| CYMER INC Item 1A Risk Factors The risks described below may not be the only risks we face |
| Additional risks that we do not currently think are material may also impair our business operations |
| If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline |
| Our revenues and operating results from quarter-to-quarter have varied in the past and our future operating results may continue to fluctuate significantly |
| Factors that contribute to fluctuations in our revenues and operating results include: • demand for semiconductors in general and, in particular, for leading edge devices with smaller circuit geometries; • cyclicality in the market for semiconductor manufacturing equipment; • rates at which chipmakers take delivery of photolithography tools from lithography tool manufacturers (“our customers”); • rates at which our customers take delivery of light source systems from us; • timing and size of orders from our small base of customers; • product lead time demands from our customers and the chipmakers; • mix of light source models, consumable and spare parts and service revenues in our total revenues; • changes in the price and profitability of our products; • our ability to develop and implement new technologies and introduce new products; • changes in market penetration by our competitor; • utilization rates of light sources and sales of consumable and spare parts and services; • our ability to manage our manufacturing requirements; 14 ______________________________________________________________________ • our ability to manage customer satisfaction, product reliability, and direct field service and support effectiveness; • foreign currency exchange rate fluctuations, principally with respect to the Japanese yen (in which sales by our Japanese subsidiary are denominated); • worldwide political instability; • changing global economic conditions, including rising energy prices; and • intellectual property protection |
| We have historically derived a large portion of our quarterly and annual revenues from selling a small number of light source systems |
| Because we sell a small number of products, the precise time that we recognize revenue from an order may have a significant impact on our total revenue for a particular period |
| Our customers may cancel or reschedule orders with little or no penalty |
| Orders expected in one quarter could shift to another period due to changes in the anticipated timing of customers’ purchase decisions or rescheduled delivery dates requested by our customers |
| Our operating results for a particular quarter or year may be adversely affected if our customers, particularly our three largest customers, cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in manufacturing, testing, shipping, and product acceptance |
| We manage our expense levels based, in large part, on expected future revenues |
| As a result, our expenses are relatively fixed for the short term, and if our actual revenue decreases below the level we expect, our operating results will be adversely affected |
| As a result of these or other factors, we could fail to achieve our expectations as to future revenue, gross profit and operating income |
| Our failure to meet the performance expectations set and published by external sources could result in a sudden and significant drop in the price of our stock, particularly on a short-term basis, and could negatively affect the value of any investment in our stock |
| Our business depends on the semiconductor and the semiconductor capital equipment industries, which are highly volatile and unpredictable |
| We derive substantially all of our revenues from photolithography tool manufacturers, or original equipment manufacturer (“OEM”) customers, who incorporate our light source systems in photolithography tools that they sell to semiconductor manufacturers, or chipmakers, and from chipmakers who purchase consumables, spare parts, upgrades and service directly from us |
| Like us, our OEM customers depend on demand for their products from the chipmakers |
| The capital equipment and related operating expenditures of chipmakers depend on a number of factors, including the current and anticipated market demand for semiconductors and the many products using semiconductors |
| That demand is highly volatile and unpredictable |
| As a result of the cyclicality of the semiconductor industry, the semiconductor capital equipment industry historically has experienced periodic ups and downs and currently appears to be in flux, with industry experts uncertain about the level of growth to expect in 2006 |
| In late 2005 and early 2006, business indicators for our industry have become more positive, and estimates of semiconductor capital equipment spending for the full year of 2006 now range from an increase of at least 5prca to as much as 10prca to 12prca over 2005 levels |
| The lithography segment of the semiconductor capital equipment industry could grow at about double the rate of the industry as a whole due to a perceived need for additional lithography tools, with advanced lithography tools expected to have higher average selling prices |
| The cyclical nature of the semiconductor and the semiconductor capital equipment industries affects our ability to accurately predict future revenue and therefore our ability to manage our future expense levels |
| When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound |
| During a down cycle or slowdown, we must be in a position to adjust our cost and expense structure to prevailing market conditions while still being able to motivate and retain our key employees |
| During periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand |
| We can provide no assurance that 15 ______________________________________________________________________ these objectives can be met in a timely manner in response to industry cycles |
| We are not able to predict with any certainty the duration of any industry cycle or the timing or order of magnitude of any recovery |
