands)**          |   |
|                                                                             |   |                        |   |   |   |   |   |
| Provision at statutory rate                                                      |   | $                           | 31,739 |   | $ | 4,020 |   | $ | 5,919 |   |
| Foreign provision in excess of  federal statutory rate                      |   | (1,434                      | )      | 412 |   | 1,756 |   |
| State income taxes, net of  federal benefit                                      |   | 1,006                       |   | (1,032 | ) | (730 | ) |
| FSC/EIE benefit, net of federal tax                                              |   | (4,469                      | )      | (787 | ) | (2,848 | ) |
| Federal tax credits                                                              |   | (1,150                      | )      | (2,509 | ) | (1,990 | ) |
| Tax exempt interest, net of disallowed expenses                                  |   | (52                         | )      | (38 | ) | — |   |
| Non-deductible amortization  of goodwill and in-process research and development |   | —                      |   | 2,869 |   | 56 |   |
| Other                                                                            |   | 606                         |   | (64 | ) | 543 |   |
|                                                                             |   |                        |   |   |   |   |   |
| Provision at effective tax  rate                                                 |   | $                           | 26,246 |   | $ | 2,871 |   | $ | 2,706 |   |

 

F-23

----

 

Deferred income taxes reflect the net taxeffects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes.  Significant components ofCymer’s net deferred tax assets are as follows:

 
|                                                                           |   | **December 31,**   |   |
|--------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                           |   | **2001**           |   | **2002** |   |
|                                                                           |   | **(in thousands)** |   |
|                                                                           |   |               |   |   |   |
| Deferred tax assets:                                                           |   |               |   |   |   |
| Reserves and accruals not  currently deductible                                |   | $                  | 15,953 |   | $ | 19,407 |   |
| Difference between book and tax basis of inventory  and property and equipment |   | 7,628              |   | 6,156 |   |
| Tax carryforwards                                                              |   | 7,384              |   | 11,766 |   |
| Tax effect of foreign transactions                                             |   | 2,359              |   | 6,726 |   |
| Accrued Japanese enterprise tax                                                |   | 731                |   | 732 |   |
| Total gross deferred tax  assets                                               |   | 34,055             |   | 44,787 |   |
| Valuation allowance                                                            |   | (2,951             | )      | (2,951 | ) |
| Net deferred tax assets                                                        |   | 31,104             |   | 41,836 |   |
| Deferred tax liabilities                                                       |   | (1,900             | )      | (1,242 | ) |
| Net deferred  tax assets                                                       |   | $                  | 29,204 |   | $ | 40,594 |   |

 

In assessing the realizability of deferred taxassets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized. Based upon thelevel of historical taxable income and projections for future taxable income,management has provided a valuation allowance of $3 million for the years endedDecember 31, 2001 and December 31, 2002, related to the acquisition of ACX netoperating loss and credit carryforwards. The utilization of these losses and credits and subsequent release ofthe related valuation allowance will generate a benefit to goodwill and willhave no impact on the tax rate.  Managementbelieves that it is more likely than not that the results of future operationswill generate sufficient taxable income to realize the deferred tax assets forwhich a valuation allowance has not been provided.

 

At December 31, 2002, Cymer had federal andstate tax loss carryforwards of $10.2 million and $2.0 million, respectively,which begin to expire in 2013 and 2003, respectively.  At December 31, 2002, Cymer had federal and state tax creditcarryforwards of $6.4 million and $6.7 million, respectively, which begin toexpire in 2013 and 2009, respectively.

 

It is Cymer’s intention toreinvest undistributed earnings of its foreign subsidiaries and therebyindefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes orUnited States income taxes which may become payable if undistributed earningsof foreign subsidiaries were paid as dividends to Cymer.

 

**12.**                               COMMITMENTS ANDCONTINGENCIES

 

***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 isrecognized on a straight-line basis over the life of the related leases andtotaled approximately $4,788,000, $5,052,000 and $4,545,000 for the years ended

 

F-24

----

 

December 31,2000, 2001 and 2002, respectively.

 

The net book value of assetsunder capital leases at December 31, 2001 and 2002 was approximately$153,000 and $112,000, which are net of accumulated amortization ofapproximately $157,000 and $187,000, respectively.

