UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[x] Annual Report pursuant to Section[X] ANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities
Exchange Act ofOF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996 or1999
OR
[_] Transition report pursuantTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)________
Commission File No. 0-13470
NANOMETRICS INCORPORATED
(Exact name of registrantRegistrant as specified in its charter)
California 94-2276314
(State or other jurisdiction of (I.R.S.Employer(I.R.S. Employer
incorporation or organization) Identification No.)Number)
310 DeGuigne Drive
Sunnyvale, California 94086
(Address of principal executive offices and zip code)offices) (Zip Code)
Registrant's telephone number, including area code: (408) 746-1600
_________________________----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
Title of Class
Indicate by check mark whether the registrantRegistrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant'sthe registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 10, 1997: $14,795,550registrant, based upon the last salesclosing price of Common Stock on December 31,
2000, as reported for such date. For purposesby Nasdaq, was approximately $44,422,597. Shares of this disclosure, shares of commonvoting
stock held by officers, directorseach officer and director and by each person who owns 5% or persons who hold more than 5%
of the outstanding shares of commonvoting stock of the Registrant have been excluded in that such persons may be
deemed to be "affiliates" as that term is defined under the rules and
regulations promulgated underof the Securities Exchange Act of 1934, as amended. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The numberAs of December 31, 2000, 9,163,998 shares outstanding of the Registrant's common stock as
of March 11, 1996 was 8,262,192.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Shareholders of the
Company to be held May 15, 1997 which will be filed with the Securities and
Exchange Commission no later than 120 days after December 31, 1996.registrant's Common Stock
were outstanding.
================================================================================
NANOMETRICS INCORPORATED
ANNUAL REPORT - - FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
----
PartPART I
Item 1. Business............................................ I-1
Item 2. Properties.......................................... I-8
Item 3. Legal Proceedings................................... I-8
Item 4. Submission of Matters to a Vote of Security Holders. I-8
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters................................
Item 1. Business............................................................................... I-1
Item 2. Properties............................................................................. I-13
Item 3. Legal Proceedings...................................................................... I-13
Item 4. Submission of Matters to a Vote of Security Holders.................................... I-13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.................. II-1
Item 6. Selected Consolidated Financial Data................................................... II-1
Item 6. Selected Consolidated Financial Data................ II-2
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations.. II-3
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................. II-18
Item 8. Consolidated Financial Statements and Supplementary Data............................... II-19
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure... II-39
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... III-1
Item 11. Executive Compensation................................................................. III-3
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... III-9
Item 13. Certain Relationships and Related Transactions......................................... III-11
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K.......... IV-1
PART I
ITEM 1. BUSINESS
This Business section and other parts of this Annual Report on Form 10-K
contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements include information concerning our possible or
assumed future results of operations. Our actual results may differ materially
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
below and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations................ II-3
Item 8. Financial Statements and Supplementary Data......... II-9
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ II-24
Part III
Item 10. Directors and Executive OfficersOperations." The forward-looking statements contained herein are
made as of the Registrant.. III-1
Item 11. Executive Compensation.............................. III-1
Item 12. Security Ownershipdate hereof, and we assume no obligation to update such forward-
looking statements or to update reasons actual results could differ materially
from those anticipated in such forward-looking statements. When we use words
such as "believe," "expect," "anticipate" or similar expressions, we are making
forward-looking statements.
We are a leader in the design, manufacture, marketing and support of Certain Beneficial Ownersthin
film metrology systems for the semiconductor, flat panel display and Management..................................... III-1
Item 13. Certain Relationshipsmagnetic
recording head industries. Our systems precisely measure a wide range of film
types deposited on substrates during manufacturing in order to control
manufacturing processes and Related Transactions...... III-1
Part IV
Item 14. Exhibits, Financial Statement Schedules,increase production yields. Our non-contact, non-
destructive thin film measurement systems use a broad spectrum of wavelengths,
high-sensitivity optics, proprietary software and Reportspatented technology to
measure the thickness and uniformity of films deposited on Form 8-K........................................ IV-1
Signatures.......................................................... V-1
(ii)
PART I
ITEM 1. BUSINESS
--------
INTRODUCTION
- ------------
Nanometrics Incorporated ("Nanometrics" orsilicon and other
substrates as well as their chemical composition.
Growth in the "Company"), incorporated
in California in 1975, designs, manufactures, markets and services optical
microscope-based measurement and inspection stations. The primary market servedfor our products is driven by the Company is the semiconductor industry, which utilizes these instruments
to monitor processes employedincreasing use of
thin film technology by manufacturers of electronic products. Many types of
thin films are used in the fabricationmanufacture of integrated circuits on
wafers,numerous products, including
semiconductors, flat panel displays (FPDs) and magnetic recording heads (MRHs)as well as
integrated fiber optics, conventional and advanced optics, high density
optical and magnetic disks and lasers. These products require the precise
electronic, optical, magnetic and surface finish properties enabled by thin
film technology. The rapid growth in the sale and use of these products has
created significant demand for our metrology systems.
We offer a complete line of systems to address the thin film metrology
requirements of our customers. Each of our systems are equipped with
computerized mapping capability for measurement, visualization and control of
film uniformity. Our metrology systems can be categorized as follows:
. Nanometrics pioneered many developmentsstand-alone, fully automated systems for measurements of thin films in
measurementhigh-volume manufacturing operations;
. integrated systems for integration into semiconductor processing
equipment that provide virtually immediate measurements and inspectionfeedback to
improve process control and today
is a leading producer of automated instrumentsincrease throughput; and
. tabletop systems used to manually or semiautomatically measure thin films
in engineering and low-volume production environments.
In addition, we provide systems that are used to measure physical
dimensionsthe overlay
accuracy of circuit elements. Allsuccessive layers of semiconductor patterns on wafers in the
photolithography process. The accurate alignment of successive film layers,
relative to each other, across the wafer is critical for device performance
and favorable production yields.
We have been a pioneer in the field of thin film measurement and have been
instrumental in the development of many innovations for over two decades. We
have been selling metrology systems since 1977 and have an extensive installed
base with industry leading customers worldwide, including Applied Materials,
Hyundai, IBM, LG International, TSMC and WaferTech.
I-1
Industry Background
Growth
The semiconductor, flat panel display and magnetic recording head
industries have experienced significant growth over the past decade. This
trend is expected to continue due to rapid growth in Internet usage and
continuing demand for applications in data processing, wireless
communications, personal computers, handheld electronic devices, computer
games and other consumer electronics. Dataquest, an independent industry
research company, estimates that worldwide semiconductor sales will increase
to approximately $251 billion in 2002 from $136 billion in 1998, representing
a compound annual growth rate of 16.6%. To keep pace with the demand, capital
equipment spending by semiconductor manufacturers is estimated to reach
$75 billion in 2002 from $30 billion in 1998, representing a compound annual
growth rate of 25.7%. Similarly, according to Stanford Resources Inc., a
display market research firm, the flat panel display market is expected to
grow to $26 billion in 2004 from $14 billion in 1998, representing a compound
annual growth rate of 10.9%.
Semiconductor Manufacturing Process
Semiconductors are fabricated by a complex series of process steps on a
wafer substrate made of silicon or other material. Thin film metrology systems
are used at many points during the fabrication process to monitor and
precisely measure film thickness and uniformity as well as chemical properties
in order to maximize the yield of acceptable semiconductors. Each wafer
typically goes through a series of 100 to 500 process and metrology steps in
generally repetitive cycles.
[CHART APPEARS HERE]
[Graphical chart depicting the interaction of metrology systems with the four
primary wafer film processing steps used in semiconductor manufacturing:
deposition, CMP, photolithography and etch. A circular diagram is used to show
the movement of a bare wafer through each of the Company's products contain
proprietary computer softwarefour areas, beginning with
deposition and patented features.
Since 1977,proceeding through CMP, photolithography and etch,
respectively. Metrology systems are shown to be used both before and after
each step in this process.]
The four primary wafer film processing steps are:
. deposition;
. chemical mechanical planarization, known in our industry as CMP;
. photolithography; and
. etch.
Deposition. Deposition refers to placing layers of insulating or conductive
materials on a wafer surface in thin films that make up the majority of the Company's revenues have been from the
salecircuit elements
of semiconductor measurement systems utilizing optical instrumentation.
Newer versionsdevices. The four most common methods of Nanometrics' optical measurement systems utilize wide-range,
high sensitivity optics that allowdeposition are
chemical vapor deposition, or CVD, physical vapor deposition, or PVD,
diffusion and oxidation. The control of uniformity and thickness during
deposition of these films is critical to the totally automated measurement of most
films used in integrated circuits, FPDs and MRHs manufacturing today.
Nanometrics' business has experienced growth because more intensive
inspection is required as a resultperformance of the semiconductor
industry's rapid
transitioncircuit.
I-2
Chemical Mechanical Planarization. CMP flattens, or planarizes, the
topography of the film surface to smallerpermit the patterning of small features on
the resulting smooth surface by the photolithography process. The CMP process
is a combination of chemical etching and mechanical polishing and commonly
uses an abrasive liquid and polishing pad. Semiconductor manufacturers need
metrology systems to control the CMP process by measuring the thin film layer
to determine precisely when the appropriate thickness has been reached.
Photolithography. Photolithography is the process step that defines the
patterns of the circuits to be built on the chip. Before photolithography, a
wafer is pre-coated with photoresist, a light sensitive film, that must have
an accurate thickness and uniformity. Photolithography involves the projection
of integrated circuit patterns onto the photoresist after which it is
developed, leaving unexposed areas available for etching. In order to
precisely control the photolithography process, it is necessary to measure
reflectivity, film thickness and overlay registration.
Etch. Etch is the process of selectively removing precise areas of thin
films that have been deposited on the surface of a wafer. The hardened
photoresist protects material that needs to be left to make up the circuits.
During etch, certain areas of the film not covered by photoresist are removed
to leave a desired circuit pattern. Thin film metrology systems are required to
verify material removal and critical dimension conformity.
Before and after deposition, CMP, photolithography and etch, the wafer
surface is measured to determine the quality of the film or pattern and find
defects. Measurements are taken to ensure process uniformity and include
thickness, width, height, roughness and other characteristics. Process control
helps avoid costly rework or misprocessing and results in higher yields for
semiconductor manufacturers.
These processing steps are typically repeated multiple times during the
fabrication process, with alternating layers of insulating and conductive
films. Depending on the specific design of a given integrated circuit, a
variety of film types and thicknesses and a number of layers can be used to
achieve desired electronic performance characteristics. The semiconductors are
then tested, separated into individual circuits, assembled and packaged into an
integrated circuit.
Flat Panel Display and Magnetic Recording Head Manufacturing Processes
Flat panel displays and magnetic recording heads are manufactured in clean
rooms using thin film processes that are similar to those used in semiconductor
manufacturing. Most flat panel displays are constructed on large glass
substrates that range in size up to 650 by 830 millimeters. Multiple magnetic
recording heads are manufactured on substrates that are typically made of an
aluminum oxide-titanium carbide alloy, two to three millimeters thick and
approximately 150 millimeters across.
Increased Use of Thin Film Metrology Systems
Manufacturers of semiconductors, flat panel displays and magnetic recording
heads are experiencing several trends that are increasing the need for thin
film metrology systems including the following:
. Growing Use of Chemical Mechanical Planarization. Manufacturers are
adopting CMP to flatten, or planarize, thin films to obtain the ultra-
flat surfaces required for advanced photolithography. In addition, the
introduction of new interconnect techniques has increased the need for
CMP. Accordingly, semiconductor manufacturers are seeking metrology
systems that can help control the CMP process by measuring the thin film
layer to determine precisely when the appropriate thickness has been
achieved.
. Adoption of New Types of Thin Films. Manufacturers are adopting new
processes and technologies that increase the importance and utilization
of thin film metrology systems. To achieve greater semiconductor device
speed, manufacturers are utilizing copper and new insulating materials
that require enhanced metrology solutions for the manufacturing process.
I-3
. Increasing Complexity of Semiconductors. Semiconductors are becoming more
complex as they operate at faster speeds with smaller feature sizes,
employ larger dies that contain more transistors and utilize increasing
numbers of manufacturing process steps. The value of process wafers and
the cost of rework is significantly higher for these complex
semiconductors and therefore, manufacturers are seeking to use metrology
systems to increase production yields and limit the amount of rework.
. Need for Rapid Ramp of Production Efficiencies. Competitive forces on
semiconductor device manufacturers, such as price cutting and shorter
product life cycles, place pressure on the manufacturers to rapidly
achieve production efficiency. Semiconductor device manufacturers are
using metrology systems throughout the fab to ensure that manufacturing
processes scale rapidly, are accurate and can be repeated on a consistent
basis.
Drive Toward Integrated Metrology
For many years, semiconductor manufacturers have sought to improve fab
efficiency by choosing systems that integrate more than one process step into a
single tool. Integrated solutions increase productivity with higher throughput,
smaller overall footprint, reduced wafer handling and faster process
development. This trend began in the mid-1980s as leading manufacturers
introduced a "cluster process tool" architecture that combined multiple
processes in separate chambers around a central wafer handling platform. More
recently, CMP systems have begun to integrate cleaning technology into a single
system in order to achieve these benefits.
Today, the same focus on increased productivity is driving the adoption of
integrated circuits on larger substrates.
As devicesmetrology for many processes, such as CMP and CVD. Until recently,
semiconductor manufacturers had to physically transport wafers from a process
tool to a separate metrology system in order to make critical measurements such
as film thickness and uniformity. Manufacturers of process equipment are
increasingly seeking to offer their customers integrated metrology in their
tools to lower costs and improve overall fab efficiency. Such tools can have
become more dense and asone or two metrology chambers that are integrated onto a process system, which
utilize the common automation platform so that measurements can be taken
without removing the wafers from the tool. Integrated metrology provides
semiconductor manufacturers with several benefits, including a reduction in the
number of test wafers, increased overall process steps have
increased, the Company has responded with more efficientthroughput, faster detection
of process excursions and automatic operator-
free measurement systems. In October 1994,faults, reduced wafer handling, faster process
development and ultimately an improvement in overall equipment effectiveness.
Nanometrics Solution
We are a new Fully Automated Film Thickness
Measurement System, the NanoSpec 8000 was introduced to the market and began
shipping to customersleader in the second quarterdesign, manufacture, marketing and support of 1995. In December 1994, as a
result of R&D performed at its wholly-owned subsidiary in Japan,thin
film metrology systems for the Company
introduced another major Automated Film Thickness Measurement System, the
NanoSpec 5500, aimed at largesemiconductor, flat panel display manufacturing. Theseand magnetic
recording head industries. We offer a complete line of systems
have undergone continuous development since their introduction, to meet current
and future requirements of modern highly automated and high-throughput
fabrication facilities.
I-1
PRODUCTS
- --------
Nanometrics offers a range of products to address the
varying needsthin film metrology requirements of its customersour customers. Our metrology systems can be
categorized as follows:
. Stand-alone, fully automated systems used for measurements of thin films
in high-volume manufacturing operations. We offer a broad line of fully
automated thin film thickness measurement systems. These systems remove
the dependence on human operators by incorporating reliable wafer
handling robots and inspection. Current products
are as follows:
NANOSPEC/AFT FILM THICKNESS SYSTEMS.
- --------------------------------------
These optical microscope-based systems measure the dielectric film
thickness and chemical composition of film materials on integrated circuits,
selectively and non-destructively. They measure the spectrum of the optical
interference pattern in small areas of the die to determine the thickness and
optical constants of different transparent films at chosen sites. A wide range
of "thick" and "thin" films can be measured, including silicon dioxide, silicon
nitride, polysilicon and photoresist on silicon, gallium arsenide, glass, metal
and other substrates. Since its introduction in 1977, the NanoSpec/AFT has gone
through several model changes which have enhanced and improved performance based
on customer needs. With an installed base of over 4200 units, the NanoSpec/AFT
continues to be a leading product line of the Company.
Fast, Automated Measurement and Analysis Systems
------------------------------------------------
In October 1994, Nanometrics introduced a new Fully Automated Film
Thickness Measurement System, the NanoSpec 8000, which can be programmed to run
operator-free and is designed to meet the speed, measurement,
performance and reliability requirements that are essential for today's
semiconductor, flat panel display and magnetic recording head
manufacturing facilities. We believe we offer the only fully automated
thin film thickness measurement systems that synergistically combine
spectroscopic ellipsometry, spectroscopic reflectometry and Fourier
transform infrared reflectometry, known in the industry as FTIR. Each of
these measurement systems are non-contact and use non-destructive
techniques to analyze and measure films. This combination of technologies
enables our systems to determine the concentration of elements, or
dopants, within a film. This is of significant importance, as many new
films used today require continuous monitoring of dopant levels and
chemical composition. Our fully automated metrology product line also
includes systems that are used to measure the overlay registration
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process.
I-4
. Integrated systems used to measure in-process wafers automatically and
quickly without having to leave the enclosed wafer processing system. In
1998, we introduced our high-speed integrated metrology system. Our
integrated metrology systems are compact and monitor a multitude of small
test points on the wafer using sophisticated pattern recognition. Our
integrated systems can be attached to film deposition, CMP, CVD, etch and
other process tools to provide rapid monitoring of films on each wafer
immediately before or after processing. Integrated systems can offer
customers significantly increased operating efficiency and equipment
utilization, lower manufacturing costs and higher throughput. Similar to
our automated metrology systems, our integrated systems can be configured
to determine the concentration of dopants within a film. We believe we
are the only supplier of integrated metrology systems with this
capability. We are currently shipping integrated systems to Applied
Materials for installation on their CMP and CVD tools.
. Tabletop systems used to manually or semiautomatically measure thin films
in engineering and low-volume production environments. We pioneered and
believe we are the leading supplier of tabletop thin film thickness
measurement systems, which are essentialmainly used in low-volume production
environments and failure analysis and engineering labs. Our three
tabletop models have unique capabilities and several available
configurations, depending on wafer handling, range of films to high level factorybe
measured, uniformity mapping and other customer needs.
Each of our thin film thickness measurement systems are equipped with
computerized readout capability for measurement, visualization and control of
today'sfilm uniformity. In addition, we have developed new automated systems and
tabletop products for emerging technologies using larger substrates such as 300
millimeter wafers and larger flat panel displays. We believe that we are the
first company to ship fully automated thin film thickness measurement systems
for 300 millimeter wafers. We have also introduced new technology for the
precise thin film measurements that are dictated by sub 0.25 micron design
rules and have developed products with mini-environments that meet the latest
standards for clean, particle-free manufacturing.
Strategy
Our strategy is to offer and support, on a worldwide basis, technologically
advanced metrology systems that meet the changing manufacturing requirements of
the semiconductor, mega-fabsflat panel display and magnetic recording head production. Theindustries as
well as other industries that use metrology systems. Key elements of our
strategy include:
Continuing to Offer Advanced Integrated Metrology Systems. We were one
of the first suppliers to offer products that integrate process metrology
systems into wafer processing equipment. We are currently the only supplier
of integrated systems that combine spectroscopic reflectometry with FTIR,
thereby providing comprehensive analysis for thin film measurement. We
intend to continue our efforts to develop the integrated metrology market
to achieve and maintain competitive advantages. In September 1998, we
entered into an OEM agreement to supply metrology systems for Applied
Materials' Mirra Mesa(TM) CMP system. In addition, in July 1999, we
introduced a metrology system that is incorporated into Applied Materials'
Producer QA(TM) CVD system. We are pursuing other OEM arrangements and will
continue to investigate other integrated metrology technologies.
Maintaining Technology Leadership. We are committed to developing
advanced metrology systems that meet the requirements of advances in thin
film manufacturing technology. We have an extensive base of proprietary
technology and expertise in optics, software and systems integration. We
have supplemented our capabilities by establishing strategic relationships
to leverage our technical resources and strengthen our product offerings.
These include relationships with Kensington Laboratories, a manufacturer of
precision robotic systems, J.A. Woollam Company, believes that this system offers the lowest costa leading designer of
ownershipspectroscopic ellipsometer systems and Midac, a provider of any system
available today dueFTIR
technology. In December 1999, we acquired inspection and metrology
technology from Phase Metrics, a data storage equipment company, to its high throughput (greater than 100 wafers per hour),
small footprint in costly clean room space, robust constructionaugment
our technology portfolio.
I-5
Leveraging Existing Customer and competitive
price. It features fully automated operationIndustry Relationships. We expect to
continue to strengthen our existing customer relationships and foster
working partnerships by providing technologically superior systems and high
efficiency optics, which
allow fastlevels of customer support. Our strong industry relationships have allowed
close customer collaboration that facilitated our ability to introduce new
products and applications that met customer needs. We believe that our
large customer base will continue to be an important source of new product
development ideas. Our large customer base also provides us with the
opportunity for increased sales of additional metrology systems to our
customers without the extensive effort that might otherwise be required.