| Downturns in the semiconductor industry often result in decreases in demand for semiconductor manufacturing equipment, including the photolithography tools that our OEM customers produce |
| The previous downturn in the semiconductor industry had a severe effect on the demand for semiconductor manufacturing equipment |
| Fluctuating levels of investment by chipmakers and resulting pricing volatility will continue to materially affect our aggregate bookings, revenues and operating results |
| Even during periods of reduced revenues we believe we must continue to invest in research and development and to maintain extensive ongoing worldwide customer service and support capabilities to remain competitive |
| Continued spending in furtherance of these objectives may temporarily harm our financial results |
| Semiconductor industry downturns and slowdowns are likely to continue to adversely affect our business, financial condition and operating results, and our operating results may fall below the expectations of public market analysts or investors in future quarters |
| Any failure to meet such expectations could materially adversely affect the price of our common stock |
| Our OEM customers try to manage their inventories and production requirements to appropriate levels that reflect their expected sales to chipmakers |
| Market conditions in the semiconductor industry and our OEM customers’ production efficiency can cause them to expand or reduce their orders for new light source systems as they try to manage their inventories and production requirements |
| However, we cannot guarantee that we will be successful in understanding our OEM customers’ inventory management and production requirements or that our OEM customers will not build up an excess inventory of light source systems |
| If our OEM customers retain an excess inventory of light source systems, our revenue could be reduced in future periods as the excess inventory is utilized, which could adversely affect our operating results, financial condition and cash flows |
| If our OEM customers demand shorter product lead times to improve their inventory and cash positions, our inventory management and cash position may be negatively impacted, which may adversely affect our operating results, financial condition and cash flows |
| A significant percentage of our revenue is derived from sales to a few large customers, and if we are not able to retain these customers, or they reschedule, reduce or cancel orders, or delay or default on payments, our revenues would be reduced and our financial condition and cash flows would suffer |
| Three large companies, ASM Lithography, Canon and Nikon dominate the photolithography tool business |
| Collectively, these three companies accounted for the following percentage of our total revenue during the periods indicated: Years ended December 31, 2003 2004 2005 ASM Lithography 24 % 34 % 32 % Canon 24 % 11 % 8 % Nikon 21 % 22 % 24 % Total 69 % 67 % 64 % Collectively, these three companies accounted for the following percentage of our total accounts receivable at the dates indicated: December 31, December 31, 2004 2005 ASM Lithography 46 % 36 % Canon 5 % 5 % Nikon 31 % 25 % Total 82 % 66 % 16 ______________________________________________________________________ We expect that sales of our light source products to these three customers will continue to account for a substantial majority of our revenue in the foreseeable future |
| We can provide no assurance that any of our customers will continue to purchase our products at past or current levels |
| For example, revenue attributable to sales to Canon has declined by more than 50prca over the last two fiscal years |
| Sales to Canon or any of 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 its industry; • a customer experiencing lithography tool production problems; • a decision to purchase light sources from other suppliers; • changes in economic conditions in the semiconductor or the photolithography tool industries; and • a decline in a customer’s financial condition |
| The loss of any significant business from or production problems for any one of these three customers would harm our business and financial condition |
| A substantial percentage of our revenue is derived from the sale of a limited number of primary products |
| Our only current product line is excimer light source systems, including KrF and ArF systems, and support, including consumable and spare parts and service support |
| We expect these light source systems and the related support to continue to account for a substantial majority of our revenues in the near term |
| Continued market acceptance of our light source system products is, therefore, critical to our future success |
| The primary market for excimer light sources is in the use of DUV photolithography equipment for manufacturing deep-submicron semiconductor devices using smaller circuit geometries |
| The demand for our products depends in part on the rate at which chipmakers further adopt excimer light sources as the chosen light source for their photolithography tools |
| The rate with which chipmakers adopt excimer light sources may vary for a variety of reasons, including: • inadequate performance of photoresists used in advanced DUV photolithography; • potential shortages of specialized materials used in DUV optics; • productivity of 300 mm photolithography tools relative to 200 mm tools; and • consolidation of chipmakers |
| We cannot guarantee that these factors can or will be overcome or that the demand for our excimer light source products will not be materially reduced |