 

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

 
| **Year  ending December 31,**               |   | **Operating** |   | **Capital** |   |
|---------------------------------------------|--------|---------------|--------|-------------|--------|
|                                        |   |          |   |        |   |
| 2003                                        |   | $             | 4,508  |        | $      | 45 |   |
| 2004                                        |   | 4,075         |   | 45          |   |
| 2005                                        |   | 3,950         |   | —      |   |
| 2006                                        |   | 3,948         |   | —      |   |
| 2007                                        |   | 4,021         |   |        |   |
| Thereafter                                  |   | 6,350         |   | —      |   |
| Total                                       |   | $             | 26,852 |        | 90     |   |
|                                        |   |          |   |        |   |
| Less amount representing interest           |   |          |   | —      |   |
|                                        |   |          |   |        |   |
| Present value of minimum  lease payments    |   |          |   | 90          |   |
| Less current portion                        |   |          |   | 45          |   |
|                                        |   |          |   |        |   |
| Long term obligations under  capital leases |   |          |   | $           | 45     |   |

 

***Patent LicenseAgreement*** - Cymer has a patent license agreementfor a non-exclusive worldwide license to certain patented light sourcetechnology.  Under the terms of theagreement, Cymer is required to pay royalties ranging from 0.25% to 5.0% ofgross sales and leases as defined depending on the total amounts attainedsubject to an annual maximum of $100,000. Royalty fees totaled $100,000 in each of the years endedDecember 31, 2000, 2001 and 2002.

 

***Employee Savings Plan*** - Cymer has a 401(k) plan that allowsparticipating employees to contribute a percentage of their salary, subject toannual limits.  The Plan is available tosubstantially all full-time United States employees.  Effective January 1, 1997 through December 31, 1999, Cymermatched 100% of each eligible employee’s contributions, up to $500 peryear.  The Plan was amended effectiveJanuary 1, 2000 to include a matching contribution of up to 4% of each participatingemployee’s contribution, not to exceed $4,000 per year.  Under the Plan, Cymer contributed$1,496,000, $1,504,000, and $1,438,000 for the years ended December 31, 2000,2001, and 2002, respectively.

 

***Executive Deferred Compensation Plan*** – Cymer has an executive deferredcompensation plan for certain officers and key executives.  Beginning in 2001, Cymer used corporateowned life insurance to finance the plan. Compensation expense under this plan totaled $8,000, $684,000 and$367,000 for the years ended December 31, 2000, 2001 and 2002, respectively.Cymer’s liability for deferred compensation totaled $1,086,000 and $1,691,000as of December 31, 2001 and December 31, 2002, respectively, and is included inother liabilities.  The cash surrender valueof the life insurance policies totaled $415,000 and $487,000 as of December 31, 2001 and 2002, respectively,and is included in other assets.

 

***Executive Option and Group Health CoverageExtension Program***– Cymer has an executive option and health coverage extension program foreligible executives who meet certain minimum service and age requirements.  This program is designed to provide extendedbenefits to eligible executives who retire and cease to serve Cymer on afull-time basis.  Under the terms of theplan, the executive acts as a consultant to Cymer for a term of fouryears.  In return for these services,the program allows the executive to continue vesting in his or her stockoptions after the retirement 

 

F-25

----

 

separation date.  The program also provides the executiveswith specified health insurance continuation benefits.  As of December 31, 2001 and 2002, there wereno executives active in this program.

 

***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 $500,000, $492,000, and $247,000 for the years endedDecember 31, 2000, 2001 and 2002, respectively.

 

***ConstructionAgreement*** - In July 2002, Cymer entered into an agreementwith a contractor for the construction of a 265,000 square foot buildingadjacent to its corporate headquarters located in San Diego, California. Thismanufacturing and office facility will be completed in two phases, with phaseone currently scheduled for completion by April 2003 and phase two willcomplete construction throughout 2003, as required. Cymer will finance the costof the construction project, which is estimated to be approximately $50million, using existing capital.

 

***Contingencies****-*Cymer is party to legal actions inthe normal course of business.  Based onthe advice of legal counsel, management does not expect the outcome of legalaction in the normal course of business to have  a material impact on the financial position or results ofoperations of Cymer.