Providing Worldwide Distribution and Support. We believe that a direct
sales and support capability is essential for developing and maintaining close
customer relationships and for rapidly responding to changing customer
requirements. Because a majority of our sales come from outside the United
States, we are expanding our direct sales force in South Korea and Taiwan and
will continue to expand into additional territories as customer requirements
dictate. We use selected sales representatives and distributors in other
countries in Asia, Europe and the Middle East. We intend to continue
developing our distribution network by expanding our existing offices, opening
new offices and forming additional distribution relationships. We believe that
growing our international distribution network will enhance our competitive
position.
Providing a Broad Portfolio of Metrology Systems and Technology. We
offer a comprehensive family of metrology systems that accurately measure
thin films and overlay registration used in the manufacturing process. We
offer automated and integrated systems for high-volume manufacturing
applications and tabletop systems for engineering and small fab
applications. Our products can include a wide range of accessories as well
as special hardware and software configurations to meet customer needs. We
plan to continue enhancing our products and integrating additional features
and measurement in small spotsmodules that will strengthen and mappingbroaden our product line.
Addressing Multiple Markets. There are broad applications of most films usedour
technology beyond the semiconductor industry. We intend to continue
developing and marketing products to address metrology requirements in the
manufacture of integrated circuits. Reliable wafer handling roboticsflat panel displays, magnetic recording heads and stage
systems are also incorporatedany other
industries that might apply our technology in the NanoSpec 8000. These mechanisms use well-
accepted principles which typically show more than 10,000 hours mean time
between failure based on actual experience in field operation. The first
shipmentsfuture. We believe our
diversification through multiple industry applications of our technology
increases the NanoSpec 8000 were madetotal available market for our products and reduces, to an
extent, our exposure to the cyclicality of any particular market.
Products
We have been a pioneer in the second quarterfield of 1995, with
more than 30 units havingthin film metrology and have been
shipped throughinstrumental in the enddevelopment of 1996.
For some time, semiconductor fabricators have wantedmany innovations over the past 25 years. Our
thin film thickness measurement systems use microscope-based, non-contact
spectroscopic reflectometry. Some of our systems provide complementary
spectroscopic ellipsometry to monitormeasure the chemical composition of films which can determine the electronic performance of
finished micro-chip circuits. To achieve this capability, in early 1995
Nanometricsthickness and J.A. Woollam Company made an agreement to incorporate Woollam's
spectroscopic ellipsometer into the Model 8000. The Woollam ellipsometer adds
unique and powerful capabilities to the Model 8000, allowing both the
measurement and analysis of the chemical compositionoptical characteristics
of films on advanceda variety of substrates. In addition, we offer an optional FTIR
feature on some of our products to determine other film parameters, such as the
concentration of dopants within a film. We also manufacture a line of optical
overlay registration systems that are used to determine the alignment accuracy
of successive layers of semiconductor wafers. The integration of this important capability was completedpatterns on wafers in the
second quarter of 1996. The tool, designated the NanoSpec 8000XSE, was
shown for the first time in July 1996 at SEMICON/West, the world's largest
semiconductor equipment trade show.
I-2
Also, in early 1995, SEMATECH, a consortium of large U.S. semiconductor
manufacturers, selected Nanometrics to design and build a tool that could handle
and measure film thickness on 300mm wafers. The previous standard wafer sizes
ranged from 100mm to 200mm in diameter, was handled by the Model 8000. The
selection of Nanometrics is part of a project SEMATECH was launching to develop
tools for the eventual industry shift to the manufacture of ICs on 300mm
semiconductor wafers. These larger diameter wafers are designed to allow lower
production cost since many more chips per waferphotolithography process. Our products can be simultaneously
manufactured. In responsedivided into three groups:
automated systems, integrated systems and tabletop systems.
I-6
Technology
-----------------------------------------------------
Fourier
Maximum Transform Advanced
Substrate Spectroscopic Spectroscopic Infrared Dimensional
System Market Size (mm) Reflectometry Ellipsometry Reflectometry Metrology
--------- ---------------------------- --------- ------------- ------------- ------------- -----------
Automated
8000X Semiconductor, Magnetic Head 200 X X X
8300X Semiconductor 300 X X X
9200 Semiconductor 200 X X
5500/6500 Flat Panel Display 960 by 1100 X
7000/7200 Semiconductor 200 X
- ------------------------------------------------------------------------------------------------------------
Integrated
9000i Semiconductor 200 X X
9000b Semiconductor 300 X X
- ------------------------------------------------------------------------------------------------------------
Tabletop
3000 Semiconductor, Magnetic Head 200 X
6100/6150 Semiconductor 200 X
50-2c Semiconductor, Magnetic Head 200 X
Automated Systems
Our stand-alone, fully automated metrology systems are employed in high-
volume production environments. These systems incorporate automated material
handling interface options for integration into a variety of fab automation
environments, and implement multiple measurement technologies for a broad range
of substrate sizes. Our automated systems range in price from approximately
$200,000 to their selection, Nanometrics unveiled the$700,000 depending on substrate sizes, measurement technologies,
material handling interfaces and software options.
NanoSpec 83008000X
The NanoSpec 8000X stand-alone, automated thin film measurement system is
capable of handling wafers ranging in July 1995 at the SEMICON/West trade show.size from 75 to 200 millimeters in
diameter. The Model 83008000X is the semiconductor industry's first 300mmbasic system configuration, while the 8000XSE
includes a fully integrated spectroscopic ellipsometer for ultrathin and
multiple film thickness measuring system.stack measurement applications. In addition, an FTIR option can
be added to determine dielectric dopant concentrations. Other 8000X options
include a standard mechanical interface with mini-environment enclosures for
use in ultra-clean manufacturing facilities. The 8000X can also be configured
to handle the substrates that are used in the magnetic recording head industry.
NanoSpec 8300X
The NanoSpec 8300X stand-alone, automated thin film measurement system is
capable of handling both 200mm200 and 300mm (eight to twelve inch)300 millimeter diameter wafers. In addition,The 8300X is
the NanoSpec 8300 incorporates both abasic system configuration and can be equipped with the spectroscopic
ellipsometer and spectrophotometer, enablingFTIR options for expanded measurement applications. This
system can also include a mini-environment enclosure and wafer load ports
compatible with industry standards. These systems conform to the new industry
standards for 300 millimeter wafer handling automation. The 8300X received a
Photonics Circle of Excellence Award for innovation and achievement in photonic
technology.
NanoSpec 9200
The NanoSpec 9200 stand-alone, automated thin film measurement system is
capable of handling wafers of 150 and 200 millimeters in diameter. We developed
this system using technologies from the NanoSpec 9000 integrated film thickness
system to accuratelybe compact and to provide high wafer throughput.
I-7
NanoSpec 5500 and 6500
The NanoSpec 5500 and 6500 measure and analyze virtually any dielectric film used in semiconductor manufacture
today. The production version of the Model 8300, the NanoSpec 8300X was
completed in July, 1996 and introduced to the industry at SEMICON/West that same
month. The first production versions of the 8300 were shipped in the second
quarter 1996 and installed in customer facilities.
At the Semicon Japan trade show held in Tokyo in December 1994, the
Company introduced a new film thickness metrology system for flat panel
displays, the Model 5500. The flat panel display industry, including displays
for lap-top computers, is projected to grow rapidly. Flat panel displays utilize
transparent films which must be accurately measured. The Model 5500 was
developed by the Company's Japanese subsidiary, which has been working closely
with a number of Japanese flat panel display manufacturers over the last several
years. The Model 5500 is fully automated and accommodates substrates up to 650 x
550 mm. Virtually allmost optically transparent films used in
the manufacture of flat panel displays can be measured.displays. The first shipments of the Model 5500 took
place inis fully automated and
handles large glass substrates up to 550 by 650 millimeters. This model is also
capable of precisely measuring at any site on the first quarter of 1995substrate and 12 units have been shipped through the
end of 1996.
Table-Top Systems
-----------------
The company believes that it manufactures the widest range ofgenerating film
thickness systems of compact design to fit on a work table. In 1992, Nanometrics
introduced and began shipping two additions tomaps, which show uniformity across the NanoSpec/AFT family of Semi
Automatic Table-Top Film Thickness Measurement Systems, the Models 4000 and
4100. These tools utilize thepanel. The 6500 is an advanced IBM OS/2 /(TM)/ software platform and a
revolutionary high-sensitivity ultraviolet/visible light optical system, an
industry first. These products provide semiconductor manufacturers with the
ability to measure certain films and film properties important for fabrication
of the latest fast, very large scale integrated (VLSI) circuits. The Model 4150,
an enhanced
version of the Model 4100 introduced5500 with many proprietary software and hardware enhancements
and is capable of handling substrates up to 960 by 1100 millimeters.
Metra 7000 and 7200
In 1998, we completed an acquisition of the Metra product line from Optical
Specialties. The Metra is a stand-alone system used to measure the overlay
accuracy of successive layers of semiconductor patterns on wafers in the
middlephotolithography process. We shipped our first automated overlay registration
system, the Metra 7000, in June 1998. The recently introduced Metra 7200
provides enhanced measurement performance and higher wafer throughput.
Integrated Systems
Our integrated metrology systems are installed inside wafer processing
equipment to provide near real-time measurements for improving process control
and increasing throughput. Our integrated systems are available for wafer sizes
up to 300 millimeters and offer deep ultraviolet, commonly referred to as DUV,
FTIR measurement technologies, in addition to spectroscopic reflectometry.
Depending on features and technologies, our integrated metrology systems range
in price from approximately $90,000 to $295,000.
NanoSpec 9000i
The NanoSpec 9000i is an ultra-compact measurement system designed for
integration into semiconductor wafer processing equipment. The system can be
used in several wafer film process steps including metal deposition, CMP, CVD,
photolithography and etch. In its basic configuration, the 9000i is equipped
with visible wavelength spectroscopic reflectometry. In 1999, the 9000i
received a Photonics Circle of 1994, providesExcellence Award for innovation and achievement
in photonic technology.
NanoSpec 9000b
The NanoSpec 9000b is a 300 millimeter-based system that incorporates all
the features of the 9000i. This system is interchangeable with industry
conforming load ports for simplified mechanical integration.
Tabletop Systems
Our tabletop systems are used mainly in low-volume production environments
and in engineering labs where automated stagehandling and focusinghigh throughput are not
required. Our tabletop product line encompasses both manual and semiautomated
models and includes systems for hands-off uniformity maps.both film thickness and critical dimension
measurements. Our tabletop system prices range from approximately $50,000 to
$200,000 depending primarily on the degree of automation and software options.
NanoSpec 3000 and 6100/6150
The Model
4000NanoSpec tabletop systems provide a broad range of thin film measurement
solutions at a lower entry price point. The NanoSpec 3000 is a lower costbasic, manual
system that provides manual stage and focusing controls. In
1994,while the Company's Japanese subsidiary introduced two table-top systems, the
Models 5000 and 5100 specifically engineered to meet the needs of the Japanese
market. These systems are modified versions of the Models 4000 and 4150,
respectively. In June, 1996 Nanometrics Japan Ltd. introduced a new enhanced
table top system, the NanoSpec 6100. First shipments of this new product were
made in the last quarter 1996.6100/6150 models feature semiautomatic wafer handling or
staging.
I-8
NanoLine 50-2C
The lowest priced FT system manufactured by
Nanometrics Japan is the Model 3000 which was introduced in 1995. The Company
believes that it has a significant share of the semi-automatic film thickness
measurement market for table-top systems.
I-3
The Company offers unique capability because of its design of
programmable algorithms to the software platforms of its table top products.
This provides the semiconductor process engineer with the freedom and
flexibility to create custom measurement programs to characterize the unique
films and multi-layer film stacks which have become common design elements in
modern VLSI circuits. The programmable measurement algorithms also broaden the
instruments' markets by allowing the measurement of specialized films used in
the thin magnetic head and flat panel display equipment manufacturing
industries.
NANOLINE LINEWIDTH MEASURING SYSTEMS
------------------------------------
The Nanoline ModelNanoLine 50-2C is a table-top instrumenttabletop critical dimension, or linewidth,
measurement system primarily used for semi-automated measurement of linewidthsin low-volume production environments and
pattern overlay alignment on semiconductor wafers. Thisphotolithography mask making shops. The system is composed ofuses a high- magnification
optical system and scanning microdensitometer microscope subsystem, a CRT display and a computer.
The technology is well proven and is effective in measuring linewidths downcombined with proprietary software to
.8 microns on both wafers and photomasks. First Nanolines were introduced in
1979 and more than 1000 units have been shipped worldwide to semiconductor
fabrication facilities.
Backlog
- -------
As of December 31, 1996, the Company's backlog was approximately
$3,603,000, compared with approximately $6,211,000 at December 31, 1995. The
decrease from last year was primarily due to the timing of some large orders
that were not received until January 1997. The Company's backlog as of the
January 31, 1997 was $9,230,000. The majority of this backlog is expected to be
shipped in 1997. Historically, order cancellations and order rescheduling have
not been significant. However, there can be no assurance that orders presently
in backlog will not be cancelled or rescheduled.
Marketing andprovide accurate, repeatable dimensions.
Customers
- -----------------------
Nanometrics sells its semiconductor equipment productsWe sell our thin film metrology systems worldwide to many of the major
integrated circuit,semiconductor, flat panel display and magnetic recording head manufacturers including those which manufacture components for use in their own
products. Limited sales are also made to manufacturersand
equipment suppliers, as well as producers of semiconductor
equipmentsilicon wafers and photomasks. No singleThe
majority of our systems are sold to customers located in the United States,
Asia and Europe. One customer, IBM, represented 10% or more11.2% of the
Company'sour total net revenues
in 1996.1998 and Applied Materials and TSMC represented 12.8% and 10.5% of our total
net revenues in 1999, respectively.
The following is a list of our top customers, based on revenues, during
1999:
Applied Materials Intertrade Scientific
CHI-MEI Sony
Hyundai Taiwan Semiconductor Manufacturing
Co. (TSMC)
IBM Texas Instruments
Innotech WaferTech
Sales to one customer represented
approximately 10% of total revenue in 1995 and 11% of total revenue in 1994.
The Company sells its products by means ofMarketing
We believe that a direct sales and through
independentsupport capability is essential for
developing and maintaining close customer relationships and for rapidly
responding to changing customer requirements. We provide direct sales representatives whose territories coversupport
from our corporate office in California. In addition, we have a direct sales
presence in Oregon and Texas in the United States as well as Scotland, South
Korea, Taiwan and Canada. The majority of the Company's domesticJapan. We use selected sales representatives have soldand distributors
in other countries in Asia, Europe and the Company'sMiddle East. We intend to continue
to develop our distribution network by expanding our existing offices and
opening new offices and forming additional distribution relationships. We
believe that growing our international distribution network will enhance our
competitive position. We maintain a direct sales force of highly trained,
technically sophisticated sales engineers who are knowledgeable in the use of
metrology systems in general and the features and advantages of our products for at least five years.
Exportin
particular. We believe that our sales which exclude sales by the Company'sand application engineers are skilled in
working with customers to solve complex measurement and process problems.
Sales to customers in foreign subsidiary in
Japan,countries constituted approximately 21%, 25%61.8% and
30%60.9% of total net revenues for 1996,
19951998 and 1994,1999, respectively. The Company's products are sold and distributed in
Japan by its wholly-owned subsidiary, Nanometrics Japan, Ltd. The Company's
products are sold in Europe to Intertrade Scientific ("ITS") an independent
dealer organization, which has offices in the United Kingdom, France, Germany
and Italy, which functions as a distributor and buys the Company's products for
resale to its customers. Direct
I-4
exports of
the Company's semiconductor equipmentour metrology systems to foreign customers and shipments to its subsidiaryour subsidiaries
require general export licenses. See Note 10note 12 of Notesthe notes to Consolidated Financial Statementsconsolidated
financial statements for information regarding total net revenues operating income (loss) and identifiablelong-
lived assets of the Company'sour foreign operations.
See "Management's DiscussionIn order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, publish technical articles,
conduct marketing programs, issue press releases regarding new products, work
with a public relations firm and Analysis of Financial
Condition and Results of Operations-Factors that May Affect Future Operating
Results-International Operations."
The Company believes that the market for its products is well-defined,
and most sales are made to established customers. Marketing activities include
participationparticipate in numerous domestic and foreignindustry trade shows advertisingand
conferences.
Technology
We believe that our engineering expertise, technology acquisitions, supplier
alliances and short-cycle production strategies enable us to develop and offer
advanced solutions that address industry trends. By offering common metrology
platforms that can be configured with a variety of measurement technologies,
our customers can specify high performance systems not offered by other
suppliers or, as a cost saving measure, they can narrowly configure a system
for a specific application.
I-9
Spectroscopic Reflectometry. We pioneered the use of micro-spot
spectroscopic reflectometry for semiconductor film metrology in trade
magazinesthe late 1970s.
Spectroscopic reflectometry uses multiple wavelengths (colors) of light to
obtain an array of data for analysis of film thickness and periodicother film
parameters. Today's semiconductor manufacturers still depend on spectroscopic
reflectometry for most film metrology applications. Reflectometry is the
measurement of reflected light. For film metrology, a wavelength spectrum in
the visible region is commonly used. Light reflected from the surfaces of the
film and the substrate is analyzed using computers and measurement algorithms.
The analysis yields thickness information and other parameters without
contacting or destroying the film.
In the mid-1980s, we introduced a DUV reflectometer for material analysis.
In 1991, we were awarded a patent for the determination of absolute reflectance
in the ultraviolet region. This technology provides enhanced measurement
performance for thinner films and films stacked on top of one another.
Spectroscopic Ellipsometry. Like reflectometry, ellipsometry is a non-
contact and non-destructive technique used to analyze and measure films. An
ellipsometer analyzes the change in a polarized beam of light after reflection
from a film's surface and interface. Our systems are spectroscopic providing
ellipsometric data at many different wavelengths. Spectroscopic ellipsometry
provides a wealth of information about a film, yielding very accurate and
reliable measurements. In general, ellipsometers are used for thin films and
complex film stacks, whereas reflectometers are used for thicker films and
stacks.
FTIR Reflectometry. FTIR is another non-contact analytical technique used to
collect information about a film. FTIR operates in the infrared region of the
electromagnetic spectrum, which is invisible to the human eye. Our proprietary,
compact FTIR design collects a wide spectrum of infrared radiation reflected
from the film and then separates this radiation into wavelength data using
mathematical algorithms, referred to as Fourier transforms. The infrared
spectrum is useful for determining the dopants in a film. FTIR is of significant
importance to the semiconductor industry, as many new films used today require
careful monitoring of dopant levels. In addition, FTIR can be used to measure
very thick films and films that cannot be analyzed within the range of visible
or DUV reflectometry and ellipsometry.
Combined Film Analysis. By combining all three film analysis techniques
(reflectometry, ellipsometry and FTIR) onto one platform, our film metrology
systems offer a comprehensive analysis for film metrology applications.
Competitive systems generally measure only thickness and optical characteristic
of a film. Our systems measure thickness, optical characteristics and the
concentration of dopants. Beyond the performance advantage, our combined
systems require less cleanroom space and provide lower cost of ownership.
Surface Analysis. We have a variety of proprietary, non-contact and non-
destructive technologies that are used to inspect the surfaces of films and
substrates. These technologies locate and analyze abnormalities found on the
surfaces and can be adapted to metrology platforms.
Overlay Registration. Overlay registration refers to the relative alignment
of two layers in the thin film photolithographic process. Our microscope-based,
measurement technology utilizes a high magnification, low distortion imaging
system combined with proprietary software algorithms to numerically quantify
the alignment.
I-10
Customer Service and Support
We believe that customer service and technical support are important
competitive factors and are essential to building and maintaining close, long-
term relationships with our customers. We provide support to our customers with
telephonic technical support access, direct mailings.
Service
- -------
Nanometrics providestraining programs and operating
manuals and other technical support information. We use our demonstration
equipment for training programs in addition to sales and marketing. We provide
warranty and post-warranty service from itsour corporate office in California. The CompanyWe
also hashave service operations based in Arizona, Massachusetts, TexasOregon,
Pennsylvania, Idaho and Pennsylvania. In Europe, localTexas. Local service and spare parts are provided in
the United Kingdom by ITS.our sales office in Scotland and in the rest of Europe by
distributors and sales representatives. In the Far East,Asia, service is provided by direct
offices in Japan, by Nanometrics Japan, Ltd., in Korea by Nanometrics Korea Ltd. and the Company'sTaiwan. Our distributors and representatives
provide service in other countries. In
addition,countries in 1996, the Company openedAsia.
We provide a sales and service office in Taiwan to
provide stronger support to a growing customer base in that country.
Nanometrics provides a one yearone-year warranty on parts and labor for products sold
domestically and in foreign markets. Revenues from post-warranty services
(Service Revenue),Service revenue, including sales of
replacement parts, represented approximately 19%, 20%10.7% and 29%11.7% of 1996, 1995 and 1994 total consolidated net
revenues in 1998 and 1999, respectively.
Backlog
As of December 31, 1999, our backlog was approximately $13.4 million,
compared with approximately $1.0 million at December 31, 1998. Backlog includes
orders for products that we expect to ship within 12 months. Orders from our
customers are subject to cancellation or delay by the customer without penalty.