| The demand for our light source products, and therefore our operating results, financial condition and cash flows, could be adversely affected by a number of factors, including: • a decline in demand for our customers’ DUV photolithography tools; • a failure to achieve continued market acceptance of our products; • a failure to manage customer satisfaction, product reliability, and direct field service and support effectiveness; • an improved version of products being offered by a competitor in the market in which we participate; • technological change that we are unable to address with our products; and • a failure to release new enhanced versions of our products on a timely basis |
| 17 ______________________________________________________________________ We depend on the introduction of new products for our success, and we are subject to risks associated with rapid technological change |
| Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances enabling such processes |
| We believe that our future success depends in part upon our ability to develop, manufacture, timely introduce and support new light source products with improved capabilities and to continue to enhance our existing light source systems and process capabilities |
| Due to the risks inherent in transitioning to new products, we must forecast accurate demand for new products while managing the transition from older products |
| Our most significant product introduction in recent years consisted of a technology change from a single-discharge-chamber excimer light source to a dual-discharge-chamber design called MOPA The MOPA design represents a paradigm shift from previously accepted lithography technology and offers chipmakers higher power, tighter bandwidth and lower cost of operation for their current – and we expect for their future – optical lithography applications |
| As originally designed, the MOPA architecture was projected to provide its benefits across all three DUV wavelengths – 248 nm, 193 nm, and 157 nm – but at this time, the semiconductor industry has only adopted MOPA at the 193 nm wavelength, due to the successful extension of 248 nm single chamber technology, and the omission of 157 nm lithography from the roadmap |
| There are risks inherent in the ongoing transition to the MOPA technology, including effective execution of our product development roadmap, continuing adoption of the product by lithography tool manufacturers and chipmakers, manufacturability, cost effectiveness, and product performance in the field of the new products and the development of a comparable product by our competitor |
| We believe that chipmakers are currently developing a capability to produce devices that are measured at 90 nm or less, and these efforts are driving the current demand for our light source products for DUV photolithography systems |
| After chipmakers have this capability, their demand for our light source products will depend, in part, on whether they want to expand their capacity to manufacture these devices |
| This will in turn depend on whether their sales forecasts and projected manufacturing process yields justify the necessary investments |
| Future technologies such as EUV, electron projection lithography, and maskless lithography may render our excimer light source products obsolete |
| We must manage product transitions, as introduction of new products could adversely affect our sales of existing products |
| If new products are not introduced on time, or have reliability or quality problems, our performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses |
| We may not be able to develop and introduce new products or enhancements to our existing products and processes in a timely or cost effective manner that satisfies customer needs or achieves market acceptance |
| Failure to develop and introduce these new products and enhancements could materially adversely affect our operating results, financial condition and cash flows |
| We expect to face significant competition from current and future competitors |
| We believe that other companies are developing systems and products that are competitive to ours and are planning to introduce new products to this market, which may affect our ability to sell our new products |
| Furthermore, new products represent significant investments of our resources and their success, or lack thereof, could have a material effect on our financial results |
| Failure to maintain effectively our direct field service and support organization could have a material adverse effect on our business |
| We believe it is critical for us to provide quick and responsive service directly to the chipmakers throughout the world that use our light source products in their photolithography systems, and that it is essential to maintain our own personnel or trained third-party resources to provide these services |
| Accordingly, we have an ongoing effort to develop our direct support system with locations in Europe, 18 ______________________________________________________________________ Korea, Japan, the People’s Republic of China, Singapore, Taiwan and the US This requires us to do the following: • recruit and train qualified field service personnel; • identify qualified independent firms; and • maintain effective and highly trained organizations that can provide service to our customers in various countries |
| We may not be able to attract and train qualified personnel to maintain our direct support operations successfully |
| We may not be able to find and engage qualified third-party resources to supplement and enhance our direct support operations |
| Further, we may incur significant costs in providing these support services |
| We must develop and manufacture enhancements to our existing products and introduce new products in order to continue to grow our business |
| We may not effectively manage our growth and integrate these new enhancements and products, which could materially harm our business |
| To continue to grow our business, our existing light source products and their process capabilities must be enhanced, and we must develop and manufacture new products to serve other semiconductor applications |
| We cannot guarantee that we will be able to manage our business to grow effectively |