 

Cymer’s former Japanese manufacturing partner, Seiko,and one of Cymer’s Japanese customers have been notified that Cymer’s lightsource systems in Japan may infringe certain Japanese patents held by anotherJapanese company.  Cymer has agreed toindemnify its former Japanese manufacturing partner and its customers againstpatent 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 it is entitled to prior user rights in Japan.

 

**13.****                              ****FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS**

 

Cymerconducts business in several international currencies through its globaloperations. Due to the large volume of Cymer’s business that is conducted inJapan, the Japanese operation poses the greatest foreign currency risk.  Cymer uses financial instruments,principally foreign currency forward exchange contracts, in Japan to manage itsforeign currency exposures. Cymer enters into foreign currency forward exchangecontracts in order to reduce the impact of currency fluctuations related to purchasesof Cymer’s inventories by Cymer Japan in US dollars for resale under firmthird-party sales commitments denominated in Japanese Yen.  Cymer does not enter into foreign currencyforward exchange contracts for trading purposes.

 

Cymer adopted SFAS 133 on January 1,2001.  SFAS 133 requires that allderivative instruments be recorded on the balance sheet at fair value.  Gains or losses resulting from changes inthe values of those derivatives are accounted for depending upon the use of thederivative and whether it qualifies for hedge accounting.  Prior to the adoption of SFAS 133, net gainsor losses were recorded on the date the light sources were received by CymerJapan (the transaction date) and were included in the cost of product sales inthe consolidated statements of income at the same time that the related salesto the third parties were consummated.

 

Cymer did not qualify forhedge accounting treatment until July 1, 2001. Accordingly, Cymer recorded allunrealized gains and losses on derivative instruments through earnings for thesix months ended June 30, 2001, in accordance with SFAS 133.  Effective July 1, 2001, for contractsentered into on or after July 1, 2001, from the date of contract inceptionthrough the date of the anticipated hedged 

 

F-26

----

 

transaction, unrealizedeffective gains and losses are recorded as other comprehensive income.   The net amount of unrealized effective gainor loss on the date the light source is received by Cymer Japan is reclassifiedto cost of sales on the date the light source is sold to the third party.Cymer’s derivative instruments are designated as cash flow hedging instrumentsand are deemed to be 100% effective. Upon adoption of SFAS 133 on January 1, 2001, Cymer recorded a loss tocumulative change in accounting principle of $370,000 and a gain of $2.4million to accumulated other comprehensive income per SFAS 133 transitionguidelines.  Of the $2.4 millionaccumulated other comprehensive income, $2.2 million and $0.2 million wasrecorded to cost of product sales during the quarter ended March 31, 2001 andthe quarter ended June 30, 2001, respectively, in accordance with SFAS 133transition guidelines.

 

At December 31, 2002, Cymerhad outstanding foreign currency forward exchange contracts to buy US $63.8million for 7.7 billion yen under foreign currency exchange facilities withcontract rates ranging from 115.5 yen to 132.9****yen per US dollar.  These contracts expire on various expirationdates through November 2003, and accordingly, the balance of the unrealizedchanges in fair values of the derivative instruments of $907,000 at December31, 2002 is expected to be recognized as a charge to earnings in fiscal2003.  Cymer recognized net gainsthrough cost of product sales from the foreign currency exchange contracts of$3,156,000 and $2,320,000 for the years ended December 31, 2000 and 2001,respectively, and a net loss of $992,000 for the year ended December 31, 2002.

 

**14.****                              ****PATENT LICENSE AGREEMENT**

 

On May 14, 2001, Cymeracquired certain patents for a total consideration of $10.3 million, whichincluded a $6.0 million cash payment and the issuance of 200,000 warrantsvalued at $4.3 million. The warrants were valued on the date of issuance usingthe Black-Scholes pricing model.  Thetotal value of these patents will be amortized over eight years whichrepresents the shortest remaining life of the patents purchased under theagreement.  The amortization of thesepatents is included in cost of product sales on the accompanying statements ofincome.

 

**15.**                               RELATED PARTYTRANSACTIONS

*** ***

***Collaborative Arrangement*** - Cymer has a collaborative arrangement witha Japanese company that was also a stockholder of Cymer until 2000.  The arrangement, entered into in August1992, includes a (i) stock purchase agreement, (ii) research and developmentagreement, (iii) product license agreement, and (iv) contract manufacturingagreement.  The general provisions ofthese agreements are as follows:

* *

*Stock Purchase Agreement* - The stockholder purchased 470,590 shares ofCymer’s Series D Redeemable Convertible Preferred Stock at $4.25 per share withnet proceeds to Cymer of $1,909,000. Such stock was converted to common stock in 1996 and was sold in 2000.