Historically, order cancellations and order rescheduling have not been
significant. However, orders presently in backlog could be canceled or
rescheduled. Since only a portion of our revenues for any fiscal quarter
represent systems in backlog, we do not believe that backlog is a meaningful or
accurate indication of our future revenues and performance.
Competition
- -----------
CompetitionThe market for our metrology systems is intensely competitive and
characterized by rapidly evolving technology. We compete on a global basis with
both larger and smaller companies in the markets for the Company'sUnited States, Japan, Israel and
Europe. We compete primarily with: stand-alone thin film thickness measurement products
from KLA-Tencor Corporation, Therma-Wave, Inc., Rudolph Technologies and inspection systems is strong as domesticDai
Nippon Screen; integrated thin film measurement products from Nova Measuring
Instruments Ltd. and foreign manufacturers continue
to introduce competitiveOnline Technologies; and overlay measurement products including automated film thickness
measurementfrom
KLA-Tencor Corporation, Bio-Rad Laboratories Inc. and inspection systems. The Company is a leading supplier of
spectrophotometric film thickness measurement systems to the semiconductor
industry; however, its measurement and inspection systems face intense
competitive pressure from numerous manufacturers.Schlumberger Ltd. Many of
the Company'sour competitors have strongsubstantially greater financial, engineering, manufacturing
and marketing resources broad product lines, large customer
service organizations and large established customer bases.
Nanometrics believes that the principalthan we do. Significant competitive factors in its
markets are the technical capabilities and characteristics of systems offeredinclude:
measurement technology, system performance (including automation and software
capability), proven productease of use, reliability, qualityestablished customer bases, cost of
service, name recognition,ownership, price and price. The Company believesglobal customer service. We believe that it
competeswe compete
favorably with respect to these factors, but continueswe must continue to develop and
design new and improved products in order to remain competitive. During 1996,
the Company invested $2.8 million in research and development or approximately
9% of total consolidated net revenues.
The Company conducts some manufacturing of itsmaintain our competitive position.
Manufacturing
We manufacture our products in the United States, Japan where
modifications are required to better serve the needs of the local Japanese
markets and to address intense competition for sales.
I-5
Manufacturing
- -------------
The Company's manufacturing activities consist of assemblingKorea. We
combine proprietary measurement components and testingsoftware produced in our
facilities with components and subassemblies obtained from outside suppliers.
Accordingly, the
Company's manufacturing operations are not capital equipment intensive, but
reflect the Company's reliance on systemsCertain of our products include system engineering and software development.
Somedevelopment to
meet specific customer requirements. Our manufacturing operations do not
require a major investment in capital equipment.
Certain components, subassemblies and services necessary for the manufacture
of our systems are obtained from a sole supplier or limited group of suppliers.
We do not maintain any long-term supply agreements with any of our suppliers.
We are relying increasingly on outside vendors to manufacture many components
and subassembliessubassemblies. We have entered into agreements with J.A. Woollam Company
for the purchase of the Company's principal products
are technically advancedspectroscopic ellipsometer components and available from only one or two suppliers, which in
some cases are not U.S. companies. As a partial safeguard against interruption
or terminationMidac
Corporation for the purchase of supplies, the Company attempts to maintain its inventory of
such items in quantities estimated to be sufficient to permit time for product
redesign, if necessary. However, the Company could be adversely affected if a
soleFTIR spectrometer components. Additionally, we
use Kensington Laboratories as our primary source of supply was terminated and product redesign could not be completed
in the time estimated or involved other unanticipated problems.
The Company has manufacturing operations in Japan through its Japanese
subsidiary. The Company currently ships product kits to its Japanese
subsidiary, which are then assembled, tested and shipped to customers.robotics components.
I-11
Research and Development
- ------------------------
The Company's currentOur research and development efforts areis directed towardtowards enhancing existing products
and developing and introducing new products to achievemaintain technological
leadership and to appealmeet current and evolving customer needs. Our process,
engineering, marketing, operations and management personnel have developed
close collaborative relationships with many of our customers' counterparts and
have used these relationships to a wider range of customers.
The Company isidentify market demands and target our
research and development to meet those demands. We are working to develop
potential applications of new and emerging technologies, including improved
methods of measurement. These efforts are
conductedmetrology methods. We conduct research and development at itsour facilities in
California, Korea and Japan. We have extensive proprietary technology and
expertise in such areas as spectroscopic reflectometry using our patented
absolute reflectivity, robust pattern recognition and complex measurement
software algorithms. We also at its Japanese subsidiary.have extensive experience in systems integration
engineering required to design compact, highly automated systems for advanced
clean room environments. Expenditures for research and development during 1996, 19951998
and 19941999 were $2.8
million, $2.6$4.2 million and $2.4$4.7 million, and represented 9%, 12%12.7% and 18%12.8% of
total
consolidated net revenues, respectively.
Patents and Trademarks
- ----------------------
NanometricsIntellectual Property
Our success depends in large part on the technical innovation of our
products. We actively pursuespursue a program of filing patent applications to seek
protection of technologically sensitive features of its products. The
Company holds numerousour metrology systems. We
hold a number of United States patents and additional patents in Japan and
Europe. Additionally, the Company haswith several patent applications pending in the
United States and abroad which cover various features of its optical systems.patents. The United
States patents, issued during the period 19801983 to 1996,1999, will expire from 19972000 to
2013.2018. While we attempt to protect our intellectual property rights through
patents and non-disclosure agreements, we believe that our success will depend
to a greater degree upon innovation, technological expertise and our ability to
adapt our products to new technology. We may not be able to protect our
technology, and competitors may be able to develop similar technology
independently. In addition, the laws of certain foreign countries may not
protect our intellectual property to the same extent as do the laws of the
United States.
From time to time we have received communications from third parties
asserting that our metrology systems infringe, or may infringe, the proprietary
rights of these third parties. We are presently discussing patent issues with
Therma-Wave, Inc. We believe that Therma-Wave's Opti-Probe product line may
infringe on a patent issued to us relating to absolute reflectance measurement.
Therma-Wave alleges that some of our thin film thickness measurement products
may infringe on a Therma-Wave patent relating to the combination of a
spectroscopic reflectometer with a spectroscopic ellipsometer. Although we
believe that none of our products infringe on a valid Therma-Wave patent, if
this matter is resolved against us, our business could be harmed. Additionally,
some customers of ours have received notices from The Lemelson Medical,
Education & Research Foundation alleging that equipment used in the manufacture
of semiconductor products infringes their patents. A number of these customers
have notified us that they are seeking indemnification from us for any damages
and expenses resulting from this matter. Certain of our customers have engaged
in litigation with the late Mr. Lemelson involving a number of his patents and
some of these cases have been settled. Although the ultimate outcome of these
matters is not presently determinable, the resolution of all such pending
matters could harm our business. These claims of infringement may lead to
protracted and costly litigation that could require us to pay substantial
damages or have the sale of our products or systems stopped by an injunction.
Infringement claims could also cause product or system delays or require us to
redesign our products or systems, and these delays could result in the loss of
substantial revenues. We may also be required to obtain a license from the third
party or cease activities utilizing the third party's proprietary rights. We may
not be able to enter into such a license or such license may not be available on
commercially reasonable terms. The loss of an infringement action or the
inability to license a third party's intellectual property could therefore
prevent our ability to sell our systems, or require us to redesign our products,
making the sale of such systems more expensive for us. We may be required to
initiate litigation in order to enforce any patents issued to or licensed by us,
or to determine the scope or validity of the Company's patents has not been adjudicated by any
court. Competitors may bring legal challengesa third party's patent or other
proprietary rights. Any such litigation, regardless of outcome, could be
expensive and time consuming, and could subject us to the validity of onesignificant liabilities or
more of
these patents,require us to re-engineer our product or attempt to circumvent the patents. While the Company does not
anticipate any challenges to the validity of its patents, there can be no
assurance that either of such activities by competitors will not be successful.
The Company has licensed some of its technology to other manufacturers in the
past. Although the Company believes that its patents are valuable, the Company
also depends on its trade secrets and the innovative skills of its technical
personnel to maintain its competitive position.
I-6
Executive Officers of the Registrant
- ------------------------------------
The executive officers of the Company are as follows:
Name Age Position with the Company
---- --- -------------------------
Vincent J. Coates 72 Chairman of the Board, Chief Executive
Officer, Secretary
John Heaton 37 Director, President and Chief Operating Officer
Paul B. Nolan 42 Vice President and Chief Financial Officer
Mr. Vincent Coates has been Chairman of the Board since the Company was
founded. He served as Presidentobtain expensive licenses from the founding through July 1988 except for
the period January 1986 through February 1987 when he served exclusively as
Chief Executive Officer. He is currently the Chief Executive Officer of the
Company and was elected Secretary in February 1989.
Mr. Heaton joined the Company in September 1990 and in March 1994 he was
elected Vice President. In July 1995 he was appointed to the Board of Directors.
In 1996 he was elected President and Chief Operating Officer. Mr. Heaton served
as Equipment Engineer at National Semiconductor prior to joining the Company.
Mr. Nolan joined the Company in March 1989 and in March 1994 he was
elected Vice President and Chief Financial Officer. Mr. Nolan served as Senior
Financial Analyst at Harris Corporation prior to joining the Company.
Mr. Vincent Coates is the father of Mr. Norman Coates, a director of the
Company. There are no other family relationships among any of the executive
officers and directors of the Company. All directors hold office until the next
annual meeting of shareholders of the Company and until their successors have
been elected and qualified. Officers are elected by and serve at the discretion
of the Board of Directors.third
parties.
I-12
Employees
- ---------
At December 31, 1996, the Company1999, we employed 134approximately 191 persons worldwide,
on a
full-time basis, including 3052 in research and development, 2938 in manufacturing and manufacturing
support, 6177 in marketing, sales and field service and 1424 in general
administration and finance. None of these employees is represented by a union
and the Company haswe have never experienced a work stoppage as a result of union actions.
Many of the Company'sour employees have specialized skills of value to the
Company. Nanometrics'us. Our future
success will depend in large part upon itsour ability to attract and retain highly
skilled scientific, technical, managerial, financial and marketing personnel,
who are in great demand in the industry. Nanometrics
considers itsWe consider our employee relations to
be good.
I-7
ITEM 2. PROPERTIES
----------
The Company'sOur principal manufacturing and administrative facility is located in
Sunnyvale, California in a leased building with approximately 35,000 square
feet. The lease on this building began in May 1992 and expiresis scheduled to expire
in April 1997. See Note 7 of Notes to Consolidated Financial Statements. During 1995, the
Company's Japanese subsidiary2002. We also leased somehave sales and service facilities.offices in Texas, Korea and
Taiwan. Rent expensesexpense for the Company'sour facilities was approximately $483,000 in 1996.
The Company owns$867,000 for 1999.
Through our Japanese subsidiary, we own a 15,000 square foot facility nearin
Narita, International
Airport in Japan. This facility is utilized by the Company'sour Japanese subsidiary for sales,
service, engineering and manufacturing. Our Japanese subsidiary also leases
three sales and service offices.
In September 1998, our Korean subsidiary entered into a two-year agreement
for manufacturing processes which are specific
to the Japanese market.facilities that provides for payments based on a percentage
of net product sales.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Some customers using certain products of the Company have received
notices of infringement from Technivision Corporation/Jerome Lemelson alleging
that equipment used in the manufacture of semiconductor products infringes his
patents. Certain of these customers have notified the Company that they may seek
indemnification from the Company for any damages and expenses resulting from
this matter. Certain of the Company's customersThere are engagedno material legal proceedings pending against us. We could become
involved in litigation with
Mr. Lemelson involving a numberfrom time to time relating to claims arising out of his patents, and are challenging the validityour
ordinary course of these patents and whether these patents are infringed. Recently, a U.S.
District Court Magistrate in Reno, Nevada recommended that a patent lawsuit
filed by Mr. Lemelson be dismissed. Following that, a District Judge in Las
Vegas, Nevada adopted a recommendation by the Magistrate that a summary judgment
sought by the defendant in this lawsuit be granted. Mr. Lemelson filed motions
seeking reconsideration of the defendant's motion. The District Judge heard
arguments on this matter and took Mr. Lemelson's motion under advisement.
Although the ultimate outcome of these matters is not presently determinable,
management believes that the resolution of all such pending matters will not
have a material adverse affect on the Company's financial position or results of
operations although there can be no assurance of such.business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
I-81999.
I-13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND ---------------------------------------------
RELATED SHAREHOLDER MATTERS
---------------------------
The Company's Common Stock had been traded on The Nasdaq National Stock
Market under the symbol "NANO" since the Company's initial public offering in
1984, until February 24, 1995 when the Nasdaq Stock Market Inc. began listing
the Company's Common Stock on the Nasdaq SmallCap Market using the symbol
"NANOC" under a temporary exception which required that the Company maintain a
minimum market value of $1 million on its public float. On August 9, 1995 the
Company'sOur common stock began trading againis quoted on the Nasdaq National Stock Market under the symbol
"NANO". The following table sets forth, for the periods indicated, the range of high and
low sale prices per share of our common stock as reported on the Nasdaq
National Market. December 27These quotations represent prices between dealers and December 29 weredo not
include retail markups, markdowns or commissions and may not necessarily
represent actual transactions.
High Low
------ ------
1998
First Quarter.................................................. $10.75 $ 7.81
Second Quarter................................................. $10.13 $ 7.85
Third Quarter.................................................. $ 9.25 $ 3.78
Fourth Quarter................................................. $ 8.88 $ 4.31
1999
First Quarter.................................................. $ 9.88 $ 5.38
Second Quarter................................................. $ 9.63 $ 5.50
Third Quarter.................................................. $10.75 $ 6.50
Fourth Quarter................................................. $24.38 $ 8.88
On February 28, 2000, the last trading days of the
1996 and 1995 fiscal years.
Year ended December 31, 1996 1995
- ----------------------- ---- ----
High Low High Low
First Quarter $8.63 $5.25 $ 2.19 $0.44
Second Quarter 7.19 4.88 6.50 1.44
Third Quarter 6.00 4.00 10.50 5.00
Fourth Quarter 6.13 4.19 9.25 4.25
As of March 11, 1997, there were approximately 144 shareholders of
record and approximately 2,000 beneficial shareholders. The lastreported sale price reportedof our common stock on
the Nasdaq National Market on February 12, 1997 was $6.88$36.50 per share. The Company hasAs of December 31, 1999, there
were approximately 120 shareholders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends. It is the present policy of
the Company's Board of Directorsdividends on our capital stock. We
currently expect to retain future earnings, to financeif any, for the use in the
operation and expansion of the
Company's operations,our business and the Company doesdo not expect to payanticipate paying any cash
dividends in the foreseeable future.
II-1
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included elsewhere in this Annual Report on Form 10-K. The consolidated
statement of operations data set forth below for the fiscal years ended December
31, 1997, 1998 and 1999, and the consolidated balance sheet data as of December
31, 1998 and 1999, have been derived from our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K, and have been audited by
Deloitte & Touche LLP, independent auditors. The consolidated statement of
operations data set forth below for the fiscal years ended December 31, 1995 and
1996, and the consolidated balance sheet data as of December 31, 1995, 1996 and
1997, have been derived from our consolidated financial statements not included
in this Annual Report on Form 10-K, and have been audited by Deloitte & Touche
LLP, independent auditors. The historical results are not necessarily indicative
of results to be expected for any future period.
II-1
The following table summarize certain selected consolidated financial
data. See Consolidated Financial Statements included herein.Years Ended December 31,
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(In thousands, except per share data)
Years Ended December 31,
- -----------------------------------------------------------------------------------------Consolidated Statement of
1996 1995 1994 1993 1992
- ------------ ---- ---- ---- ---- ----
Operations Data ( In thousands, except per share data)
- ---------------Data:
Net revenues:
Product sales.................... $18,117 $24,603 $32,767 $29,718 $32,162
Service.......................... 4,642 5,733 3,890 3,546 4,246
------- ------- ------- ------- -------
Total net revenues $30,336 $22,759 $13,579 $16,570 $15,213
======= ======= ======= ======= =======
Gross margin $16,139 $11,164 $ 5,589 $ 7,768 $ 6,479
======= ======= ======= ======= =======
Operating income(loss) $revenues............. 22,759 30,336 36,657 33,264 36,408
------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales............ 8,189 10,109 12,092 13,002 14,606
Cost of service.................. 3,406 4,088 3,632 3,669 4,560
Research and development......... 2,631 2,754 2,986 4,206 4,658
Acquired in-process research and
development..................... -- -- -- 1,421 --
Selling.......................... 3,712 4,696 6,050 5,728 5,871
General and administrative....... 2,180 2,476 2,765 2,828 2,973
------- ------- ------- ------- -------
Total costs and expenses....... 20,118 24,123 27,525 30,854 32,668
------- ------- ------- ------- -------
Income from operations............ 2,641 6,213 $ 2,641 $(2,231) $ 216 $ (838)
======= ======= ======= ======= =======9,132 2,410 3,740
------- ------- ------- ------- -------
Other income (expense):
Interest income.................. 302 390 535 572 662
Interest expense................. (152) (92) (110) (108) (180)
Other, net....................... 674 146 (175) 64 94
------- ------- ------- ------- -------
Total other income, net........ 824 444 250 528 576
------- ------- ------- ------- -------
Income (loss) before cumulative effect of
accounting change $ 3,993 $ 4,277 $(2,074) $ 555 $ (416)
Cumulative effect of
accounting change (1) - - - (200) -income taxes........ 3,465 6,657 9,382 2,938 4,316
Provision (benefit) for income
taxes............................ (812) 2,664 3,625 1,108 1,682
------- ------- ------- ------- -------
Net income (loss)income........................ $ 4,277 $ 3,993 $ 4,277 $(2,074)5,757 $ 3551,830 $ (416)2,634
======= ======= ======= ======= =======
Income (loss)Net income per common and
equivalent share:
Income (loss) before
cumulative effect of
accounting changeBasic............................ $ .470.56 $ .520.50 $ (.28)0.69 $ .080.21 $ (.06)
Cumulative effect of
accounting change - - - (.03) -0.30
======= ======= ======= ======= =======
Diluted.......................... $ 0.52 $ 0.47 $ 0.65 $ 0.20 $ 0.28
======= ======= ======= ======= =======
Shares used in per share
computation:
Basic............................ 7,604 8,047 8,325 8,635 8,829
======= ======= ======= ======= =======
Diluted.......................... 8,280 8,524 8,820 9,041 9,393
======= ======= ======= ======= =======
December 31,
---------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
Net income (loss) $ .47 $ .52 $ (.28) $ .05 $ (.06)
======= ======= ======= ======= =======
Weighted average
common and
equivalent shares
outstanding 8,524 8,280 7,304 7,016 6,949
======= ======= ======= ======= =======(In thousands)
Consolidated Balance Sheet Data:
- ------------------Cash, cash equivalents and short-term
investments.......................... $ 8,083 $ 8,382 $13,251 $11,431 $18,140
Working Capital $22,613 $18,338 $10,205 $11,809 $11,308capital....................... 18,338 22,613 28,653 30,621 36,021
Total Assetsassets.......................... 25,167 29,964 25,167 15,786 18,414 17,404
Long-term36,243 39,305 46,410
Debt obligations, less current
portion.............................. 3,528 3,296 3,528 421 578 961
Shareholders' Equity2,568 2,496 2,288
Total shareholders' equity............ 17,574 22,060 17,574 12,995 14,427 13,53328,528 32,010 38,155
(1) Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", and recognized the
cumulative effect of adoption of the change in accounting for income taxes of
$200,000 ($0.03 per share).
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -------------------------------------------------
CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
Total revenues for 1996 were $30.3 million,The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K. Our discussion contains forward-looking statements based
upon current expectations that involve risks and uncertainties, such as our
plans, objectives and intentions. When we use words such as "believe," "expect,"
"anticipate" or similar expressions, we are making forward-looking statements.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a 33% increase from 1995.
The increaseresult of certain risk factors, including those
set forth in total revenues resulted primarily from increased worldwide sales"Factors That May Affect Future Operating Results" and elsewhere in
this Annual Report on Form 10-K. We believe it is important to communicate our
expectations to our investors. However, there may be events in the future that
we are not able to predict accurately or over which we have no control. You
should be aware that the occurrance of the Company's flagship NanoSpec 8000 product familyevents described in these risk
factors and elsewhere in this Annual Report on Form 10-K could materially and
adversely affect our business, operating results and financial condition. We
disclaim any obligation to update information contained in any forward-looking
statement.
Overview
We are a leader in the design, manufacture, marketing and support of thin
film metrology systems for the fully
automated Model 5500semiconductor, flat panel display and magnetic
recording head industries. We have made several strategic changes in our
business over the past two years that have positioned us to further
participate in these markets. These changes include:
. becoming an original equipment manufacturer, or OEM, of metrology systems
that are integrated into various types of semiconductor processing
equipment;
. the development of new products that can be used for 300 millimeter wafers
and chemical mechanical planarization;
. an increased emphasis on product development, manufacturing and direct
sales in Japan and Korea;
. a shift to direct sales from third-party representatives in Asia and the
United States;
. a decision to outsource certain system particularlycomponents such as robotics,
enabling us to leverage our technical resources;
. the acquisition of an overlay registration product line from Optical
Specialties, Inc. in March 1998 (see "Acquisition" for more information on
the product line acquisition); and
. the acquisition of inspection and metrology technology from Phase Metrics
in December 1999.