| Nor can we guarantee that we will be able to accelerate the development of new enhancements to our existing products and create new products |
| Further, we may not be able to effectively integrate new products and applications into our current operations |
| Any of these risks could materially harm our business, financial condition and results of operations |
| We must effectively manage changes in our business |
| In order to respond to the business cycles of the semiconductor industry, in the past few years we have sharply expanded and contracted the scope of our operations and the number of employees in many of our locations and departments |
| As the semiconductor industry cycle moves between growth and contraction we will need to: • closely manage our global operations; • improve our process and other internal management systems; • improve our quality control, order fulfillment, field service 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 we fail to effectively manage changes in our business, our operating results, financial condition and cash flows will be adversely affected |
| Chipmakers’ prolonged use of our products in high volume production may not produce the results they desire and, as a result, our reputation and that of our customers who supply photolithography tools to the chipmakers could be damaged in the semiconductor industry |
| Over time, our light source products may not meet chipmakers’ production specifications or operating cost requirements after the light source has been used for a long period in high volume production |
| If any chipmaker cannot successfully achieve or sustain their volume production using our light sources, our reputation could be damaged with the chipmakers and our customers who are the limited number of lithography tool manufacturers |
| This would have a material adverse effect on our business |
| 19 ______________________________________________________________________ We depend on a few key suppliers for purchasing components and subassemblies that are included in our products |
| We purchase a limited number of components and subassemblies included in our light source products from a single supplier or a small group of suppliers |
| For certain optical, control system and pulse power components and subassemblies used in our light source systems, we currently utilize a single supplier |
| To reduce the risk associated with this single supplier, we carry a significant strategic inventory of these components |
| Strategic inventories are managed as a percentage of future demand |
| We have also negotiated to have vendor-managed inventory of critical components to further reduce the risk of a single supplier |
| In addition, we contract the manufacture of various subassemblies more often than in the past |
| Further, some of our suppliers have specialized in supplying equipment or manufacturing services to semiconductor equipment manufacturers and therefore are susceptible to industry ups and downs and subject to the same risks and uncertainties regarding their ability to respond to changing market conditions |
| Because many of these suppliers reduce the size of their workforce in an industry downturn and increase it in an upturn, they may not be able to meet our requirements or respond quickly enough as an upturn begins and gains momentum |
| Due to the nature of our product development requirements, these key suppliers must rapidly advance their own technologies and production capabilities in order to support the introduction schedule of our new products |
| These suppliers may not be able to provide new modules and subassemblies when they are needed to satisfy our product schedule requirements |
| If we cannot purchase enough of these materials, components or subassemblies, or if these items do not meet our quality standards, there could be delays or reductions in our product shipments, which would have a material adverse effect on our operating results, financial condition and cash flows |
| We face competition from one company and may face competition from additional competitors who enter the market |
| We are currently aware of one significant competitor that sells light sources for DUV photolithography applications |
| This competitor, Gigaphoton, is a joint venture between two large companies, Komatsu and Ushio, and is headquartered in Japan |
| Additionally, late in 2004, a former competitor Coherent, Inc, a US company, announced that their Lambda-Physik subsidiary would no longer pursue the excimer light source systems business for photolithography in the semiconductor industry |
| We believe that Gigaphoton is aggressively trying to gain larger market penetration in the excimer light source industry |
| We know that our customers have purchased products from this competitor and that our customers have approved this competitor’s light sources for use with their products |
| We know that Gigaphoton has been approved by chipmakers in Japan, the US and elsewhere for producing excimer light sources |
| Larger companies with substantially greater resources, such as other manufacturers of industrial light sources for advanced lithography, may attempt to sell competitive products to our customers |
| Potential competitors may also be attracted to our growing installed base of light sources which represents a steady and significant consumable and spare parts revenue stream for us, and they may attempt to supply consumable and spare parts to that installed base |
| If any existing or future competitors gain market acceptance we could lose market share and our growth could slow or decline, which could have a material adverse effect on our operating results, financial condition and cash flows |
| We depend on key personnel, especially management and technical personnel, who may be difficult to attract and retain |