* *

*Research and Development Agreement –*The stockholderentered into a research and development agreement with Cymer in August1992.  In exchange for performingR&D activities associated with its high powered light source system, Cymerreceived payment from the stockholder. This agreement expired in August 1996.

* *

*ProductLicense Agreement* - Cymer granted to the stockholder the exclusiveright in Japan and the non-exclusive right outside Japan to manufacture andsell one of Cymer’s products and subsequent enhancements thereto. Cymer alsogranted the stockholder the right of first refusal to license and fund thedevelopment of new technologies not developed with funding from otherparties.  In exchange for these rights,Cymer received up-front license fees and was entitled to royalties of 5% onrelated product sales through September 1999, after which the royalty rate issubject to renegotiation.  The licenseagreement also provides that product sales between Cymer and the stockholderwill be at a 15% discount from the respective companies’ list price. Theagreement terminates in August 2012. There was no activity under this agreement in 2000, 2001 and 2002.

 

F-27

----

 

*ContractManufacturing Agreement* - The stockholder agreed to manufacture forCymer certain products and Cymer was required to purchase a specifiedpercentage of its total annual product, as defined, from the stockholder.  Cymer and this stockholder mutually agreedto the termination of this contract effective March 31, 2003.

 

Cymer made $10.6 million, $3.1 million and $2.0 million in purchasesunder this agreement in 2000, 2001 and 2002, respectively.  In addition, Cymer had payables due underthis agreement of $42,000 and $155,000 at December 31, 2001 and 2002,respectively.

 

**16.****                              ****SEGMENT INFORMATION**

 

Cymer designs, manufacturesand sells excimer light source systems, replacement parts, and support servicesfor use in photolithography systems used in the manufacture of semiconductorswith critical features sizes.  Inaccordance with Statement of Financial Accounting Standards No. 131, “Disclosureabout Segments of an Enterprise and Related Information”.  Cymer currently considers its business toconsist of one reportable operating segment.

 

**Geographic Information**

 

Presented below isinformation regarding sales, income (loss) from operations, and identifiableassets, classified by operations located in the United States, Japan, Korea,Taiwan, Singapore, the People’s Republic of China ("China"), and theNetherlands.  Cymer sells its excimerlight sources in Japan through Cymer Japan. Intercompany sales to the subsidiaries are generally priced between 90%to 95% of the price of products sold to outside customers.  All significant intercompany balances areeliminated in consolidation.  Themajority of corporate costs and expenses are incurred in the United States andare reflected in the operating loss from the United States operations.

 
|                                            |   | **Year ended  December 31,** |    |
|-------------------------------------------------|--------|------------------------------|---------|
|                                            |   | **2000**                     |    | **2001** |   | **2002** |   |
|                                            |   |                         |    |   |   |   |   |
| Sales from:                                     |   |                         |    |   |   |   |   |
| United States                                   |   | $                            | 173,979 |   | $ | 124,325 |   | $ | 119,708 |   |
| Japan                                           |   | 156,064                      |    | 111,407 |   | 122,917 |   |
| Korea, Taiwan, Singapore, China and Netherlands |   | 37,417                       |    | 33,712 |   | 47,535 |   |
|                                            |   |                         |    |   |   |   |   |
| Total                                           |   | $                            | 367,460 |   | $ | 269,444 |   | $ | 290,160 |   |
|                                            |   |                         |    |   |   |   |   |
| Operating income (loss) :                       |   |                         |    |   |   |   |   |
| United States                                   |   | $                            | (8,774  | ) | $ | (58,141 | ) | $ | (61,870 | ) |
| Japan                                           |   | 81,606                       |    | 57,545 |   | 61,990 |   |
| Korea, Taiwan, Singapore, China and Netherlands |   | 18,900                       |    | 13,527 |   | 18,706 |   |
|                                            |   |                         |    |   |   |   |   |
| Total                                           |   | $                            | 91,732  |   | $ | 12,931 |   | $ | 18,826 |   |
|                                            |   |                         |    |   |   |   |   |
| Identifiable assets:                            |   |                         |    |   |   |   |   |
| United States                                   |   | $                            | 405,388 |   | $ | 419,500 |   | $ | 688,234 |   |
| Japan                                           |   | 59,676                       |    | 32,805 |   | 39,543 |   |
| Korea, Taiwan, Singapore, China and Netherlands |   | 36,498                       |    | 31,041 |   | 39,110 |   |
|                                            |   |                         |    |   |   |   |   |
| Total                                           |   | $                            | 501,562 |   | $ | 483,346 |   | $ | 766,887 |   |