Our business is dependent upon the capital expenditures of manufacturers of
semiconductors, flat panel displays and magnetic recording heads and their
suppliers. The demand by these manufacturers and suppliers for our products
is, in turn, dependent on the current and future market demand for
semiconductors and products utilizing semiconductors, disk drives and
computers that utilize disk drives and flat panel displays for use in laptop
computers, pagers, cell phones and a variety of other applications. The
increasing complexity of the manufacturing processes for semiconductors, flat
panel displays and magnetic recording heads is also an important factor in the
Far
East. The Company experienced a 77% increase in domesticdemand for our metrology systems.
We derive our revenues from product sales and services, which include sales
of accessories and service to $14.4
million for 1996the installed base of products. For the year
ended December 31, 1999, we derived 88.3% of our total net revenues from
$8.2 million in 1995 while internationalproduct sales and 11.7% of our total net revenues increased 9% to $15.9 million for 1996 from 14.6 million in 1995. The increase
in international revenue was partially offset byservices. Revenues from
product sales and replacement and spare parts are recognized at the impacttime of
shipment. Revenues from service work are recognized when performed. See note 1
of the strengtheningnotes to consolidated financial statements for more information on our
revenue recognition policy.
II-3
Results of the US dollar against the Japanese yen on sales in Japan. Total revenues for
1995 were $22.8 million, a 68% increase from 1994 total revenuesOperations
The following table presents our consolidated statements of $13.6
million which resulted primarily from the introduction and sales of the NanoSpec
8000 product family and the Model 5500 in 1995. Domestic revenues increased 119%
to $8.2 million in 1995 from $3.7 million in 1994 while international revenues
increased 48% to $14.6 million in 1995 from $9.9 million in 1994.
Cost of product salesoperations data
as a percentage of total net revenues for the years ended December 31, 1997,
1998 and 1999:
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
Net revenues:
Product sales................................... 89.4% 89.3% 88.3%
Service......................................... 10.6 10.7 11.7
-------- -------- --------
Total net revenues............................ 100.0 100.0 100.0
-------- -------- --------
Cost and expenses:
Cost of product sales........................... 33.0 39.1 40.1
Cost of service................................. 9.9 11.0 12.5
Research and development........................ 8.1 12.7 12.8
Acquired in-process research and development.... -- 4.3 --
Selling......................................... 16.5 17.2 16.1
General and administrative...................... 7.6 8.5 8.2
-------- -------- --------
Total cost and expenses....................... 75.1 92.8 89.7
-------- -------- --------
Income from operations............................ 24.9 7.2 10.3
-------- -------- --------
Other income (expense):
Interest income................................. 1.5 1.7 1.8
Interest expense................................ (0.3) (0.3) (0.5)
Other, net...................................... (0.5) 0.2 0.3
-------- -------- --------
Total other income, net....................... 0.7 1.6 1.6
-------- -------- --------
Income before income taxes........................ 25.6 8.8 11.9
Provision for income taxes........................ 9.9 3.3 4.7
-------- -------- --------
Net income........................................ 15.7% 5.5% 7.2%
======== ======== ========
Years ended December 31, 1997, 1998 and 1999
Total net revenues. Total net revenues increased 9.5% from $33.3 million in
1998 to $36.4 million in 1999. Product sales increased 8.2% from $29.7 million
in 1998 to $32.2 million in 1999. The increase in product sales decreased to
41% in 1996resulted from
45% in 1995 primarily because of higher prices resulting from
strongstronger demand for and increased shipments of our products, especially in the
Company'sU.S. and Asia. Service revenue increased 19.7% from $3.5 million in 1998 to
$4.2 million in 1999. The increase in service revenue is primarily attributable
to higher sales of parts, services and accessories in Asia and the U.S. in 1999
due in part to the recovery in the semiconductor market. Total net revenues
decreased 9.3% from $36.7 million in 1997 to $33.3 million in 1998. Product
sales decreased 9.3% from $32.8 million in 1997 to $29.7 million in 1998. The
decrease in product sales resulted from slower worldwide demand for and
decreased shipments of our products, especially in the U.S. and in Asia.
Service revenue decreased 8.8% from $3.9 million in 1997 to $3.5 million in
1998. The decrease in service revenue is primarily attributable to lower sales
of parts, services and accessories in Asia and the U.S. in 1998 due in part to
increased functionality and reliability of our newer products. International
revenues, which includes sales by our foreign subsidiaries, constituted
approximately 60.9%, 61.8% and 60.3% of total net revenues for 1999, 1998 and
1997, respectively. In 1998, we experienced a continued decline12.7% decrease in fixed
operating costs as a percentdomestic
revenues from $14.5 million in 1997 to $12.7 million in 1998, while
international revenues decreased 7.1% from $22.1 million in 1997 to $20.6
million in 1998.
II-4
Cost of higherproduct sales. Cost of product sales as a percentage of net product
sales decreasedincreased from 43.8% in 1998 to 45%45.4% in 1995 from 53% in 19941999 primarily as a result of
a shiftlower volume purchasing resulting in fewer purchasing discounts for materials
early in 1999. Cost of product mix and a decline in fixed operating costssales as a percentpercentage of product sales increased
from 36.9% in 1997 to 43.8% in 1998 primarily because of lower sales volumes in
1998 resulting in higher sales. The Company may experience fluctuations in gross
margins as a resultper unit manufacturing costs.
Cost of competitive pressures, changes in product mix, product
introductions and transitions, varying production levels, and fluctuations in
material and labor costs among other factors.
Service revenues increased to $5.7 million in 1996 from $4.6 million in
1995 and $3.9 million in 1994. The increase in 1996 resulted from continued
higher levels of service and accessory sales in the U.S. and Japan as the
Company's installed base of systems has increased.service. Cost of service as a percentage of service revenue
increased from 103.5% in 1998 to 107.4% in 1999 primarily as a result of
increased fixed service costs to support our growing installed based of systems
at customer locations in 1999. Cost of service as a percentage of service
revenue increased from 93.4% in 1997 to 103.5% in 1998. This increase was
71%primarily attributable to the decline in 1996,the sales of accessories and parts
while fixed service costs increased slightly lower than 73%to support our growing installed
base of systems at customer locations in both
19951998.
Research and in 1994.development. Research and development expenses for 1996 were higher than 1995 levels
by $123,000 or 5%.increased 10.7%
from $4.2 million in 1998 to $4.7 million in 1999 as a result of additional
headcount and a purchase of technology from Phase Metrics in the fourth quarter
of 1999. Research and development expenses for 1995 were higher than
1994 levels by $226,000 or 9%. These increases were primarilyincreased 40.9% from $3.0 million in
1997 to $4.2 million in 1998 due to additional
personnel hired to developthe development of our new productsMetra overlay
registration product line and features. The Company continues to
beour new NanoSpec 9000 integrated film thickness
metrology product line. We are committed to the development of new and enhanced
products and believesbelieve that new product introductions will play an important and necessary role in obtaining
future revenues. The Company expects that spendingare required for us to
maintain our competitive position. During 1999, research and development
expenses represented 12.8% of total net revenues, compared to 12.7% in 1997 will be comparable1998 and
8.1% in 1997.
Acquired in-process research and development. In the first quarter of 1998,
we paid approximately $3.2 million for the assets and technology related to 1996 levels.the
Metra product line from Optical Specialties. Of this purchase price, $1.4
million related to the value of in-process research and development that had no
alternative future use and was charged to expense during the year ended
December 31, 1998. Our increase in research and development expenses discussed
above is primarily attributable to efforts to bring the acquired in-process
technology to completion. See "Acquisition" for further discussion.
Selling. Selling expenses increased $984,0002.5% from $5.7 million in 1996 or 27% when1998 to $5.9
million in 1999 primarily because of higher sales in 1999. Selling expenses
decreased 5.3% from $6.1 million in 1997 to $5.7 million in 1998 primarily due
to lower commission expenses and other expenses associated with lower sales
levels in 1998. In 1999 selling expenses represented 16.1% of total net
revenues, compared to 199517.2% in 1998 and 16.5% in 1997.
General and administrative. General and administrative expenses increased
5.1% from $2.8 million in 1998 to $3.0 million in 1999 as a result of higher
sales commission expenses from increased sales andspending associated with the addition of sales personnelincrease in the U.S. and the Far East. Selling expenses
increased $766,000 in 1995 or 26% when compared to 1994 as a result of both
higher sales commission expenses from increased sales and startup costs in
establishing new domestic and foreign sales offices in 1995. During 1996 selling
expenses represented 15% of
II-3
total consolidated revenues, compared to 16% and 22% in 1995 and 1994,
respectively. This decrease, particularly from 1994, was due primarily to fixed
selling expenses growing at a slower rate than revenues in 1996.net revenues. General and
administrative expenses in 1996 increased by $296,000 or 14%
compared to 1995 due primarily to the addition of a managing director and
related expenses in Japan. General and administrative expenses during 1995
decreased by $289,000 or 12% when compared to 1994. The general and
administrative expenses in 1994 were higher than in 1995 primarily because of a
$517,000 write-off of a doubtful receivable in 1994.1997 remained essentially unchanged from 1998 at
$2.8 million. During 19961999, general and administrative expenses represented 8%8.2%
of total consolidatednet revenues, compared to 10%8.5% in 1998 and 18%7.6% in 1995 and 1994, respectively.
Other1997.
Total other income, net. Total other income, net increased 9.1% from
$528,000 in 1998 to $576,000 in 1999 primarily due to higher interest income in
1999. Total other income, net increased 111.2% from $250,000 in 1997 to
$528,000 in 1998 primarily due to lower exchange rate losses in 1998.
Income taxes. Our effective income tax rate increased from 37.7% in 1998 to
39.0% in 1999 primarily due to a valuation allowance established in 1999
against the net defferred tax assets of our Japanese subsidiary. Our effective
income tax rate decreased $380,000 or 46%from 38.6% in 1996 compared1997 to 199537.7% in 1998 primarily as a
result of more favorable exchange rate resultsincome tax benefits realized from net operating losses in 1995. Other income increased
$639,000 or 345% in 1995 compared to 1994 as a result of higher interest income
and more favorable exchange rate results.
The Company's provision for income taxes in 1996 was $2.7 million and
the effectiveforeign tax
rate was 40%.jurisdictions. The effective income tax rate exceedsrates in 1999, 1998 and 1997 exceed the
U.S. statutory rate due primarily due to state income taxes andpartially offset by the
realization of foreign sales corporation benefit.
II-5
Quarterly Results of Operations
The effective income tax rate differed fromfollowing tables present unaudited quarterly results of operations in
dollars and as a percentage of total net revenues for the U.S.
statutory rate becauseeight quarters ended
December 31, 1999. We believe that all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated below
to present fairly such quarterly information. The operating results for 1995 included a $2.3 million favorable
income tax adjustment to reverseany
quarter are not necessarily indicative of results for any subsequent period.
Quarters Ended,
--------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Net revenues:
Product sales.......... $ 9,618 $ 9,705 $ 6,249 $ 4,146 $ 5,265 $ 6,468 $ 8,717 $11,712
Service................ 920 1,023 756 847 924 1,055 1,104 1,163
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues... 10,538 10,728 7,005 4,993 6,189 7,523 9,821 12,875
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product
sales................. 3,629 4,029 2,813 2,531 2,552 2,984 3,976 5,094
Cost of service........ 985 967 835 882 1,104 1,017 1,176 1,263
Research and
development........... 1,231 1,063 886 1,026 1,016 1,094 1,099 1,449
Acquired in process
research and
development........... 1,421 -- -- -- -- -- -- --
Selling................ 1,572 1,529 1,366 1,261 1,277 1,309 1,519 1,766
General and
administrative........ 785 694 614 735 641 724 730 878
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 9,623 8,282 6,514 6,435 6,590 7,128 8,500 10,450
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 915 2,446 491 (1,442) (401) 395 1,321 2,425
Total other income
(expense), net......... 126 (3) 165 240 66 112 216 182
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 1,041 2,443 656 (1,202) (335) 507 1,537 2,607
Provision (benefit) for
income taxes........... 417 948 262 (519) (134) 203 637 976
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 624 $ 1,495 $ 394 $ (683) $ (201) $ 304 $ 900 $ 1,631
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share
Basic.................. $ 0.07 $ 0.17 $ 0.05 $ (0.08) $ (0.02) $ 0.03 $ 0.10 $ 0.18
Diluted................ $ 0.07 $ 0.17 $ 0.04 $ (0.08) $ (0.02) $ 0.03 $ 0.10 $ 0.17
Shares used in per share
computation
Basic.................. 8,545 8,641 8,669 8,686 8,701 8,757 8,823 9,033
Diluted................ 8,978 9,003 9,074 8,686 8,701 9,177 9,347 9,842
Quarters Ended,
--------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
Net revenues:
Product sales.......... 91.3% 90.5% 89.2% 83.0% 85.1% 86.0% 88.8% 91.0%
Service................ 8.7 9.5 10.8 17.0 14.9 14.0 11.2 9.0
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product
sales................. 34.4 37.6 40.2 50.7 41.2 39.7 40.5 39.6
Cost of service........ 9.3 9.0 11.9 17.7 17.8 13.5 12.0 9.8
Research and
development........... 11.7 9.9 12.6 20.5 16.4 14.5 11.2 11.3
Acquired in process
research and
development........... 13.5 -- -- -- -- -- -- --
Selling................ 14.9 14.3 19.5 25.3 20.6 17.4 15.5 13.7
General and
administrative........ 7.5 6.4 8.8 14.7 10.5 9.6 7.3 6.8
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 91.3 77.2 93.0 128.9 106.5 94.7 86.5 81.2
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 8.7 22.8 7.0 (28.9) (6.5) 5.3 13.5 18.8
Total other income
(expense), net......... 1.2 0.0 2.4 4.8 1.1 1.4 2.2 1.4
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 9.9 22.8 9.4 (24.1) (5.4) 6.7 15.7 20.2
Provision (benefit) for
income taxes........... 4.0 8.9 3.8 (10.4) (2.2) 2.7 6.5 7.5
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 5.9% 13.9% 5.6% (13.7)% (3.2)% 4.0% 9.2% 12.7%
======= ======= ======= ======= ======= ======= ======= =======
II-6
Total net revenues for the valuation allowance for certain deferred
tax assets in accordance with SFAS 109. The effective income tax rate differed
from the U.S. statutory rate during 1994quarters ended September 30, 1998, December 31,
1998 and March 31, 1999 were adversely affected as a result of non-deductible expenses
and an increasedecreased
shipments of our products in the valuation allowanceU.S. and Asia due primarily to slower
worldwide demand in the semiconductor industry. In the first quarter of 1998,
we paid approximately $3.2 million for deferred tax assets.the assets and technology related to the
Metra product line from Optical Specialties. Of this purchase price, $1.4
million related to the value of in-process research and development that had no
alternative future use and was charged to expense during the quarter ended
March 31, 1998. See Note 5
of Notes to Consolidated Financial Statements.
The Company reported an operating profit of $6,213,000 and net income of
$3,993,000 or $.47 per share"Acquisition" for further discussion. During the quarter
ended December 31, 1999, we benefited from a generalized recovery in 1996 compared to an operating profit of
$2,641,000 and net income of $4,277,000 or $.52 per share in 1995 and an
operating loss of $2,231,000 and net loss of $2,074,000 or $.28 per share in
1994. The impact of inflation on the
Company's results of operations has not
been significant.semiconductor industry.
During each quarter the Company sellswe sell a relatively small number of systems, and
therefore a slight change in the timing of shipments can have a significant
impact on our quarterly results of operations. The Company'sOur backlog at the beginning of
each quarter generally does not include all systems sales needed to achieve expected
revenues for that quarter. Consequently, the Company
is oftenwe are dependent on obtaining orders
for systems to be shipped in the same quarter that the order is received.
Moreover, customers may reschedule shipments, and production difficulties could
delay shipments. Accordingly, the
Company'sour results of operations are subject to
significant variability from quarter to quarter and could be adversely affected
forin a particular quarter if shipments for that quarter were lower than
anticipated. Because a relatively small group of customers may account for a
significant percentage of the
Company'sour sales in any given period, the loss of any single
customer could have a short-termmaterial, adverse effect on the Company'sour results of operations.
II-4
LIQUIDITY AND CAPITAL RESOURCES
During 1996,We believe that our quarterly and annual revenues, expenses and operating
results could vary significantly in the future and that period-to-period
comparisons should not be relied upon as indications of future performance. We
may not sustain or increase our level of net revenues or our rate of revenue
growth on a quarterly or annual basis. We may, in some future quarter, have
operating results that will be below the expectations of stock market analysts
and investors. In such event, the price of our common stock could decline.
Acquisition
On March 30, 1998, we purchased from Optical Specialties a metrology system
product line and related assets used to measure the critical dimensions and
overlay registration errors observed in sub-micron photolithography. Under the
agreement, we paid approximately $3.2 million in cash for the assets and in-
process research and development. The total purchase price and allocation among
the tangible and intangible assets and liabilities acquired (including acquired
in-process research and development) is summarized as follows (in thousands):
Total purchase price--cash consideration................................ $3,225
======
Purchase price allocation:
Tangible assets....................................................... $1,923
Intangible assets*:
Core and developed technology....................................... 419
Goodwill............................................................ 196
In-process research and development................................... 1,421
Liabilities........................................................... (734)
------
Total purchase price allocation......................................... $3,225
======
- --------
* Intangible assets are being amortized using the straight-line method over a
five-year useful life.
The purchase price allocation and intangible valuation was based on our
estimates of the after tax net cash flows and gave explicit consideration to
the SEC's views on acquired in-process research and development as set forth in
its September 9, 1998 letter to the American Institute of Certified Public
Accountants. Specifically, the valuation gave consideration to the following:
. the employment of a fair market value premise excludes any Nanometrics-
specific considerations, which could result in estimates of investment
value for the subject assets; and
II-7
. comprehensive due diligence concerning all potential intangible assets
including trademarks/tradenames, patents, copyrights, noncompete
agreements, assembled workforce and customer relationships and sales
channel.
The value of core technology was specifically addressed, with a view toward
ensuring the relative allocations to core technology and in-process research
and development were consistent with the relative contributions of each to the
final product. The allocation to in-process research and development was based
on a calculation that considered only the efforts completed as of the
transaction date, and only the cash flow associated with these completed
efforts for the products currently in process.
As indicated above, we recorded a one-time charge of $1.4 million in the
first quarter of 1998 for acquired in-process research and development related
to the Metra 7000 development project that had not reached technological
feasibility, had no alternative future use and for which successful
development was uncertain. Our conclusion that the in-process development
effort, or any material sub-component, had no alternative future use was
reached in consultation with our engineering personnel and engineering
personnel from Optical Specialties.
The project to complete the Metra 7000 product included the completion of a
software platform design started by Optical Specialties in 1997. As of the
acquisition date, the Metra 7000 had yet to achieve technological feasibility
since there was not a working prototype with a reliable new software design.
At the time of acquisition, the estimated cost to complete this software and
related development was approximately $300,000. We began shipments of the
Metra 7000 product to a customer in June 1998 and it was at that time that we
began to benefit from the acquired research and development related to the
product.
Significant assumptions used to determine the value of in-process research
and development included several factors, including the following:
. forecast of net cash flows that were expected to result from the
development effort using projections prepared by us; and
. percentage complete of 77.0% for the Metra 7000 project estimated by
considering a number of factors, including the costs invested to date
relative to total cost of the development effort and the amount of
progress completed as of the acquisition date, on a technological basis,
relative to the overall technological achievements required to achieve
the functionality of the eventual product.
The technological issues were addressed by engineering representatives from
both us and Optical Specialties, and when estimating the value of the
technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without any consideration to potential
synergic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the
existing as well as the in-process Metra 7000 products. These projected
results were based on the number of units sold times average selling price
less the associated costs. After preparing the estimated cash flow from the
product being developed, a portion of this cash flow was attributed to the
core technology, which was embodied in the in-process Metra 7000 product line
and enabled a quicker and more cost effective development of the Metra 7000.
When estimating the value of the developed, core and in-process technologies,
discount rates of 25.0%, 30.0% and 35.0%, respectively, were used. These
discount rates considered both the status and risk associated with the
respective cash flows as of the acquisition date.
Liquidity and Capital Resources
At December 31, 1999, our cash, cash equivalents and short-term investments
totaled $18.1 million as compared to $11.4 million at December 31, 1998.
Additionally, our working capital of $36.0 million at December 31, 1999
increased from $30.6 million at December 31, 1998. We believe our working
capital, together with the proceeds of this offering, will be sufficient to
meet our needs at least through the next twelve months.