| We are highly dependent on the services of many key employees in various areas, including: • research and development; • engineering; • sales and marketing; 20 ______________________________________________________________________ • field service and support; • manufacturing; and • management |
| In particular, there are a limited number of experts in excimer light source technology, and we require highly skilled hardware and software engineers |
| Competition for qualified personnel is intense and we cannot guarantee that we will be able to continue to attract and retain qualified personnel as needed |
| We do not have employment agreements with most of our employees |
| We believe that our future growth and operating results will depend on: • the continued services of our research and development, engineering, sales and marketing, field service and support, manufacturing and management personnel; • our ability to attract, train and retain highly-skilled key personnel; and • the ability of our personnel and key employees to continue to expand, train and manage our employee base |
| If we are unable to hire, train and retain key personnel as required, our operating results, financial condition and cash flows could be adversely affected |
| Economic, political, regulatory and other events in geographic areas where we have significant sales or operations could interfere with our business |
| We serve an increasingly global market |
| A large portion of our total revenues is derived from customers located outside of the US, particularly in Asian countries |
| We expect our international sales to continue to account for a very large portion of our total revenues |
| In order to support our foreign customers, we maintain a manufacturing and field service subsidiary in Korea as well as field service and support subsidiaries in Japan, the Netherlands, the People’s Republic of China, Singapore and Taiwan |
| We may not be able to manage our operations to address and support our global customers effectively |
| Further, our investments in these types of activities may not make us competitive in the global market or we may not be able to meet the service, support, and manufacturing levels required by our global customers |
| 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, including changes in tariff and freight rates, foreign customs and duties; • difficulty in coordinating our management and operations in several different countries; • difficulties in staffing and managing foreign subsidiary and branch operations; • limited intellectual property protection in some countries; • potentially adverse tax consequences in some countries; • the possibility of accounts receivable collection difficulties; • in the case of Asia, the risk of business interruption and damage from earthquakes; • the effect of acts of terrorism and war; and • the burdens of complying with a variety of foreign laws |
| Many of our major customers and many of the chipmakers who use our light source products in their photolithography systems are located in Asia |
| Economic problems and currency fluctuations affecting these regions in Asia could create a larger risk for us |
| Further, even though it has not been difficult for us to comply with US export controls, these export rules could change in the future and make it more difficult or impossible for us to export our products to many countries |
| Any of these 21 ______________________________________________________________________ vulnerabilities could have a material adverse effect on our business, financial condition and results of operations |
| We may acquire a business or enter a new market that will involve numerous risks |
| We may not be able to address these risks successfully without substantial expense, delay or other operational and financial challenges |
| The risks involved with acquiring a new company, forming a joint venture, or entering a new market include the following: • diversion of management’s attention and resources to integrate the new company or new business opportunity; • failure to retain key personnel; • client dissatisfaction or performance problems with the acquired company or new product in a new market; • amortization of acquired definite-lived intangible assets and deferred compensation; • the cost associated with acquisitions and joint ventures and the integration of acquired operations; • the cost associated with developing, marketing, introducing and supporting a new product in a new market; • failure to commercialize purchased technologies; • ability of the acquired companies, joint ventures or new markets to meet their financial projections; • assumption of unknown liabilities or other unanticipated events or circumstances; and • compliance with the Sarbanes-Oxley Act of 2002, new SEC regulations, Nasdaq Stock Market rules and new accounting pronouncements as they relate to the new company or joint venture |
| Mergers, acquisitions and joint ventures as well as entering new markets are inherently subject to multiple significant risks, and the inability to effectively manage these risks could have a material adverse effect on our business |
| In July 2005, we formed a joint venture with Zeiss named TCZ GmbH, to produce tools for the manufacture of flat panel displays |
| This is a new market for both Cymer and Zeiss and may involve numerous risks |
| Any of these risks could materially harm our business, financial condition and operating results |
| Compliance with changing regulations of corporate governance and public disclosure may result in additional expenses |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, Nasdaq Stock Market rules, and new accounting pronouncements are creating uncertainty and additional complexities for companies such as ours |
| In particular, the Section 404 internal control requirements under the Sarbanes-Oxley Act have added and will continue to add complexity and costs to our business and require a significant investment of our time and resources to complete each year |