 

F-28

----

 

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

 
|                               |   | **QUARTERLY RESULTS OF OPERATIONS**           |   |
|------------------------------------|--------|-----------------------------------------------|--------|
|                               |   | **(in thousands, except for per share data)** |   |
|                               |   |                                          |   |   |   |   |   |   |   |
|                               |   | **Year ended December 31, 2001**              |   |
|                               |   | **1st**                                       |   | **2nd** |   | **3rd** |   | **4th** |   |
|                               |   |                                          |   |   |   |   |   |   |   |
| Revenues                           |   | $                                             | 91,197 |   | $ | 70,411 |   | $ | 53,035 |   | $ | 54,801 |   |
|                               |   |                                          |   |   |   |   |   |   |   |
| Operating income (loss)            |   | $                                             | 11,111 |   | $ | 5,413 |   | $ | (2,278 | ) | $ | (1,315 | ) |
|                               |   |                                          |   |   |   |   |   |   |   |
| Net income (loss)                  |   | $                                             | 8,299  |   | $ | 4,835 |   | $ | (2,782 | ) | $ | (1,867 | ) |
|                               |   |                                          |   |   |   |   |   |   |   |
| Basic earnings (loss) per  share   |   | $                                             | 0.28   |   | $ | 0.16 |   | $ | (0.09 | ) | $ | (0.06 | ) |
|                               |   |                                          |   |   |   |   |   |   |   |
| Diluted earnings (loss) per  share |   | $                                             | 0.27   |   | $ | 0.15 |   | $ | (0.09 | ) | $ | (0.06 | ) |
|                                    |        |                                               |        |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                               |   | **Year ended December 31, 2002** | ** ** |
|------------------------------------|--------|----------------------------------|------------|
|                               |   | **1st**                          |       | **2nd** |   | **3rd** |   | **4th** |   |
|                               |   |                             |       |   |   |   |   |   |   |
| Revenues                           |   | $                                | 61,983     |   | $ | 73,669 |   | $ | 84,484 |   | $ | 70,024 |   |
|                               |   |                             |       |   |   |   |   |   |   |
| Operating income (loss)            |   | $                                | 7,107      |   | $ | 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 | ) |
|                                    |        |                                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-29

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**CYMER, INC.**

**SCHEDULE II**

**VALUATION AND QUALIFYING ACCOUNTS**

**Years Ended December 31, 2000, 2001 and 2002**

**(in thousands)**

** **
|                                |   | **Balance at  Beginning of Year** |   | **Additions (net)****(1)** |   | **Deductions** |   | **Balance at  End of Year** |   |
|-------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|----------------|--------|-----------------------------|--------|
|                                |   |                              |   |                       |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| **Allowance for Doubtful Accounts** |   |                              |   |                       |   |           |   |                        |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| Year  ended December 31, 2000       |   | $                                 | 727    |                       | $      | 1,351          |   | $                           | — |   | $ | 2,078 |   |
| Year  ended December 31, 2001       |   | $                                 | 2,078  |                       | $      | 182            |   | $                           | (63    | ) | $ | 2,197 |   |
| Year  ended December 31, 2002       |   | $                                 | 2,197  |                       | $      | (398           | )      | $                           | (42    | ) | $ | 1,757 |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| **Inventory Allowance**             |   |                              |   |                       |   |           |   |                        |   |
|                                |   |                              |   |                       |   |           |   |                        |   |
| Year  ended December 31, 2000       |   | $                                 | 12,300 |                       | $      | 6,087          |   | $                           | (3,387 | ) | $ | 15,000 |   |
| 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 |   |

 

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(1) Includesreversals of allowance amounts as deemed necessary.

 

Seeaccompanying independent auditors’ report.

 

S-1

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