II-8
Operating activities during 1999 provided cash of $7.1 million primarily
from net income and changes in income taxes of $2.8 million. Investing
activities used $5.9 million due to net purchases of short-term investments of
$4.8 million and $1.0 million in capital expenditures and prepaid licenses
fees. Financing activities provided cash of $356,000$816,000 primarily due to the sale
of shares under the employee stock purchase and option plans offset by the net
repayment of debt obligations in Japan of $1.3 million.
Operating activities during 1998 provided net cash of $885,000 primarily
from higher net income partially offset by higher working capital requirements. Investing
activities used cash of $3.8 million, primarily to purchase the Metra product
line, as previously discussed above, and to fund net purchases of short-term
investments. Financing activities provided cash of $358,000$801,000 resulting primarily
from the sale of shares under the employee stock purchase and option plans.
InvestingOperating activities used
cash of $2.6 million, primarily from the purchase of short-term investments in
the U.S. During 1995, operating activitiesduring 1997 provided cash of $2.3 million
primarily from higher net income partially offset by higher working capital
requirements. Financing activities provided cash of $4.2 million primarily
from a loan of $4.7 million from a bank in Japan using the Company's building and
adjacent land in Japan as collateral.net income partially offset by working capital requirements. Investing
activities used cash of $4.1$3.1 million, primarily from the investment of proceeds of the bank financing into purchase short-term
investments in the U.S. During 1994, operatingFinancing activities usedprovided cash of $2.0 million$590,000
resulting from the sale of shares under the employee stock purchase and financing activities used cash of $385,000. The Company
reduced its short-term investments by $3.4 million in 1994 to meet these cash
flow requirements.
The Company believes that its working capital, including cash and short-
term investments of approximately $8.4 million, will be sufficient to meet its
needs at least through the end of 1997. At December 31, 1996, the Company had
$22.6 million in working capital and its current ratio was 6.0 to 1.
Outstanding borrowings at December 31, 1996 totalled approximately $3.6
million of which $347,000 is due within one year. See Note 6 of Notes to
Consolidated Financial Statements.
The Company hasoption
plans.
We have evaluated in the past and will continue to evaluate the acquisition of products,
technologies or businesses that are complementary to the Company'sour business. These
activities may result in product and business investments. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTSFor example, as
previously discussed above, in March 1998, we purchased from Optical
Specialties a metrology system product line and related assets. Under the
agreement, we paid approximately $3.2 million in cash for the assets and
technology. We funded this acquisition from our cash equivalents, short-term
investments and cash flows from operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
us beginning in the first quarter of fiscal year 2001. Although we have not
fully assessed the implications of SFAS No. 133, our management does not
believe adoption of this statement will have a significant impact on our
consolidated financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the first fiscal quarter of
2000. Although we have not fully assessed the implications of SAB No. 101, our
management does not believe adoption of this bulletin will have a significant
impact on our consolidated financial position, results of operations or cash
flows.
II-9
Year 2000 Issues
Many computer systems had been expected to experience problems handling
dates for the Year 2000. The Year 2000 issue arose as a result of certain
computer programs being written using two digits rather than four to define the
applicable year. Consequently, these computer programs were unable to
distinguish between 21st century dates and 20th century dates and could have
caused computer system failures or miscalculations that could result in
significant business disruptions.
Over the past year we have been testing our systems to evaluate Year 2000
problems, executing remediation activities to fix non-compliant systems and
monitoring and testing products and systems. To date, we have not experienced
any problems complying with the Year 2000 issue and have not been informed of
any failures of our products from customers.
Factors That May Affect Future Operating Results
You should carefully consider the risks described below together with all of
the other information included in this Annual Report on Form 10-K contains forward-looking statements withinbefore making
an investment decision. The risks and uncertainties described below are not the
meaning of Section 27Aonly ones facing our company. If any of the Securities Action of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including, but not
limited to, the statements regarding the Company backlog, outcome of legal
proceedings, expected research and development expenses. These forward-looking
statements inherently involvefollowing risks and uncertainties. The Company's actual
results could differ materially from the results anticipated in such forward-
looking statements. Factors that could cause or contribute to such differences
include, without limitation, the factors set forth below as well as and
elsewhere in this report.
The following risk factors should be considered by shareholders of and
by potential investors in the Company in evaluating the Company, itsactually occurs, our
business, financial condition or operating results could be harmed. In such
case, the trading price of our common stock could decline, and business prospects.
Significant Fluctuationsyou could lose
all or part of your investment.
II-10
Risks Related to Our Business
Cyclicality in Operating Results. The Company'sthe semiconductor, flat panel display and magnetic recording
head industries has led to substantial decreases in demand for our systems and
may from time to time continue to do so
Our operating results have fluctuatedvaried significantly due to the cyclical nature of
the semiconductor, flat panel display and magnetic recording head industries.
The majority of our business depends upon the capital expenditures of
semiconductor device and capital equipment manufacturers. These manufacturers'
capital expenditures, in turn, depend upon the current and anticipated market
demand for semiconductors and products using semiconductors. The semiconductor
industry is cyclical and has historically experienced periodic downturns. These
downturns have often resulted in substantial decreases in the demand for capital
equipment, including metrology systems. We have found that the resulting
decrease in capital expenditures has typically been more pronounced than the
precipitating downturn in semiconductor device industry revenues. We expect the
cyclical nature of the semiconductor industry, and therefore, our business, to
continue. Any future downturn in the semiconductor industry will likely
seriously harm our business.
We are highly dependent on international sales and operations, which exposes
us to foreign political and economic risks
Sales to customers in foreign countries accounted for approximately 61.8%
and 60.9% of our total net revenues in 1998 and 1999, respectively. We
maintain facilities in Japan and Korea. We anticipate that international sales
will continue to account for a significant portion of our revenues.
Our reliance on international sales and operations exposes us to foreign
political and economic risks, including:
. political, social and economic instability;
. trade restrictions and changes in tariffs;
. import and export license requirements and restrictions;
. difficulties in staffing and managing international operations;
. disruptions in international transport or delivery;
. fluctuations in currency exchange rates;
. difficulties in collecting receivables; and
. potentially adverse tax consequences.
If any of these risks materialize, our international sales could decrease
and our foreign operations could suffer.
Because we derive a significant portion of our revenues from sales in Asia,
our sales and results of operations could be adversely affected by the
instability of Asian economies
Our sales to customers in Asian markets represented approximately 45.6% and
53.7% of our total net revenues in 1998 and 1999, respectively. Countries in
the Asia Pacific region, including Japan, Korea and Taiwan, each of which
accounted for a significant portion of our business in that region, have
experienced general economic weaknesses over the last several years. These
weaknesses began to adversely affect our sales to semiconductor manufacturers
located in these regions in the third and fourth quarters of 1998 and continued
through the first half of 1999. Although we have recently received increased
orders from customers in the Asia Pacific region, any further instability in the
Asian markets could harm our sales in future periods.
II-11
Our largest customers account for a significant portion of our revenues, and
our revenues would significantly decline if one or more of these customers were
to purchase significantly fewer of our systems or if they delayed or cancelled
a large order
Historically, a significant portion of our revenues in each quarter and year
has been derived from sales to relatively few customers, and we expect this
trend to continue. If any of our key customers were to purchase significantly
fewer systems, or if a large order were delayed or cancelled, our revenues
would significantly decline. In 1999, revenue from our ten largest customers
accounted for approximately 59.5% of our total net revenues. In 1998, sales to
International Business Machines Corp. accounted for 11.2% of our total net
revenues. In 1999, sales to Applied Materials and TSMC represented 12.8% and
10.5% of our total net revenues, respectively. There are only a limited number
of large companies operating in the semiconductor, flat panel display and
magnetic recording head industries. Accordingly, we expect that we will continue
to depend on a small number of large customers for a significant portion of our
revenues for at least the next several years. In addition, as large
semiconductor, flat panel display and magnetic recording head manufacturers and
suppliers seek to establish closer relationships with their suppliers, we expect
that our customer base will become even more concentrated.
The success of our product development efforts depends on our ability to
anticipate market trends and the price, performance and functionality
requirements of semiconductor device manufacturers. In order to anticipate
these trends and ensure that critical development projects proceed in a
coordinated manner, we must continue to collaborate closely with our customers.
Our relationships with our customers provide us with access to valuable
information regarding industry trends, which enables us to better plan our
product development activities. If our current relationships with our large
customers are impaired, or if we are unable to develop similar collaborative
relationships with important customers in the future, our long-term ability to
produce commercially successful systems will be impaired.
We depend on Applied Materials for sales of our integrated metrology systems,
and the loss of Applied Materials as a customer could harm our business
We believe that sales of integrated metrology systems will be an important
source of future revenues. We have entered into an agreement with Applied
Materials to supply metrology systems for Applied Materials' CMP systems,
including the Mirra Mesa(TM) CMP system. This agreement restricts us from
supplying integrated film thickness systems for use in CMP applications to any
company other than Applied Materials. This agreement is not a long-term
contract and is terminable under various circumstances within a short period of
time. Sales of our integrated metrology systems depend upon Applied Materials
selling semiconductor equipment products that include our metrology systems as
components. If Applied Materials is unable to sell such products, or if Applied
Materials chooses to focus its attention on products that do not integrate our
systems, our business could suffer. We may be unable to retain Applied
Materials as a customer. If we lose Applied Materials as a customer for any
reason, our ability to realize sales from integrated metrology systems would be
significantly diminished, which would harm our business.
Our quarterly operating results have varied in the past and probably will
continue to vary significantly in the future, which will cause volatility in
our stock price
Our quarterly operating results have varied significantly in the past and
may fluctuate
significantlyare likely to vary in the future. The Company anticipatesfuture, which could cause our stock price to decline.
Some of the factors that factors affecting its
futuremay influence our operating results will include the cyclicality ofand subject our
stock to extreme price and volume fluctuations include:
. changes in customer demand for our systems;
. economic conditions in the semiconductor, industryflat panel display and magnetic
recording head industries;
II-12
. the markets served by the Company's customers, the sizetiming, cancellation or delay of customer orders and timingshipments;
. market acceptance of II-5
orders, patterns of capital spending by customers, the proportion of direct
salesour products and sales through distributorsour customers' products;
. competitive pressures on product prices and representatives, the proportion of
international sales to net sales, changes in pricing by the Company, its
competitors,our
customers or suppliers, market acceptance of new and enhanced
versions of the Company's products,suppliers;
. the timing of new product announcements and product releases ofby us or our
competitors and our ability to design, introduce and manufacture new
products by the Company or its competitors, delays, cancellations or
rescheduling of orders due to customer financial difficulties or otherwise
lengthy sales cycles. Gross margins may vary materially based on a variety of
factors including the mixtimely and average selling prices of product sales and the
cost associated with new product introductions.
Limited Systems Sales; Backlog. The Company derives a substantial
portion of its sales from the sale of a relatively small number of systems which
typically range in purchase price from approximately $40,000 to $400,000. As a
result,cost-effective basis;
. the timing of recognitionacquisitions of businesses, products or technologies;
. the levels of our fixed expenses, including research and development
costs associated with product development, relative to our revenue
for a single transaction could have
a material adverse affect on the Company's saleslevels; and
operating results. The
Company's backlog at the beginning of a quarter typically does not include all
sales required to achieve the Company's sales objective for that quarter.
Moreover, all customer purchase orders are subject to cancellation or
rescheduling by the customer with limited or no penalties. Therefore, backlog at
any particular date is not necessarily representative of actual sales for any
succeeding period. The Company's net sales and operating results for a quarter
may depend upon the Company obtaining orders for systems to be shipped in the
same quarter that the order is received. The Company's business and financial
results for a particular period could be materially adversely affected if an
anticipated order for even one system is not received in time to permit shipment
during such period.
Highly Competitive Industry. The semiconductor capital equipment
industry is intensely competitive. A substantial investment is required by
customers to install and integrate capital equipment into a semiconductor
production line. As a result, once a semiconductor manufacturer has selected a
particular vendor's capital equipment, the Company believes that the
manufacturer generally relies upon that equipment for the specific production
line application and frequently will attempt to consolidate its other capital
equipment requirements with the same vendor. Accordingly, the Company expects to
experience difficulty in selling to a particular customer for a significant
period of time if that customer selects a competitor's capital equipment. The
Company currently experiences intense competition worldwide from a number of
foreign and domestic manufacturers, including Tencor Instruments and Therma-
Wave, some of which have substantially stronger financial resources than the
Company. The Company expects its competitors to continue to develop enhancements
to and future generations of competitive products that may offer improved price
or performance features.
New product introductions and enhancements by the Company's competitors
could cause a significant decline in sales or loss of market acceptance of the
Company's systems in addition to intense price competition or otherwise make the
Company's systems or technology obsolete or noncompetitive. Increased
competitive pressure could lead to reduced demand and lower prices for the
Company's products, thereby materially adversely affecting the Company's
operating results. There can be no assurance that the Company will be able to
compete successfully in the future.
II-6
International Operations. A significant portion of the Company's total
revenues are derived from customers outside the United States, and the Company
anticipates that international revenues will continue to be significant in the
future. The Company's international operations are subject to risks inherent in
the conduct of international business, including unexpected changes in
regulatory requirements, exchange rates, export license requirements, tariffs
and other barriers, political and economic instability, limited intellectual
property protection, difficulties in collecting payments due from sales agents
or customers, difficulties in managing distributors or representatives,
difficulties in staffing and managing foreign subsidiary operations and
potentially adverse tax consequences. In addition, the Company does not
currently engage in currency exchange rate hedging transactions and there can be
no assurance that. fluctuations in foreign currency exchange rates, particularly the
Japanese yen.
Due to the foregoing factors and other factors described in the future will not
have a material adverse impact on the Company's business,this "Factors
That May Affect Future Operating Results" section, we believe that period-to-
period comparisons of our operating results are not necessarily meaningful, and
financial conditions.
Rapid Technological Change; Importanceyou should not view these operating results as indicators of Timely Product Introduction.
The semiconductor manufacturing industry is subject to rapid technological
changeour future
performance. If our operating results in any period fall below the expectations
of securities analysts and new product introductionsinvestors, the market price of our common stock would
likely decline.
We obtain some of the components and enhancements. The Company's ability to
remain competitive will dependsubassemblies included in part upon its ability to develop newour systems
from a single source or a limited group of suppliers, and enhanced systems and to introducethe partial or
complete loss of one of these systems at competitive prices and in a
timely and cost effective manner to enable customers to integrate the systems
into their operations either prior to or upon commencement of volume product
manufacturing. In addition, new product introductions or enhancements by the
Company's competitorssuppliers could cause production delays and a
decline in sales orsubstantial loss of market
acceptance of the Company's existing products. Increased competitive pressure
could also leadrevenue
We rely on outside vendors to intensified price-based competition resulting in lower pricesmanufacture many components and
margins, which would materially adversely affect the Company's business,
financial conditions and results of operations. The success of the Company in
developing, introducing and selling new and enhanced systems depends upon a
variety of factors, including product selections, timely and efficient
completion of product design and development, timely and efficient
implementation of manufacturing and assembly processes, effective sales and
marketing and product performance in the field. Because new product development
commitments must be made well in advance of sales, new product decisions must
anticipate both the future demand for the products under development and the
equipment required to produce such products. There can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or in enhancing existing products.
Intellectual Property Rights. Although the Company attempts to protect
its intellectual property rights through patents, copyrights, trade secrets and
other measures, it believes that its financial performance will depend more upon
the innovation, technological expertise and marketing abilities of its employees
than upon such protection. There can be no assurance that any of the Company's
pending patent applications will be issued or that foreign intellectual property
laws will protect the Company's intellectual property rights. There can be no
assurance that any patent issued to the Company will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
competitive advantages to the Company. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate the
Company's product, or, if patents are issued to the Company, design around the
patents issued to the Company. Although there are currently no pending claims or
lawsuits against the Company regarding any possible infringement claims, there
can be no assurance that infringement claims by third parties or claims for
indemnification resulting from infringement claims will not be asserted in the
future or that such assertions, if proven to have merit, will not materially
adversely affect the Company's business,
II-7
financial condition and results of operations. If any such claims are asserted
against the Company, the Company may seek to obtain a license under the third
party's intellectual property rights. There can be no assurance that a license
will be available on reasonable terms or at all. The Company could decide, in
the alternative, to resort to litigation to challenge such claim. Such
challenges could be extremely expensive and time consuming and could materially
adversely affect the Company's business, financial condition and results of
operations. In addition, some customers of the Company have received notices of
infringement from Technivision Corporation/Jerome Lemelson alleging that
equipment used in the manufacture of semiconductor products infringes their
patents. A number of these customers have notified the Company that they may
seek indemnification from the Company for any damages and expenses resulting
from this matter. Certain of the Company's customers have engaged in litigation
with Mr. Lemelson involving a number of his patents and some of these cases have
settled. Although the ultimate outcome of these matters is not presently
determinable, the Company believes that the resolution of all such pending
matters will not have a material adverse effect on the Company's financial
position or results of operations, however, there can be no assurance of this.
Sole or Limited Sources of Supply; Reliance on Subcontractors;
Complexity in Manufacturing Processes.subassemblies. Certain components, subassemblies and services necessary for
the manufacture of the Company'sour systems are obtained from a sole supplier or limited
group of suppliers. The Company doesWe do not maintain any long-term supply agreements with
any of itsour suppliers. TheWe have entered into arrangements with J.A. Woollam
Company is relying increasinglyfor the purchase of the spectroscopic ellipsometer component, Midac
Corporation for the purchase of the FTIR spectrometer component, and
Kensington Laboratories for the robotics incorporated in our advanced
measurement systems. Our reliance on outside vendors to manufacture many components and
subassemblies. The Company's reliance ona sole or a limited group of suppliers
and the Company's increasing reliance on subcontractors involveinvolves several risks, including a potential inabilitythe following:
. we may be unable to obtain an adequate supply of required components andcomponents;
. we have reduced control ofover pricing and the timely delivery of
components and subassemblies.subassemblies; and
. our suppliers may be unable to develop technologically advanced products
to support our growth and development of new systems.
Because the manufacturemanufacturing of certain of these components and subassemblies
is aninvolves extremely complex processprocesses and requires long lead times, there can be no assurance thatwe may
experience delays or shortages caused by suppliers will not
occur in the future. Certainsuppliers. We believe that
alternative sources could be obtained and qualified, if necessary, for most
sole and limited source parts. However, if we were forced to seek alternative
sources of the Company'ssupply or to manufacture such components or subassemblies
internally, we may be forced to redesign our systems, which could prevent us
from shipping our systems to customers on a timely basis. Some of our
suppliers have relatively limited financial and other resources. Any inability
to obtain adequate deliveries, or any other circumstance that would restrict
the Company'sour ability to ship itsour products, could damage relationships with current and
prospective customers and could harm our business.
II-13
Our current and potential competitors have significantly greater resources
than we do, and increased competition could impair sales of our products
We operate in the highly competitive semiconductor, flat panel display and
magnetic recording head industries and face competition from a number of
companies, many of which have greater financial, engineering, manufacturing,
marketing and customer support resources than we do. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
or market developments by devoting greater resources to the development,
promotion and sale of products, which could impair sales of our products.
Moreover, there has been significant merger and acquisition activity among our
competitors and potential competitors. These transactions by our competitors and
potential competitors may provide them with a competitive advantage over us by
enabling them to rapidly expand their product offerings and service capabilities
to meet a broader range of customer needs. Many of our customers and potential
customers in the semiconductor, flat panel display and magnetic recording head
industries are large companies that require global support and service for their
metrology systems.
Variations in the amount of time it takes for us to sell our systems may cause
fluctuations in our operating results, which could cause our stock price to
decline
Variations in the length of our sales cycles could cause our revenues to
fluctuate widely from period to period. Our customers generally take a long
time to evaluate our metrology systems. We expend significant resources
educating and providing information to our prospective customers regarding the
uses and benefits of our systems. The length of time it takes for us to make a
sale depends upon many factors, including:
. the efforts of our sales force and our independent sales representatives
and distributors;
. the complexity of the customer's metrology needs;
. the internal technical capabilities and sophistication of the customer;
. the customer's budgetary constraints; and
. the quality and sophistication of the customer's current processing
equipment.
Because of the number of factors influencing the sales process, the period
between our initial contact with a customer and the time when we recognize
revenue from that customer, if ever, varies widely. Our sales cycles, including
the time it takes for us to build a product to customer specifications after
receiving an order, typically range from three to six months. Sometimes our
sales cycles can be much longer, particularly with customers in Asia. During
these cycles, we commit substantial resources to our sales efforts in advance
of receiving any revenue, and we may never receive any revenue from a customer
despite our sales efforts.
If we do make a sale, our customers often purchase only one of our systems,
and then evaluate its performance for a lengthy period of time before
purchasing additional systems. The purchases are generally made by purchase
orders and not long-term contracts. The number of additional products a
customer purchases, if any, depends on many factors, including a customer's
capacity requirements. The period between a customer's initial purchase and any
subsequent purchases can vary from three months to a year or longer, and
variations in the length of this period could cause fluctuations in our
operating results and stock price.