| We take these requirements seriously and expect to continue to make every effort to ensure that we receive clean attestations on our internal controls each year from our outside auditors |
| To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with all other evolving standards |
| These investments may result in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities |
| 22 ______________________________________________________________________ Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees, and changes in accounting for equity compensation could adversely affect earnings |
| We have historically used broad based stock option programs and other forms of equity-related incentives as a key component of our employee compensation packages |
| We believe that stock options and other long-term equity incentives directly motivate a broader base of employees to maximize long-term stockholder value and, through the use of long-term vesting, encourage employees to remain with us |
| In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards Nodtta 123R (“SFAS Nodtta 123R”), “Share-Based Payment – An Amendment to Statement Nos |
| 123 and 95,” which we have adopted as of January 1, 2006 |
| This new rule requires us to record an expense to earnings for employee stock option grants and other equity incentives |
| Moreover, applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans has made it more difficult and expensive for us to grant options to employees, which has resulted in changes to our equity compensation strategy, including a reduction in the number of stock options granted to employees |
| We have already developed alternative cash compensation arrangements for our employees to replace the majority of these stock option programs and may be required to offer additional alternative cash compensation arrangements in the future |
| These and other developments in the provision of equity compensation to employees could make it more difficult to attract, retain and motivate employees, and such a change in accounting rules and alternative cash compensation programs may adversely impact our future operating results, financial condition and cash flows |
| Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights |
| These types of claims could seriously harm our business or require us to incur significant costs |
| We believe our success and ability to compete depend in large part upon protecting our proprietary technology |
| We rely on a combination of patent, trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights |
| As of December 31, 2005, we owned 230 US patents covering certain aspects of technology related to light sources and piezo techniques |
| These patents will expire at various times during the period from January 2008 to October 2023 |
| As of December 31, 2005, we had applied for 110 additional patents in the US As of December 31, 2005, we owned 334 foreign patents and had 344 patent applications pending in various foreign countries |
| Our pending patent applications and any future applications might not be approved |
| Our patents might not provide us with a competitive advantage and may be challenged by third parties |
| In addition, third parties’ patents might have an adverse effect on our ability to do business |
| As a result of cost constraints, we did not begin seeking patent protection in Japan and other countries for our inventions that are covered by US patents and patent applications until 1993 |
| As a result we do not have the right to seek foreign patent protection for some of our early inventions |
| Additionally, laws of some foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the US Thus, the likelihood of piracy of our technology and products is greater in these countries |
| Further, third parties might independently develop similar products, duplicate our products, or design around patents that are granted to us |
| Other companies or persons may have filed or may file in the future patent applications that are similar or identical to ours |
| We may have to participate in appropriate proceedings in the courts or the patent offices to determine the priority of inventions |
| These proceedings may determine that these third-party patent applications have priority over our patent applications |
| Loss of priority in these interference proceedings could result in substantial cost to us |
| 23 ______________________________________________________________________ We also rely on the following to protect our confidential information and our other intellectual 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 and intellectual property, particularly our trade secrets, because third parties may: • independently develop substantially the same proprietary information and techniques; • gain access to our trade secrets; or • disclose our technology |
| The parties to whom we provide research and development services may dispute the ownership of the intellectual property that we develop performing these services |
| In the past, funds from research and development arrangements with third parties have been used to pay for a portion of our own research and development expenses |
| We receive these funds from government-sponsored programs and customers, in connection with our designing and developing specific products |
| Currently, funds from lithography tool manufacturers and chipmakers are used to fund a small portion of our research and development expenses |
| In providing these research and development services to these manufacturers, we try to make clear who owns the intellectual property that results from the research and development services we perform |
| However, disputes over the ownership or rights to use or market this intellectual property may arise between the funding organizations and us |
| Any dispute over ownership of the intellectual property we develop could restrict our ability to market our products and have a material adverse effect on our business |
| In the future, we may be subject to patent litigation to enforce patents issued to us and defend ourselves against claimed infringement by our competitor or any other third party |
| Third parties have notified us in the past, and may notify us in the future, that we are infringing their intellectual property rights |
| Also, we have notified third parties in the past, and may notify them in the future, that they may be infringing our intellectual property rights |
| Specifically, Komatsu has notified us that we may be infringing some of its Japanese patents |
| During our subsequent discussions, Komatsu also asserted that our former Japanese manufacturing partner, Seiko, or we may be infringing on some of Komatsu’s US patents and a number of its additional Japanese patents |
| Komatsu has also notified one of our customers, Nikon, of its belief that our light sources infringe several of Komatsu’s Japanese and US patents |
| As a result, we started proceedings in the Japanese Patent Office to oppose certain patents and patent applications of Komatsu |
| Thus, litigation may result in connection with Komatsu’s Japanese patents or US patents |
| Also, Komatsu might claim that we infringe other or additional patents |
| Komatsu notified Seiko that it intends to enforce its rights against Seiko with respect to its Japanese patents if Seiko continued to engage in manufacturing activities for us |
| In connection with our former manufacturing agreement with Seiko, we agree to pay Seiko under certain conditions for damages associated with these types of claims |
| Seiko may not prevail in any litigation against Komatsu, and therefore, we may be required to pay Seiko for such damages |
| We have notified our competitor and others of our US patent portfolio |
| Specifically, we have notified Komatsu that it may be infringing some of our US patents |
| We have discussed with Komatsu our claims against each other |
| Komatsu challenged one of our US patents in the USPTO but our patent was subsequently re-issued by the USPTO Also, Komatsu transferred its lithography light source business to our competitor, Gigaphoton |
| We also have had discussions with Lambda-Physik (a 24 ______________________________________________________________________ subsidiary of Coherent, Inc |
| ) regarding allegations by each party against the other for possible patent infringement |
| Any of these discussions with our competitor or former competitor may not be successful and litigation could result |
| In the future, patent litigation may result due to a claim of infringement by our competitor or any other third party or may be necessary to enforce patents issued to us |
| Any such litigation could result in substantial cost to us and diversion of our effort, which would have an adverse effect on our business, financial condition and operating results |
| Furthermore, our customers and the end-users of our products might assert other claims for indemnification that arise from infringement claims against them |
| If these assertions are successful, our business, financial condition and operating results may be materially affected |
| Instead of litigation, or as a result thereof, we may seek a license from third parties to use their intellectual property |
| Alternatively, we may design around the third party’s intellectual property rights or we may challenge these claims in legal proceedings |
| Any adverse determination in a legal proceeding could result in one or more of the following, any of which could harm our business, financial condition and operating results: • loss of our proprietary rights; • exposure to significant liabilities by other third parties; • requirement that we get a license from third parties on terms that are not favorable; or • restriction from manufacturing or selling our products |
| Any of these actions could be costly and would divert the efforts and attention of our management and technical personnel, which would materially adversely affect our business, financial condition and results of operations |
| Trademark infringement claims against our registered and unregistered trademarks would be expensive and we may have to stop using such trademarks and pay damages |
| We registered the trademarks ‘‘CYMER’’ and “INSIST ON CYMER” and others in the US and in some other countries |
| We are also trying to register additional trademarks in the US and in other countries |
| We use these trademarks and many other marks in our advertisements and other business materials, which are distributed throughout the world |
| We may be subject to trademark infringement actions for using these marks and other marks on a worldwide basis and this would be costly to defend |
| If a trademark infringement action were successful, we would have to stop using the mark and possibly pay damages |
| We are dependent on air transport to conduct our business and disruption of domestic and international air transport systems could adversely affect our business |
| We depend on regular and reliable air transportation on a worldwide basis for many of our routine business functions |
| If civil aviation in the US or abroad is disrupted by terrorist activities or security responses to the threat of terrorism or for any other reason, our business could be adversely affected in the following ways: • supplies of raw materials and components for the manufacture of our products or our customers’ products may be disrupted; • we may not be able to deliver our products to our customers in a timely manner; • we may not be able to provide timely service or support of installed light sources for chipmakers; and • our sales and marketing efforts may be disrupted |
| 25 ______________________________________________________________________ We are exposed to risks related to the fluctuations in the currency exchange rates for all foreign currencies in which we do business, but particularly for the Japanese yen |
| When we sell products to our Japanese subsidiary, the sale is denominated in US dollars |