Relatively small fluctuations in our system costs may cause our operating
results to vary significantly each quarter
During any quarter, a significant portion of our revenue is derived from the
sale of a relatively small number of systems. Our automated metrology systems
range in price from approximately $200,000 to $700,000 per system, our
integrated metrology systems range in price from approximately $90,000 to
$295,000 per system and our tabletop metrology systems range in price from
approximately $50,000 to $200,000 per system. Accordingly, a small change in
the number of systems we sell will cause significant changes in our operating
results.
II-14
We depend on orders that are received and shipped in the same quarter and
therefore have limited visibility of future product shipments
Our net sales in any given quarter depend upon a combination of orders
received in that quarter for shipment in that quarter and shipments from
backlog. Our backlog at the beginning of each quarter does not include all
systems sales needed to achieve expected revenues for that quarter.
Consequently, we are dependent on obtaining orders for systems to be shipped in
the same quarter that the order is received. Moreover, customers may reschedule
shipments, and production difficulties could delay shipments. Accordingly, we
have limited visibility of future product shipments, and our results of
operations are subject to significant variability from quarter to quarter.
Because of the high cost of switching equipment vendors in our markets, it is
sometimes difficult for us to win customers from our competitors even if our
metrology systems are superior to theirs
We believe that once a semiconductor, flat panel display or magnetic
recording head customer has selected one vendor's metrology system, the
customer generally relies upon that system and, to the extent possible,
subsequent generations of the same vendor's system, for the life of the
application. Once a vendor's metrology system has been installed, a customer
must often make substantial technical modifications and may experience downtime
in order to switch to another vendor's metrology system. Accordingly, unless
our systems offer performance or cost advantages that outweigh a customer's
expense of switching to our systems, it will be difficult for us to achieve
significant sales to that customer once it has selected another vendor's system
for an application.
If we deliver systems with defects, our credibility will be harmed and the
sales and market acceptance of our systems will decrease
Our systems are complex and sometimes have contained errors, defects and
bugs when introduced. If we deliver systems with errors, defects or bugs, our
credibility and the market acceptance and sales of our systems would be harmed.
Further, if our systems contain errors, defects or bugs, we may be required to
expend significant capital and resources to alleviate such problems. Defects
could also lead to product liability as a result of product liability lawsuits
against us or against our customers. We have agreed to indemnify our customers
in some circumstances against liability arising from defects in our systems. In
the event of a successful product liability claim, we could be obligated to pay
damages significantly in excess of our product liability insurance limits.
If we are not successful in developing new and enhanced metrology systems we
will likely lose market share to our competitors
We operate in an industry that is subject to technological changes, changes
in customer demands and the introduction of new, higher performance systems
with short product life cycles. To be competitive, we must continually design,
develop and introduce in a timely manner new metrology systems that meet the
performance and price demands of semiconductor, flat panel display and magnetic
recording head manufacturers and suppliers. We must also continue to refine our
current systems so that they remain competitive. We may experience difficulties
or delays in our development efforts with respect to new systems, and we may
not ultimately be successful in developing them. Any significant delay in
releasing new systems could adversely affect our reputation, give a competitor
a first-to-market advantage or cause a competitor to achieve greater market
share.
II-15
Successful infringement claims by third parties could result in substantial
damages, lost product sales and the loss of important intellectual property
rights by us
Our commercial success depends in part on our ability to avoid infringing or
misappropriating patents or other proprietary rights owned by third parties.
From time to time we have received communications from third parties asserting
that our products infringe, or may infringe, the proprietary rights of these
third parties. We are presently discussing patent issues with Therma-Wave, Inc.
We believe that Therma-Wave's Opti-Probe product line may infringe on a patent
issued to us relating to absolute reflectance measurement. Therma-Wave alleges
that some of our thin film thickness measurement products may infringe on a
Therma-Wave patent relating to the combination of a spectroscopic reflectometer
with a spectroscopic ellipsometer. Although we believe that none of our products
infringe on a valid Therma-Wave patent, if this matter is resolved against us,
our business could be harmed. Additionally, some customers of ours have received
notices from The Lemelson Medical, Education, & Research Foundation, a limited
partnership, alleging that equipment used in the manufacture of semiconductor
products infringes on their patents. A number of these customers have notified
us that they are seeking indemnification from us for any damages and expenses
resulting from this matter. Certain of our customers have engaged in litigation
with the late Mr. Lemelson involving a number of his patents and some of these
cases have been settled. Although the ultimate outcome of these matters is not
presently determinable, the resolution of all such pending matters could harm
our business. These claims of infringement may lead to protracted and costly
litigation that could require us to pay substantial damages or have the sale of
our products stopped by an injunction. Infringement claims could also cause
product delays or require us to redesign our products, and these delays could
result in the loss of substantial revenues. We may also be required to obtain a
license from the third party or cease activities utilizing the third party's
proprietary rights. We may not be able to enter into such a license or such
license may not be available on commercially reasonable terms. The loss of an
infringement action or the inability to license a third party's intellectual
property could therefore prevent our ability to sell our products, or require us
to redesign our products making the sale of such products more expensive for us.
We may be required to initiate litigation in order to enforce any patents issued
to or licensed by us, or to determine the scope or validity of a third party's
patent or other proprietary rights. Any such litigation, regardless of outcome,
could be expensive and time consuming, and could subject us to significant
liabilities or require us to re-engineer our product or obtain expensive
licenses from third parties.
If we fail to adequately protect our intellectual property, it will be easier
for our competitors to sell competing products
Our future success and competitive position depend in part upon our ability
to obtain and maintain proprietary technology for our principal product
families, and we rely, in part, on patent, trade secret and trademark law to
protect that technology. If we fail to adequately protect our intellectual
property, it will be easier for our competitors to sell competing products. We
own or have licensed a number of patents relating to our metrology systems, and
have filed applications for additional patents. Any of our pending patent
applications may be rejected, and we may not in the future be able to develop
additional proprietary technology that is patentable. In addition, the patents
we do own or that have been issued or licensed to us may not provide us with
competitive advantages and may be challenged by third parties. Third parties
may also design around these patents.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information and technology. We routinely enter
into confidentiality agreements with our employees. However, in the event that
these agreements may be breached, we may not have adequate remedies. Our
confidential and proprietary information and technology might also be
independently developed by or become otherwise known to third parties.
II-16
We must expend a significant amount of time and resources to develop new
products, and if these products do not achieve commercial acceptance, our
operating results may suffer
We expect to spend a significant amount of time and resources to develop new
systems and refine existing systems. In light of the long product development
cycles inherent in our industry, these expenditures will be made well in
advance of the prospect of deriving revenue from the sale of new systems. Our
ability to commercially introduce and successfully market new systems is
subject to a wide variety of challenges during this development cycle that
could delay introduction of these systems. In addition, since our customers are
not obligated by long-term contracts to purchase our systems, our anticipated
product orders may not materialize, or orders that do materialize may be
cancelled. As a result, if we do not achieve market acceptance of new products,
our operating results will suffer.
We must attract and retain key personnel with relevant industry knowledge to
help support our future growth, and competition for such personnel in our
industry is intense
Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing, customer support,
finance and manufacturing personnel. We do not enter into employment contracts
with any of our key personnel. The loss of any of these key personnel, who
would be extremely difficult to replace, could harm our business and operating
results. To support our future growth, we will need to attract and retain
additional qualified employees. Competition for such personnel in our industry
is intense, and we may not be successful in attracting and retaining qualified
employees.
We manufacture all of our systems at a limited number of facilities, and any
prolonged disruption in the operations of those facilities could reduce our
revenues
We produce all of our systems in our manufacturing facilities located in
Sunnyvale, California and through our subsidiaries in Japan and Korea. Our
manufacturing processes are highly complex and require sophisticated, costly
equipment and specially designed facilities. As a result, any prolonged
disruption in the operations of our manufacturing facilities could seriously
harm our ability to satisfy our customer order deadlines. If we cannot deliver
our systems in a timely manner, our revenues will likely suffer.
If we choose to acquire new and complementary businesses, products or
technologies instead of developing them ourselves, we may be unable to complete
these acquisitions or may not be able to successfully integrate an acquired
business in a cost-effective and non-disruptive manner
Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands and
competitive pressures. To this end, from time to time we have acquired
complementary businesses, products, or technologies instead of developing them
ourselves and may choose to do so in the future. We do not know if we will be
able to complete any acquisitions, or whether we will be able to successfully
integrate any acquired business, operate it profitably or retain its key
employees. Integrating any business, product or technology we acquire could be
expensive and time consuming, disrupt our ongoing business and distract our
management. In addition, in order to finance any acquisitions, we might need to
raise additional funds through public or private equity or debt financings. In
that event, we could be forced to obtain financing on terms that are not
favorable to us and, in the case of equity financing, that result in dilution
to our shareholders. If we are unable to integrate any acquired entities,
products or technologies effectively, our business will suffer. In addition,
any amortization of goodwill or other assets or charges resulting from the
costs of acquisitions could harm our business and operating results.
II-17
Our efforts to protect our intellectual property may be less effective in some
foreign countries where intellectual property rights are not as well protected
as in the United States
In 1998 and 1999, 61.8% and 60.9%, respectively, of our total net revenues
were derived from sales to customers in foreign countries, including certain
countries in Asia, such as Taiwan, Korea and Japan. The laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States, and many U.S. companies have encountered substantial
problems in protecting their proprietary rights against infringement in such
countries. For example, Taiwan is not a signatory of the Patent Cooperation
Treaty, which is designed to specify rules and methods for defending
intellectual property internationally. The publication of a patent in Taiwan
prior to the filing of a patent in Taiwan would invalidate the ability of a
company to obtain a patent in Taiwan. Similarly, in contrast to the United
States, where the contents of patents remain confidential during the patent
prosecution process, the contents of a patent are published upon filing, which
provides competitors an advanced view of the contents of a patent application
prior to the establishment of patent rights. If we fail to adequately protect
our intellectual property in these countries, it would be easier for our
competitors to sell competing products in those countries.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, which include changes in foreign
currency exchange rates and interest rates. We do not use derivative financial
instruments. Instead, we actively manage the balances of current assets and
liabilities denominated in foreign currencies to minimize currency fluctuation
risk. As a result, a hypothetical 10% change in the foreign currency exchange
rates at December 31, 1998 and 1999 would not have a material adverse effectimpact on the Company's business andour
results of operations. Cyclicality of Semiconductor Industry. The semiconductor industry has
been characterized by cyclicality. The industry has experienced significant
economic downturns at various timesOur investments in the last decade, characterized by
diminished product demand, accelerated erosion of average selling prices and
production over-capacity. The Company may experience substantial period-to-
period fluctuations in future operating resultsmarketable securities are subject to
interest rate risk but due to general industry
conditions or events occurring in the general economy.
Managementshort-term nature of Growth. The Company's business is currently experiencing
a period of growth that has placed and is expected to continue to place a
significant strain on the Company's personnel and resources. The Company's
ability to manage future growth, if any, will depend on its ability to continue
to implement and improve operational, financial and management information and
controls systems on a timely basis, together with maintaining effective cost
controls, and any failure to do so couldthese investments,
interest rate changes would not have a material adverse effectimpact on the
Company's business, operatingtheir value at
December 31, 1998 and 1999. We also have fixed rate yen denominated debt
obligations in Japan that have no interest rate risk. At December 31, 1998 and
1999, our total debt obligation was $3.8 million and $2.9 million with a long-
term portion of $2.5 million and $2.3 million, respectively. The fixed rates on
such obligations in 1998 and 1999 ranged from 1.9% to 3.4% and 1.5% to 3.4%,
respectively, and mature on various dates through May 2006. A hypothetical 10%
change in interest rates at December 31, 1998 and 1999 would not have a material
impact on our results and financial condition.
II-8of operation.
II-18
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements filed herewith are listedinformation required by Item 8 of Form 10-K is presented here in the
index in Item
14.
II-9following order:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report........................................................... 4
Consolidated Balance Sheets............................................................ 4
Consolidated Statements of Income...................................................... 4
Consolidated Statements of Shareholders' Equity and Comprehensive Income............... 4
Consolidated Statements of Cash Flows.................................................. 4
Notes to Consolidated Financial Statements............................................. 4
II-19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Nanometrics Incorporated:Incorporated
We have audited the accompanying consolidated balance sheets of Nanometrics
Incorporated and subsidiaries as of December 31, 19961998 and 1995,1999, and the related
consolidated statements of operations,income, shareholders' equity and comprehensive
income, and of cash flows for each of the three years in the period ended
December 31, 1996. Our audits also
included the consolidated financial statement schedule listed in the Index at
Item 14.(a)2.1999. These financial statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Nanometrics Incorporated and
subsidiaries at December 31, 19961998 and 1995,1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 19961999 in conformity with generally accepted accounting principles. Also, in
our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
February 19, 1997
II-10
15, 2000
II-20
NANOMETRICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and equivalents $ 1,725 $ 3,625
Short-term investments 6,657 4,458
Accounts receivable, less allowance
for doubtfull accounts of $419 and
$380 in 1996 and 1995, respectively 11,100 7,567
Inventories 5,078 3,955
Deferred income taxes 1,648 2,069
Prepaid expenses and other 882 428
------- -------
Total current assets 27,090 22,102
PROPERTY, PLANT AND EQUIPMENT, Net 2,600 2,900
OTHER ASSETS 274 165
------- -------
TOTAL $29,964 $25,167(In thousands, except share amounts)
December 31,
----------------
1998 1999
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,518 $ 3,442
Short-term investments...................................... 9,913 14,698
Accounts receivable, net of allowances of $420 and $425 in
1998 and 1999, respectively................................ 8,458 11,435
Inventories................................................. 11,719 9,460
Deferred income taxes....................................... 1,441 1,722
Prepaid expenses and other.................................. 2,328 1,196
------- -------
Total current assets...................................... 35,377 41,953
PROPERTY, PLANT AND EQUIPMENT, Net............................ 2,481 2,998
DEFERRED INCOME TAXES......................................... 560 135
OTHER ASSETS.................................................. 887 1,324
------- -------
TOTAL ASSETS.............................................. $39,305 $46,410
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 1,395 $ 2,412
Accrued payroll and related expenses........................ 317 751
Other current liabilities................................... 1,720 1,721
Income taxes payable........................................ -- 464
Current portion of debt obligations......................... 1,324 584
------- -------
Total current liabilities................................. 4,756 5,932
DEFERRED RENT................................................. 43 35
DEBT OBLIGATIONS.............................................. 2,496 2,288
------- -------
Total liabilities......................................... 7,295 8,255
------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 25,000,000 shares authorized;
8,690,643 and 9,163,998 outstanding in 1998 and 1999,
respectively............................................... 14,170 17,277
Retained earnings........................................... 17,974 20,608
Accumulated other comprehensive income (loss)............... (134) 270
------- -------
Total shareholders' equity................................ 32,010 38,155
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $39,305 $46,410
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,563 $ 1,172
Accrued payroll and related expenses 533 486
Other current liabilities 763 1,155
Income taxes payable 1,271 398
Current portion of long-term debt 347 553
------- -------
Total current liabilities 4,477 3,764
LONG-TERM DEBT, Net of current portion 3,296 3,528
DEFERRED INCOME TAXES 131 301
------- -------
Total liabilities 7,904 7,593
------- -------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, no par value;
25,000,000 shares authorized;
8,258,061 and 7,883,910 outstanding 11,833 10,983
Retained earnings 10,387 6,394
Accumulated translation adjustment (160) 197
------- -------
Total shareholders' equity 22,060 17,574
------- -------
TOTAL $29,964 $25,167
======= =======
See notes to consolidated financial statements.
II-11
II-21
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
NET REVUES: 1996 1995 1994
Product sales $24,603 $18,117 $ 9,655
Service 5,733 4,642 3,924
------- ------- -------
Total net revenues 30,336 22,759 13,579
------- ------- -------
COSTS AND EXPENSES:
Cost of product sales 10,109 8,189 5,128
Cost of service 4,088 3,406 2,862
Research and development 2,754 2,631 2,405
Selling 4,696 3,712 2,946
General and administrative 2,476 2,180 2,469
------- ------- -------
Total costs and expenses 24,123 20,118 15,810
------- ------- -------
OPERATING INCOME
(LOSS) 6,213 2,641 (2,231)
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income 390 302 93
Interest expense (92) (152) (49)
Other, net 146 674 141
------- ------- -------
Total other income, net 444 824 185
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 6,657 3,465 (2,046)
PROVISION (BENEFIT) FOR INCOME TAXES 2,664 (812) 28
------- ------- -------
NET INCOME (LOSS) $ 3,993 $ 4,277 $(2,074)(In thousands, except per share amounts)
Years Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
NET REVENUES:
Product sales...................................... $32,767 $29,718 $32,162
Service............................................ 3,890 3,546 4,246
------- ------- -------
Total net revenues............................... 36,657 33,264 36,408
------- ------- -------
COSTS AND EXPENSES:
Cost of product sales.............................. 12,092 13,002 14,606
Cost of service.................................... 3,632 3,669 4,560
Research and development........................... 2,986 4,206 4,658
Acquired in-process research and development....... -- 1,421 --
Selling............................................ 6,050 5,728 5,871
General and administrative......................... 2,765 2,828 2,973
------- ------- -------
Total costs and expenses......................... 27,525 30,854 32,668
------- ------- -------
INCOME FROM OPERATIONS............................... 9,132 2,410 3,740
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income.................................... 535 572 662
Interest expense................................... (110) (108) (180)
Other, net......................................... (175) 64 94
------- ------- -------
Total other income, net.......................... 250 528 576
------- ------- -------
INCOME BEFORE INCOME TAXES........................... 9,382 2,938 4,316
PROVISION FOR INCOME TAXES........................... 3,625 1,108 1,682
------- ------- -------
NET INCOME........................................... $ 5,757 $ 1,830 $ 2,634
======= ======= =======
NET INCOME PER SHARE:
Basic.............................................. $ 0.69 $ 0.21 $ 0.30
======= ======= =======
Diluted............................................ $ 0.65 $ 0.20 $ 0.28
======= ======= =======
SHARES USED IN PER SHARE COMPUTATION:
Basic.............................................. 8,325 8,635 8,829
======= ======= =======
Diluted............................................ 8,820 9,041 9,393
======= ======= =======
EARNINGS PER COMMON AND EQUIVALENT
SHARE $ 0.47 $ 0.52 $ (0.28)
======= ======= =======
COMMON AND EQUIVALENT SHARES USED IN
PER SHARE COMPUTATION 8,524 8,280 7,304
======= ======= =======
See notes to consolidated financial statements.
II-12
II-22
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------COMPREHENSIVE INCOME
(In thousands, except share amounts)
COMMON STOCK ACCUMULATED TOTAL
---------------------- RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT EARNINGS ADJUSTMENT EQUITYAccumulated
Common Stock Other Total
----------------- Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income(Loss) Equity Income
--------- ------- -------- ------------- ------------- -------------
BALANCES, January 1,
1994 7,119,303 $ 9,859 $ 4,191 $ 377 $14,4271997................... 8,258,061 $11,833 $10,387 $(160) $22,060
Comprehensive income:
Net income............. -- -- 5,757 -- 5,757 $5,757
Other comprehensive
loss, net of tax:
Foreign currency
translation
adjustments........... -- -- -- (607) (607) (607)
------
Comprehensive
income.............. -- -- -- -- -- $5,150
======
Issuance of common stock
under employee stock
purchase plan 11,975 8 - - 8plan.......... 24,482 112 -- -- 112
Issuance of common stock
under stock option
plan 239,700 151 - - 151
Accumulated translation adjustment - - - 483 483
Net loss - - (2,074) - (2,074)plan................... 238,941 478 -- -- 478
Tax benefit of employee
stock transactions..... -- 728 -- -- 728
--------- ------- ------- ----- -------
BALANCES, December 31,
1994 7,370,978 10,018 2,117 860 12,9951997................... 8,521,484 13,151 16,144 (767) 28,528
Comprehensive income:
Net income............. -- -- 1,830 -- 1,830 $1,830
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustments........... -- -- -- 633 633 633
------
Comprehensive
income.............. -- -- -- -- -- $2,463
======
Issuance of common stock
under employee stock
purchase plan 26,504 29 - - 29plan.......... 18,006 124 -- -- 124
Issuance of common stock
under stock option
plan 486,428 322 - - 322plan................... 151,153 576 -- -- 576
Tax benefit of employee
stock option
transactions - 614 - - 614
Accumulated translation adjustment - - - (663) (663)
Net income _ _ 4,277 - 4,277transactions..... -- 319 -- -- 319
--------- ------- ------- ----- -------
BALANCES, December 31,
1995 7,883,910 10,983 6,394 197 17,5741998................... 8,690,643 14,170 17,974 (134) 32,010
Comprehensive income:
Net income............. -- -- 2,634 -- 2,634 $2,634
Other comprehensive
income (loss), net of
tax:
Foreign currency
translation
adjustments........... -- -- -- 422 422 422
Unrealized loss on
investments........... -- -- -- (18) (18) (18)
------
Comprehensive
income.............. -- -- -- -- -- $3,038
======
Issuance of common stock
under employee stock
purchase plan 25,627 115 - - 115plan.......... 28,937 148 -- -- 148
Issuance of common stock
under stock option
plan 348,524 233 - - 233plan................... 444,418 1,936 -- -- 1,936
Tax benefit of employee
stock option
transactions - 502 - - 502
Accumulated translation adjustment - - - (357) (357)
Net income - - 3,993 - 3,993transactions..... -- 1,023 -- -- 1,023
--------- ------- ------- ----- -------
BALANCES, December 31,
1996 8,258,061 $11,833 $10,387 $(160) $22,0601999................... 9,163,998 $17,277 $20,608 $ 270 $38,155
========= ======= ======= ======= ===== =======
See notes to consolidated financial statements.