| When our Japanese subsidiary sells our products directly to customers in Japan, the sale is denominated in Japanese yen |
| Thus, our results of operations may fluctuate based on the changing value of the Japanese yen to the US dollar |
| We manage the exposure of our Japanese subsidiary to these fluctuations through forward contracts to hedge the subsidiary’s purchase commitments |
| We will continue to monitor our exposure to these currency fluctuations, and, when appropriate, use hedging transactions to minimize the effect of these currency fluctuations |
| However, exchange rate fluctuations may still have a material adverse effect on our operating results |
| In the future, we may need to sell our products in foreign currencies other than the Japanese yen and the management of more currency fluctuations will be more difficult and expose us to greater risks in this area |
| We are subject to many standards and regulations of foreign governments and, even though we intend to comply, we may not always be in compliance with these rules, or we may be unable to design or redesign our products to comply with these rules |
| Many foreign government standards and regulations apply to our products |
| These standards and regulations are always being amended |
| Although we intend to meet all foreign standards and regulations, our products may not comply with these foreign government standards and regulations |
| Further, it might not be cost effective for us to redesign our products to comply with these foreign government standards and regulations |
| Our inability to design products to comply with foreign standards therefore could have a material adverse effect on our business |
| We are dependent on our manufacturing facilities and subcontractors to assemble and test our products |
| Operations at our primary manufacturing facility and our subcontractors are subject to disruption for a variety of reasons, including work stoppages, terrorism, fire, earthquake, energy shortages, flooding or other natural disasters |
| Such disruptions could cause delays in shipments of our products to our customers |
| We cannot ensure that alternate production capacity would be available if a major disruption were to occur or that, if it were available, it could be obtained on favorable terms |
| Such disruption could result in cancellation of orders or loss of customers, which would have a material adverse effect on our operating results, financial condition and cash flows |
| Our operations are subject to environmental and other government regulations that may expose us to liabilities for noncompliance |
| We are subject to federal, state and local regulations, such as regulations related to the environment, land use, public utility utilization and the fire code, in connection with the storage, handling, discharge and disposal of substances that we use in our manufacturing process and on our facilities |
| We believe that our activities comply with current government regulations that are applicable to our operations and current facilities |
| We may be required to purchase additional capital equipment or other requirements for our processes to comply with these government regulations in the future if they change |
| Further, these government regulations may restrict us from expanding our operations |
| Adopting measures to comply with changes in the government regulations, our failure to comply with environmental and land use regulations, or restrictions on our ability to discharge hazardous substances, could subject us to future liability or cause our manufacturing operations to be reduced or stopped |
| Our products are subject to potential product liability claims if personal injury or death results from their use |
| We are exposed to significant risks for product liability claims if personal injury or death results from the use of our products |
| We may experience material product liability losses in the future |
| We 26 ______________________________________________________________________ maintain insurance against product liability claims |
| However, our insurance coverage may not continue to be available on terms that we accept |
| This insurance coverage also may not adequately cover liabilities that we incur |
| A successful claim against us that exceeds our insurance coverage level, or any claim or product recall that results in adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations |
| The price of our common stock has fluctuated and may continue to fluctuate widely |
| The price of our common stock has fluctuated in the past |
| The market price of our common stock will continue to be subject to significant fluctuations in the future in response to a variety of factors, including the risk factors contained in this report |
| Various factors may significantly affect the market price of our common stock, including: • the cyclical nature of the semiconductor industry; • actual or anticipated fluctuations in our operating results; • conditions and trends in the light source device and other technology industries; • announcements of innovations in technology; • new products offered by us or our competitor; • developments of patents or proprietary rights; • changes in financial estimates by securities analysts; • general worldwide political, economic, and market conditions; • US political, economic, and market conditions; and • failure to properly manage any single or combination of risk factors listed in this section |
| In addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market price for many high technology companies |
| Such fluctuations have in some cases been unrelated to the operating performance of these companies |
| Severe price fluctuations in a company’s stock have frequently been followed by securities litigation |
| Any such litigation can result in substantial costs and a diversion of management’s attention and resources and therefore could have a material adverse effect on our business, financial condition and results of operations |