II-13II-23
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)(In thousands)
- ------------------------------------------------------------------------------------------------
1996 1995 1994December 31,
----------------------------
1997 1998 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)income..................................... $ 3,9935,757 $ 4,2771,830 $ (2,074)2,634
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 309 318 332amortization................ 213 298 359
Deferred rent................................ 13 26 (8)
Acquired in-process research and
development................................. -- 1,421 --
Deferred income taxes 263 (1,826) 306taxes........................ (588) (573) 174
Changes in assets and liabilities:liabilities, net of
effects of product line acquisition:
Accounts receivable (4,031) (2,886) 811
Inventories (1,228) 766 (494)receivable........................ 93 2,805 (2,496)
Inventories................................ (2,322) (2,751) 2,449
Prepaid expenseincome taxes....................... -- (1,325) 1,325
Prepaid expenses and other (458) (202) (125)other................. (218) 93 (178)
Accounts payable, accrualsaccrueds and other
current liabilities 111 782 (526)liabilities....................... 1,238 (1,355) 1,341
Income taxes payable 1,397 1,050 (285)payable....................... 26 416 1,462
-------- -------- --------
Net cash provided by (used in)
operating
activities 356 2,279 (2,055)activities.............................. 4,212 885 7,062
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
PurchasePurchases of short-term investments (12,522) (8,786) (3,250)investments............ (18,152) (17,790) (22,575)
Sales/maturities of short-term investments 10,321 4,821 6,688investments..... 15,214 17,472 17,760
Purchases of property, plant and equipment (270) (117) (31)equipment..... (97) (167) (511)
Other assets (128) (60) 11assets................................... (17) (50) (536)
Product line acquisition....................... -- (3,225) --
-------- -------- --------
Net cash provided by (used in)used in investing activities (2,599) (4,142) 3,418activities.... (3,052) (3,760) (5,862)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 762 4,700 -issuance of debt obligations..... 329 761 90
Repayments of long-term borrowings (752) (822) (544)debt obligations................. (329) (660) (1,358)
Sale of shares under employee stock purchase
and stock option plans 348 351 159plans........................ 590 700 2,084
-------- -------- --------
Net cash provided by (used in)
financing
activities 358 4,229 (385)activities.............................. 590 801 816
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (15) (876) (53)CASH.......... 181 (64) (92)
-------- -------- --------
NET CHANGE IN CASH AND EQUIVALENTS (1,900) 1,490 925CASH EQUIVALENTS.......... 1,931 (2,138) 1,924
CASH AND CASH EQUIVALENTS, beginningBeginning of year 3,625 2,135 1,210year..... 1,725 3,656 1,518
-------- -------- --------
CASH AND CASH EQUIVALENTS, endEnd of yearyear........... $ 1,7253,656 $ 3,6251,518 $ 2,1353,442
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interestinterest......................... $ 118117 $ 13592 $ 5072
======== ======== ========
Cash paid for income taxestaxes..................... $ 7154,192 $ 1572,558 $ 16182
======== ======== ========
See notes to consolidated financial statements.
II-14
II-24
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 19951997, 1998 AND 1994
- --------------------------------------------------------------------------------1999
1. SIGNIFICANT ACCOUNTING POLICIESSignificant Accounting Policies
Description of Business - NanometricsBusiness--Nanometrics Incorporated (the "Company") designs,
manufactures, markets and services optical microscope-based measurementits wholly-owned
subsidiaries sell, design, manufacture, market and inspectionsupport thin film and
overlay dimension metrology systems used primarily for customers in the semiconductor, flat
panel display and magnetic recording head industries. These metrology systems
precisely measure a wide range of film types deposited on substrates during
manufacturing processin order to control duringmanufacturing processes and increase
production yields in the fabrication of wafers used to make integrated circuits, and flat panel displays.
In addition, the Company produces analytical instruments for general use in
biological and industrial research. The Company's products are primarily sold
to semiconductor and flat panel display manufacturers in the United States, Asia
and Europe, and its business is dependent on the demand for semiconductors and
electronic products using flat panel
displays (suchand magnetic recording heads. The thin film metrology systems use a
broad spectrum of wavelengths, high-sensitivity optics, proprietary software
and patented technology to measure the thickness and uniformity of films
deposited on silicon and other substrates as portable computers).well as their chemical
composition. The overlay metrology systems are used to measure the overlay
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process.
Basis of Presentation - ThePresentation--The consolidated financial statements include
the
CompanyNanometrics Incorporated and its wholly-owned subsidiaries.subsidiaries (the Company). All
significant intercompany accounts and transactions are eliminated.
Although for presentation purposes the Company has indicated its year end as
December 31, its fiscal year actually ends on the Saturday nearest to December
31. The Company's fiscal years for 1996, 1995 and 1994 ended on December 28,
1996, December 30, 1995, and December 31, 1994. Fiscal 1996, 1995 and 1994 each
contained 52 weeks.
Financial Statement Estimates - Thehave been eliminated in
consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include provisions for
doubtful accounts, warranty costs and lower of cost or market valuation
reserves. Actual results could differ from those estimates.
Fiscal Year--The Company uses a 52/53 week fiscal year ending on the
Saturday nearest to December 31. Accordingly, fiscal years 1997, 1998 and 1999
ended on January 3, 1998, January 2, 1999, and January 1, 2000, and consisted
of 53, 52 and 52 weeks, respectively. For purposes of the consolidated
financial statements, the year end is denoted as December 31. All references to
years relate to fiscal years rather than calendar years.
Cash and Equivalents - Cash Equivalents--Cash and cash equivalents include cash and highly
liquid debt instruments with original maturities of three months or less when
purchased.
Short-Term Investments - The Company's short-termInvestments--Short-term investments consist of United States
Treasury bills with maturitiesand are stated at the date of acquisition of more than
three months.
While the Company's intent is to hold debt securities to maturity, theyfair value based on quoted market prices.
Short-term investments are classified as available-for-sale becausebased on the
saleCompany's intended use. The difference between amortized cost and fair value
representing unrealized holding gains or losses are recorded as a component of
such securities may be
required prior to maturity. Available-for-sale securities at December 31, 1996shareholders' equity as accumulated other comprehensive income (loss). Gains
and losses on sales of investments are determined on a specific identification
basis.
Fair Value of Financial Instruments--Financial instruments include cash
equivalents, short-term investments and debt obligations. Cash equivalents and
short-term investments are stated at cost whichfair market value based on quoted market
prices. The recorded carrying amount of the Company's debt obligations
approximates fair market value.
Concentration of Credit Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of cash and
equivalents, short-term investments and accounts receivable. The Company
invests its cash and short-term investments generally in United States Treasury
bills that are primarily held by one broker. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral
for sales on credit. The Company maintains reserves for potential credit losses
and such losses have historically been within management's expectations.
II-15
Inventories - InventoriesInventories--Inventories are stated at the lower of cost (first-in, first-out)first-
out) or market.
II-25
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Property, Plant and Equipment - Property,Equipment--Property, plant and equipment are stated at
cost. Depreciation is computed using straight line and accelerated methods over
the following estimated useful lives of the assets ranging from three to 45 years.assets:
Building........................................................ 15--45 years
Machinery and equipment......................................... 3-- 7 years
Furniture and fixtures.......................................... 5--15 years
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the improvements or the lease term.
Goodwill and Intangible Assets--The Company amortizes goodwill and acquired
intangible assets (included in other assets) using the straight-line method
over an estimated useful life of five years.
Long-Lived Assets--The Company evaluates long-lived assets for impairment
using an undiscounted cash flow method whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Income Taxes--Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. A valuation allowance is provided when necessary to reduce
deferred tax assets to an amount that is more likely than not to be realized.
Revenue Recognition--Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. For
product sales, this generally occurs at the time of shipment, and for revenues
from service work, this generally occurs when the work is performed. Revenues
from service contracts are recognized ratably over the period under contract.
The Company sells the majority of its product with a one-year repair or
replacement warranty and records a provision for estimated claims at the time
of sale.
Stock-Based Compensation - TheCompensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, "AccountingAccounting for Stock Issued to
Employees."
Revenue Recognition - Revenues from product sales are recognized at the time of
shipment. Revenue from service contracts is recognized ratably over the period
of the contract. The Company sells the majority of its products with a one-year
repair or replacement warranty and records a provision for estimated claims at
the time of sale.
Fair Value of Financial Instruments - Financial instruments include cash
equivalents, short-term investments, and long-term obligations. Cash
equivalents are stated at fair market value based on quoted market prices. The
short-term investments are stated at cost which approximates fair market value.
The recorded carrying amount of the Company's long-term obligations approximates
fair market value.
Foreign Currency - TheCurrency--The functional currencies of the Company's foreign
subsidiaries are the local currencies. Accordingly, translation adjustments for
the subsidiaries have been included in shareholders' equity. Gains and losses
from transactions denominated in currencies other than the functional
currencycurrencies of the Company or its subsidiaries are included in other income and
expense and consist of gainslosses of $39,000, $623,000$217,000 for 1997 and $65,000$13,000 for 1996, 19951998 and 1994, respectively.a
gain of $91,000 for 1999.
Net Income Taxes -The Company accounts forPer Share--Basic net income taxes under an asset and liability
approach for financial accounting and reporting of income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, and net operating loss and tax credit
carryforwards.
Common and Equivalent Per Share Data - Common and equivalent per share dataexcludes dilution and is
computed usingby dividing net income by the number of weighted average number of common andshares
outstanding for the period. Diluted net income per share reflects the potential
dilution from outstanding dilutive common
equivalent shares outstanding. Common equivalent shares include dilutive common stock options (using the treasury stock
method) and shares issuable under the employee stock purchase plan.
Common stockRecently Issued Accounting Standards--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of
II-26
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for the Company beginning in the first quarter of fiscal year
2001. Although the Company has not fully assessed the implications of SFAS No.
133, management does not believe the adoption of this statement will have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This bulletin summarizes certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the first quarter of fiscal
2000. Although the Company has not fully assessed the implications of SAB No.
101, management does not believe adoption of this bulletin will have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
Certain Significant Risks and Uncertainties--Financial instruments which
potentially subject the Company to concentration of credit risk consist of cash
and cash equivalents, short-term investments and accounts receivable. Cash and
cash equivalents and short-term investments are excludedheld primarily with two
financial institutions and consist primarily of cash in bank accounts and
United States Treasury bills. The Company sells its products primarily to end
users in the United States and Asia, and generally does not require its
customers to provide collateral or other security to support accounts
receivable. Management performs ongoing credit evaluations of its customers'
financial condition. The Company maintains allowances for estimated potential
bad debt losses.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position, results of operations or cash
flows; advances and trends in new technologies and industry standards;
competitive pressures in the form of new products or price reductions on
current products; changes in product mix; changes in the overall demand for
products offered by the Company; changes in third-party manufacturers; changes
in key suppliers; changes in certain strategic relationships or customer
relationships; litigation or claims against the Company based on intellectual
property, patent, product, regulatory or other factors; fluctuations in foreign
currency exchange rates; risk associated with changes in domestic and
international economic and/or political regulations; availability of necessary
components or subassemblies; disruption of manufacturing facilities; and the
Company's ability to attract and retain employees necessary to support its
growth.
The Company's customer base is highly concentrated. A relatively small
number of customers have accounted for a significant portion of the Company's
revenues. In 1999, aggregate revenue from the computationCompany's top ten largest
customers comprised approximately 59.5% of the Company's total net revenues.
Certain components and subassemblies used in loss periodsthe Company's products are
purchased from a sole supplier or a limited group of suppliers. In particular,
the Company currently purchases its spectroscopic ellipsometer, Fourier
transform infrared reflectometry spectrometer and robotics used in its advanced
measurement systems from a sole supplier or a limited group of suppliers. Any
shortage or interruption in the supply of any of the components or
subassemblies used in the Company's products or the inability of the Company to
procure these components or subassemblies from alternate sources on acceptable
terms, could have a material adverse effect on the Company's business,
financial condition and results of operations.
II-27
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
2. Product Line Acquisition
On March 30, 1998, the Company purchased from Optical Specialties, Inc.
(OSI) a metrology system product line and related assets used to measure
the critical dimensions and overlay registration errors observed in
submicron photolithography. Under the agreement, the Company paid
approximately $3,225,000 in cash for the assets and in-process research and
development. The total purchase price and allocation among the tangible and
intangible assets and liabilities acquired (including acquired in-process
research and development) is summarized as theyfollows (in thousands):
Total purchase price--cash consideration............................ $3,225
======
Purchase price allocation:
Tangible assets................................................... $1,923
Intangible assets:
Core and developed technology................................... 419
Goodwill........................................................ 196
In-process research and development............................... 1,421
Liabilities....................................................... (734)
------
Total purchase price allocation............................... $3,225
======
Net intangible assets as of December 31, 1998 and 1999 of $523,000 and
$400,000, respectively (net of accumulated amortization of $92,000 and
$215,000, respectively), are antidilutive.
Reclassifications - Certain prior year amountsrecorded within other assets in the accompanying
financial
statements have been reclassified to conformconsolidated balance sheet and are being amortized using the straight-line
method over a five-year useful life.
The purchase price allocation and intangible valuation was based on
management's estimates of the after tax net cash flows and gave explicit
consideration to the current year presentation.
II-16
2. INVENTORIESSEC's views on acquired in-process research and
development as set forth in its September 9, 1998 letter to the American
Institute of Certified Public Accountants. Specifically, the valuation gave
consideration to the following: (i) the employment of a fair market value
premise excluding any Nanometrics-specific considerations which could result in
estimates of investment value for the subject assets; and (ii) comprehensive
due diligence concerning all potential intangible assets including
trademarks/tradenames, patents, copyrights, noncompete agreements, assembled
workforce and customer relationships and sales channel. The value of core
technology was specifically addressed, with a view toward ensuring the relative
allocations to core technology and in-process research and development were
consistent with the relative contributions of each to the final product. The
allocation to in-process research and development was based on a calculation
that considered only the efforts completed as of the transaction date, and only
the cash flow associated with said completed efforts for the products currently
in process.
As indicated above, the Company recorded a one-time charge of $1,421,000 in
the first quarter of 1998 for acquired in-process research and development
related to the Metra 7000 development project that had not reached
technological feasibility, had no alternative future use and for which
successful development was uncertain. Management's conclusion that the in-
process development effort, or any material sub-component, had no alternative
future use was reached in consultation with engineering personnel from both the
Company and OSI.
The project to complete the Metra 7000 product included the completion of a
software platform design started by OSI in 1997. As of the acquisition date,
the Metra 7000 had yet to achieve technological feasibility since there was not
a working prototype with a reliable new software design. At the time of
acquisition, the
II-28
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
estimated cost to complete this software and related development was
approximately $300,000. The Company began shipments of the Metra 7000 product
to a customer in June 1998 and it was at that time that the Company began to
benefit from the acquired research and development related to the product.
Significant assumptions used to determine the value of in-process research
and development included several factors, including the following: (i) forecast
of net cash flows that were expected to result from the development effort
using projections prepared by the Company's management; (ii) percentage
complete of 77% for the Metra 7000 project estimated by considering a number of
factors, including the costs invested to date relative to total cost of the
development effort and the amount of progress completed as of the acquisition
date, on a technological basis, relative to the overall technological
achievements required to achieve the inacquisition functionality of the
eventual product. The technological issues were addressed by engineering
representatives from both the Company and OSI, and when estimating the value of
the technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without any consideration to potential
synergic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the
existing as well as the in-process Metra 7000 products. These projected results
were based on the number of units sold times average selling price less the
associated costs. After preparing the estimated cash flow from the product
being developed, a portion of this cash flow was attributed to the core
technology, which was embodied in the in-process Metra 7000 product line and
enabled a quicker and more cost effective development of the Metra 7000. When
estimating the value of the developed, core and in-process technologies,
discount rates of 25%, 30% and 35%, respectively, were used. These discount
rates considered both the status and risk associated with the respective cash
flows as of the acquisition date.
In the first quarter of 1998, the Company also hired certain former
employees of OSI and incurred approximately $350,000 in related nonrecurring
hiring expenses. Such expenses are classified in the accompanying 1998
consolidated statement of income according to the employees' functions.
3. Inventories
at December 31Inventories consist of the following:
1996 1995
(IN THOUSANDS)
Finished goods $ 1,809 $ 1,398
Work in process 1,414 830following (in thousands):
December 31,
--------------
1998 1999
------- ------
Finished goods............................................... $ 5,607 $4,593
Work in process.............................................. 2,253 1,092
Raw materials and subassemblies.............................. 3,859 3,775
------- ------
Total inventories.......................................... $11,719 $9,460
======= ======
II-29
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
4. Property, Plant and subassemblies 1,855 1,727
------- -------
$ 5,078 $ 3,955
======= =======
3. PROPERTY, PLANT AND EQUIPMENTEquipment
Property, plant and equipment atconsists of the following (in thousands):
December 31,
--------------
1998 1999
------ ------
Land......................................................... $ 949 $1,054
Building..................................................... 2,863 3,183
Machinery and equipment...................................... 1,096 1,462
Furniture and fixtures....................................... 380 446
Leasehold improvements....................................... 453 466
------ ------
5,741 6,611
Accumulated depreciation and amortization.................... (3,260) (3,613)
------ ------
Total property, plant and equipment, net..................... $2,481 $2,998
====== ======
5. Other Current Liabilities
Other current liabilities consist of the following:
1996 1995
(IN THOUSANDS)
Land $ 908 $ 1,014
Building 2,753 3,000
Machinery and equipment 1,510 1,667
Leasehold improvements 397 392
Furnitures and fixtures 281 251
------- -------
5,849 6,324
Accumulated depreciation and amortization (3,249) (3,424)
------- -------
$ 2,600 $ 2,900
======= =======
4. OTHER CURRENT LIABILITIES
Other current liabilities atfollowing (in thousands):
December 31,
-------------
1998 1999
------ ------
Commissions payable.......................................... $ 366 $ 247
Accrued warranty............................................. 581 482
Trade-in allowances.......................................... 262 --
Unearned revenue............................................. 65 384
Other........................................................ 446 608
------ ------
Total other current liabilities.............................. $1,720 $1,721
====== ======
6. Debt Obligations
Debt obligations consist of the following:
1996 1995
(IN THOUSANDS)
Commissions payable $ 269 $ 317
Accrued warranty 303 198
Trade-in allowances - 293
Other accrued liabilities 191 347
------- -------
$ 763 $ 1,155
======= =======
5. INCOME TAXES
Income (loss) before income taxes for the years ended December 31 consists
of the following:
1996 1995 1994
(IN THOUSANDS)
Domestic $ 6,305 $ 1,964 $(2,331)
Foreign 352 1,501 285
------- ------- -------
Total $ 6,657 $ 3,465 $(2,046)
======= ======= =======
II-17
The provision (benefit) for income taxes consists of the following:
1996 1995 1994
(IN THOUSANDS)
Current:
Federal $ 1,583 $ 477 $ (304)
State 354 137 5
Foreign 304 461 21
------- ------- -------
2,241 1,075 (278)
------- ------- -------
Deferred:
Federal 287 (1,302) 304
State 186 (557) -
Foreign (50) (28) 2
------- ------- -------
423 (1,887) 306
------- ------- -------
Provision (benefit) for
income taxes $ 2,664 $ (812) $ 28
======= ======= =======
Significant components of the Company's net deferred tax asset (liability)
at December 31 are as follows:
1996 1995
(IN THOUSANDS)
Deferred tax assets:
Reserves and accruals not currently
deductible $ 1,466 $ 1,234
Capitalized inventory costs 182 244
Net operating loss carryforwards - 230
Tax credit carryforwards - 561
------- -------
Total deferred tax assets 1,648 2,269
------- -------
Valuation allowance - (200)
------- -------
1,648 2,069
------- -------
Deferred tax liabilities:
Depreciation (56) (50)
Other (75) (251)
------- -------
Total deferred tax liabilities (131) (301)
------- -------
Net deferred tax asset $ 1,517 $ 1,768
======= =======
During the year ended December 31, 1996, the Company determined that it was not
likely to realize certain foreign tax credit carryforward benefits and wrote
these deferred tax assets off against the related valuation allowance.
II-18
Following is a summary of differences between income taxes computed by applying
the statutory federal income tax rate to income (loss) before income taxes and
the provision for income taxes:
1996 1995 1994
(IN THOUSANDS)
Income taxes (benefit) computed
at 35% U.S. statutory rate $ 2,330 $ 1,213 $ (716)
State income taxes 356 - -
Foreign taxes higher than
U.S. taxes 60 225 -
Foreign sales corporation benefit (205) (66) -
Nondeductible expenses 87 84 82
Change in valuation allowance - (2,339) 662
Other, net 36 71 -
------- ------- -------
Provision (benefit) for
income taxes $ 2,664 $ (812) $ 28
======= ======= =======
6. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
BANK LOAN DESCRIPTION 1996 1995
(IN THOUSANDS)
1995 working capital bank loan $ 2,949 $ 3,675
1996 working capital bank loan 649 -
Real estate bank loan - 232
Building construction bank loan - 174
------- -------
Total 3,643 4,081
Current portion (347) (553)
------- -------
Long-term debt $ 3,296 $ 3,528
======= =======following (in thousands):
December 31,
--------------
1998 1999
------ ------
1995 working capital bank loan............................... $2,292 $2,154
1996 working capital bank loan............................... 642 620
Other debt obligations....................................... 886 98
------ ------
Total...................................................... 3,820 2,872
Current portion of debt obligations.......................... (1,324) (584)
------ ------
Debt obligations............................................. $2,496 $2,288
====== ======
The 1995 working capital bank loan was obtained by the Company's Japanese
subsidiary. The loan is securedcollateralized by receivables of the Japanese
subsidiary and is guaranteed by the parent, Nanometrics Incorporated. The loan
is denominated in Japanese yen ((Yen)340,000,000220,000,000 at December 31, 1996)1999) and
bears interest at
the rate of 3.3% per annum. The loan is payable in quarterly installments
with unpaid principal and interest due in May 2005.
InII-30
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The 1996 a working capital bank loan was also obtained by the Company's
Japanese subsidiary. A portion of the borrowing proceeds were used to repay the
remaining balances of the real estatesubsidiary and building construction loans. The loan
is securedcollateralized by land and building. The loan is
denominated in Japanese yen ((Yen)80,000,00063,200,000 at December 31, 1996)1999) and bears
interest at the rate of 3.4% per annum. The loan is payable in quarterly installments beginning May 1998
with
unpaid principal and interest due in May 2006.
II-19
Other debt obligations represent short-term borrowings by the Company's
Japanese subsidiary which are collateralized by the subsidiary's accounts
receivable. The borrowings are denominated in Japanese yen ((Yen)10,000,000 at
December 31, 1999) and bear interest at rates ranging from 1.5% to 1.625% per
annum. The outstanding borrowings and unpaid interest at December 31, 1999 were
due and paid in January 2000.
At December 31, 1996,1999, future annual maturities of long-term debt (excluding
current portion)obligations are as
follows (in thousands):
1998 $ 409
1999 430
2000 430
Thereafter 2,027
-------
$ 3,296
=======
2000................................................................. $ 584
2001................................................................. 486
2002................................................................. 486
2003................................................................. 486
2004................................................................. 486
Thereafter........................................................... 344
------
Total.............................................................. $2,872
======
7. COMMITMENTS AND CONTINGENCIESCommitments and Contingencies
The Company leases manufacturing and administrative facilities and certain
equipment under noncancellable operating leases. The Company's current primary
facility lease expires in April 1997 and includes a renewal option for a five
year extension.2002. Rent expense for 1996, 19951997, 1998 and 1994,1999 was
approximately $483,000, $420,000$583,000, $693,000 and $500,000,$867,000, respectively. Future minimum
lease payments under the Company's operating leases for each of the years
ending December 31 are as follows (in thousands):
1997 $ 200
2000................................................................. $ 720
2001................................................................. 627
2002................................ ................................ 197
Thereafter........................................................... 15
------
Total.............................................................. $1,559
======
In September 1998, 49
1999 49
2000 35
2001 4
-------
$ 337
=======the Company's Korean subsidiary entered into a two-year
lease agreement for manufacturing facilities. The lease payments are based on a
percentage of net product sales, as defined.
Pursuant to a 1985 agreement, as amended, if the Company's Chairman of the
Board is involuntarily removed from his position, the Company is required to
continue his salary and related benefits for a period of five years from such
date, at his option.
The high technology industry is characterized by frequent claims and related
litigation regarding patent and other intellectual property rights. The Company
is a party to various claims, legal actions and complaints in the
normal course of business.this nature.
Although the ultimate outcome of these matters is not presently determinable,
management believes that the resolution of all such pending matters will not
have a material adverse effect on the Company's financial position, or results of
operations.operations or cash flows.
II-31
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
8. SHAREHOLDERS' EQUITYShareholders' Equity
Common Stock
The authorized capital stock of the Company consists of 25,000,000 common
shares, of which 22,500,000 shares have been designated "Common Stock" and
2,500,000 shares have been allocated to all other series of common shares,
collectively designated "Junior Common."
Net Income per Share
The reconciliation of the share denominator used in the basic and diluted
net income per share computations is as follows (in thousands):
Years Ended
December 31,
-----------------
1997 1998 1999
----- ----- -----
Weighted average shares outstanding--shares used in
basic net income per share computation.................. 8,325 8,635 8,829
Dilutive effect of common stock equivalents, using the
treasury stock method.................................. 495 406 564
----- ----- -----
Shares used in diluted net income per share
computation............................................ 8,820 9,041 9,393
===== ===== =====
During 1997, 1998 and 1999, the Company had common stock options outstanding
which could potentially dilute basic net income per share in the future, but
were excluded from the computation of diluted net income per share as the
common stock options' exercise prices were greater than the average market
price of the common shares for the period. At December 31, 1997, 1998 and 1999,
5,000, 248,000 and 51,000, respectively, of the Company's outstanding common
stock options with a weighted average exercise price of $10.88, $7.88 and
$19.59, respectively, per share were excluded from the diluted net income per
share computation.
Stock Option Plans
Under the 1991 Stock Option Plan (the Option Plan), as amended, the Company
may grant options to purchaseacquire up to 1,500,0003,000,000 shares of common stock to
employees and consultants at prices not less than the fair market value at date
of grant for incentive stock options and not less than 50% of fair market value
for nonstatutory stock options. These options generally expire five years from
the date of grant and become exercisable ratablyas they vest, generally over a period33.3% upon
each anniversary of three yearsthe grant, as set forth in the stock option agreements.
Under the 1991 Directors' Stock Option Plan (the Directors' Plan),
nonemployee directors of the Company are automatically granted options to
purchaseacquire 10,000 shares of common stock, at the fair market value at the date of
grant, each year that such person remains a director of the Company. Options
granted II-20
under the planDirectors' Plan become exercisable ratably over a periodas they vest 33.3% upon
each anniversary of three yearsthe grant and expire five years from the date of grant. The
total shares authorized under the planDirectors' Plan are 300,000.
II-32
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Option activity under the plans is summarized as follows:
OUTSTANDING OPTIONS
-------------------------------
WEIGHTED
SHARES NUMBER OF AVERAGE
AVAILABLE SHARES EXERCISE PRICEOutstanding Options
-------------------------------------
Weighted
Shares Number of Average
Available Shares Exercise Price
---------- --------- --------------
Balances, January 1, 1994 1,198,000 1,435,700 $ 0.81
Exercised - (239,700) 0.63
Granted (468,500) 468,500 0.65
Cancelled 212,000 (380,800) 1.23
--------- ---------
Balances, December 31, 1994 (780,7101997 (348,514
exercisable at a weighted average price
of $0.65) 941,500 1,283,700 0.66
Exercised - (486,428) 0.66$2.91).............................. 210,407 1,097,941 $4.08
Additional shares reserved.............. 1,500,000 -- --
Exercised............................... -- (238,941) 2.00
Granted (weighted average fair value of
$3.20) (636,700) 636,700 4.76
Cancelled 122,500 (204,400) 0.73
---------$5.17)................................. (488,500) 488,500 9.33
Canceled................................ 14,139 (14,139) 4.46
---------- ---------
Balances, December 31, 1995 (372,3121997 (503,267
exercisable at a weighted average price
of $0.63) 427,300 1,229,572 2.77
Exercised - (348,524) 0.67$4.32).............................. 1,236,046 1,333,361 6.37
Exercised............................... -- (151,153) 3.81
Granted (weighted average fair value of
$3.61) (308,500) 308,500 5.36
Cancelled 91,607 (91,607) 3.69
---------$1.88)................................. (1,395,174) 1,395,174 6.14
Canceled................................ 986,949 (986,949) 8.24
---------- ---------
Balances, December 31, 1996 210,407 1,097,941 $ 4.08
=========1998 (745,171
exercisable at a weighted average price
of $4.57).............................. 827,821 1,590,433 5.25
Exercised............................... -- (444,418) 4.36
Granted (weighted average fair value of
$6.67)................................. (455,000) 455,000 12.06
Canceled................................ 106,351 (106,351) 6.65
---------- ---------
Balances, December 31, 1999............. 479,172 1,494,664 $7.49
========== =========
During the third quarter of fiscal 1998, the Company approved the
cancellation and reissuance of outstanding options under the Company's stock
options plans. Under the program, holders of outstanding options with exercise
prices in excess of $5.13 per share were given the choice of retaining these
options or of obtaining, in substitution, new options for the same number of
shares. The new options were exercisable at a price of $5.13 per share, the
fair market value of the common stock on the reissue date. The new options
maintained the vesting schedule and expiration dates established by the
canceled option.
Additional information regarding options outstanding as of December 31, 19961999
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICEOptions Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Average
Contractual Average Weighted
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
- ------------------------ ----------- ----------- -------- ----------- --------
$ 0.56 - 2.06--$ 0.75 251,073 3.1 $ 0.63 162,756 $ 0.63
$ 0.88 - $ 2.06 117,668 3.9 1.99 43,297 1.88
$ 4.31 - $10.00 729,200 4.4 5.61 142,461 5.835.13 822,662 2.67 $4.95 582,322 $4.88
5.63-- 9.00 449,502 4.44 7.58 83,366 7.49
15.88-- 20.13 222,500 5.00 16.73 -- --
--------- -------
$ 0.56 - $10.00 1,097,941 4.0 2.06--$ 4.08 348,514 $ 2.9120.13 1,494,664 3.55 $7.49 665,688 $5.21
========= =======
II-33
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Employee Stock Purchase Plan
Under the 1986 Employee Stock Purchase Plan (the Purchase Plan), eligible
employees are allowed to have salary withholdings of up to 10% of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of each six-
II-21
month offering period, subject to an annual limitation. StockShares issued under the
plan was 11,975, 26,504were 24,482, 18,006 and 25,627 shares28,937 in 1994, 19951997, 1998 and 19961999 at weighted average
prices of $0.66, $1.10$4.58, $6.87 and $4.49,$5.10, respectively. The weighted average per share
fair valuevalues of the 19951997, 1998 and 19961999 awards was $5.19were $4.41, $2.42 and $5.16,$2.89,
respectively. At December 31, 1996, 97,3191999, 25,894 shares were reserved for future
issuances under the Purchase Plan.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board OpinionAPB No. 25,
"AccountingAccounting for Stock Issued to Employees"Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the accompanying
consolidated financial statements for employee stock arrangements.
Statement of Financial Accounting StandardsSFAS No. 123, "AccountingAccounting for Stock-Based Compensation" (SFAS 123) requires the
disclosure of pro forma net income and earningsnet income per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which differ significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's fair value
calculations on stock-based awards under the Option Plan and the Directors'
Plan were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, fourthree years from the date of grant;grant
in 1997, 1998 and 1999; stock volatility, 90%80% in 19951997, 1998 and 1996;1999; risk free
interest rates, 6.3%rate, 6.1% in 19951997, 5.0% in 1998 and 6.0%5.9% in 1996;1999; and no dividends
during the expected term. The Company's calculations are based on a single
option valuation approach and forfeitures are recognized at a historical rate
of 29% per year.for 1997 and 1998, and 24% for 1999. The Company's fair value
calculations on stock-based awards under the Purchase Plan were also made using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, six months in 1997, 1998 and 1999; stock
volatility, 80% in 1997, 1998 and 1999; risk free interest rate, 5.5% in 1997,
5.0% in 1998 and 5.3% in 1999; and no dividends during the expected term.
If the computed fair values of the stock-based awards after 1995 and 1996 awards had been
amortized to expense over the vesting period of the awards, pro forma net
income and net income per share, basic and diluted, would have been $4,116,000 ($0.51as follows
(in thousands except per share)share amounts):
Years Ended
December 31,
-------------------
1997 1998 1999
------ ----- ------
Pro forma net income.................................... $5,057 $ 807 $1,729
Pro forma net income per share:
Basic................................................. $ 0.61 $0.09 $ 0.20
Diluted............................................... $ 0.60 $0.09 $ 0.18
II-34
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
9. Income Taxes
Income before income taxes consists of the following (in thousands):
Years Ended December 31,
------------------------
1997 1998 1999
------ ------ ------
Domestic............................................. $9,644 $3,471 $3,928
Foreign.............................................. (262) (533) 388
------ ------ ------
Income before income taxes........................... $9,382 $2,938 $4,316
====== ====== ======
The provision for income taxes consists of the following (in thousands):
Years Ended December 31,
------------------------
1997 1998 1999
------ ------ ------
Current :
Federal............................................ $3,080 $ 840 $1,127
State.............................................. 884 148 186
Foreign............................................ 181 16 195
------ ------ ------
4,145 1,004 1,508
====== ====== ======
Deferred:
Federal............................................ (574) 161 71
State.............................................. 9 166 (128)
Foreign............................................ 45 (223) 231
------ ------ ------
(520) 104 174
------ ------ ------
Provision for income taxes........................... $3,625 $1,108 $1,682
====== ====== ======
Significant components of the Company's deferred tax assets are as follows
(in thousands):
December 31,
--------------
1998 1999
------ ------
Deferred tax assets--current:
Reserves and accruals not currently deductible............ $ 978 $1,307
Capitalized inventory costs............................... 201 161
Net operating loss carryforwards.......................... 246 338
Tax credit carryforwards.................................. 16 147
------ ------
Total gross deferred tax assets--current.................... 1,441 1,953
Valuation allowance......................................... -- (231)
------ ------
Total net deferred tax assets--current...................... $1,441 $1,722
------ ------
Deferred tax assets--noncurrent:
Depreciation.............................................. $ (25) $ (69)
Goodwill and capitalized acquired technology.............. 553 391
Translation adjustments................................... -- (225)
Other..................................................... 32 38
------ ------
Total net deferred tax assets--noncurrent................... $ 560 $ 135
====== ======
II-35
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Due to continuing losses in 1995 and $3,576,000 ($0.43 per share) in 1996.
However,its Japanese subsidiary during the impact of outstanding nonvested stock options granted prior to 1995
has been excludedyear ended
December 31, 1999, the Company determined that it was more likely than not that
future tax benefits from the pro forma calculation; accordingly,deferred tax assets of the 1995Japanese subsidiary
would not be realized. Accordingly, as of December 31, 1999, the Company has
provided a full valuation allowance of $231,000 against the net deferred tax
assets of its Japanese subsidiary.
As of December 31, 1999, the Company has available for carryforward net
operating losses of approximately $800,000 generated by the Company's Japanese
subsidiary. The net operating loss carryforwards will expire if not utilized
beginning in the years 2002 through 2004.
Differences between income taxes computed by applying the statutory federal
income tax rate to income before income taxes and 1996
pro forma adjustments are not indicativethe provision for income
taxes consist of future period pro forma adjustments,
when the calculation will apply to all applicable stock options.
9. PROFIT-SHARING AND RETIREMENT AND BONUS PLANSfollowing (in thousands):
Years Ended December 31,
------------------------
1997 1998 1999
------ ------ ------
Income taxes computed at 35% U.S. statutory rate... $3,284 $1,028 $1,511
State income taxes................................. 589 207 58
Foreign tax provision (benefit) higher than U.S.
rates............................................. -- (74) 59
Foreign sales corporation benefit.................. (274) (99) (228)
Change in valuation allowance...................... -- -- 231
Other, net......................................... 26 46 51
------ ------ ------
Provision for income taxes......................... $3,625 $1,108 $1,682
====== ====== ======
10. Profit-Sharing and Retirement and Bonus Plans
No contributions were made by the Company in 1996, 19951997, 1998 and 19941999 to the
Company's discretionary profit-sharing and retirement plan. The Company paid
$523,000$678,000, $688,000 and $188,000$92,000 in 19961997, 1998 and 1995,1999, respectively, under
formal discretionary cash bonus plans which cover all eligible employees.
No such cash bonuses were
paid in 1994.
10. MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION11. Major Customers
In 1996, no1997, sales to a singleone customer accounted for 10% or moreapproximately 11.4% of total
revenues. SalesIn 1998, sales to oneanother customer representedaccounted for approximately 10%11.2%
of total revenues. In 1999, sales to two other customers accounted for
approximately 12.8% and 10.5% of total revenues, in 1995 and 11% of total revenues in 1994.respectively.
At December 31, 1996,1998, no single customer accounted for 10%10.0% or more of
accounts receivable. At December 31,
1995, one customer's balance accountedThe customer accounting for 11% of accounts receivable.
II-22
Export sales constituted approximately 21%, 25% and 30%12.8% of total revenues in
1999 also accounted for 1996, 199511.8% of accounts receivable, at December 31, 1999.
12. Product, Segment and 1994, respectively.Geographic Information
The majorityCompany's operating divisions consist of these export sales have been
to Asia and Europe. Transfers between geographic areas are recorded at amounts
generally above cost. Identifiable assets of geographic areas represent those
assets usedits geographically based
entities in the Company's operationsUnited States, Japan, South Korea and Taiwan. All such
operating divisions have similar economic characteristics, as defined in each area.SFAS
No. 131 "Disclosures About Segments of an Enterprise and Related Information",
and accordingly, the Company operates in one reportable segment: the sale,
design, manufacture, marketing and support of thin film and overlay dimension
metrology systems. For the years ended December 31, 1997, 1998 and 1999, the
Company recorded revenue from customers throughout the United States, Canada,
Germany, the United Kingdom, Ireland, France, Italy, Sweden,
II-36
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Israel, Japan, South Korea, China, Singapore, Hong Kong, Taiwan, Indonesia
and Malaysia. The following table summarizes selected geographic financial information of the Company at December
31.
1996 1995 1994
(IN THOUSANDS)
Net revenues:
United States $20,781 $13,876 $ 7,770
Japan 9,454 8,883 5,809
Korea 101 - -
------- ------- -------
$30,336 $22,759 $13,579total net revenues and long-lived
assets attributed to significant countries (in thousands):
Years Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
Total net revenues:
United States...................................... $14,539 $12,698 $14,225
Japan.............................................. 10,086 9,167 11,594
Korea.............................................. 5,954 2,596 2,991
Taiwan............................................. 2,583 3,404 4,967
Germany............................................ 1,763 4,784 2,340
All other.......................................... 1,732 615 291
------- ------- -------
Total net revenues*.............................. $36,657 $33,264 $36,408
======= ======= =======
Export sales:
Asia $ 4,997 $ 3,020 $ 1,847
Europe 1,235 2,326 1,493
Other 128 370 708
------- ------- -------
$ 6,360 $ 5,716 $ 4,048
December 31,
-------------
1998 1999
------ ------
Long-lived assets:
United States............................................... $1,439 $1,716
Japan....................................................... 2,419 2,569
Korea....................................................... 59 81
Taiwan...................................................... 11 91
------ ------
Total long-lived assets................................... $3,928 $4,457
====== ======
- --------
* Net revenues are attributed to countries based on the deployment and service
locations of systems.
The Company's product lines differ primarily based on the environment the
systems will be used in. Automated systems are used primarily in high-volume
production environments. Integrated systems are installed inside wafer
processing equipment to provide near real-time measurements for improving
process control and increasing throughput. Tabletop systems are used primarily
in low-volume production environments and in engineering labs where automated
handling and high throughput are not required. Sales by product type were as
follows (in thousands):
Years Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
Automated systems.................................... $21,982 $21,694 $20,885
Integrated systems................................... -- 120 3,953
Tabletop systems..................................... 10,785 7,904 7,324
------- ------- -------
Total product sales................................ $32,767 $29,718 $32,162
======= ======= =======
Transfers between United States
II-37
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
13. Selected Quarterly Financial Results (Unaudited)
The following tables set forth selected quarterly results of operations for
the years ended December 31, 1998 and Japan eliminated in
consolidation $ 4,118 $ 2,564 $ 1,529
======= ======= =======
Operating income (loss)1999 (in thousands, except per share
amounts):
United States $ 5,280 $ 741 $(3,013)
Japan 1,324 1,900 782
Korea (391) - -
------- ------- -------
$ 6,213 $ 2,641 $(2,231)
======= ======= =======
Identifiable assets:
United States $20,805 $15,799 $ 8,391
Japan 9,040 9,368 7,395
Korea 119 - -
------- ------- -------
$29,964 $25,167 $15,786
======= ======= =======
* * * * *
II-23
Quarters Ended
-----------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998 1998 1998 1998
-------- -------- -------- --------
Total net revenues......................... $10,538 $10,728 $7,005 $4,993
Gross profit............................... 5,924 5,732 3,357 1,580
Income (loss) from operations.............. 915 2,446 491 (1,442)
Net income (loss).......................... 624 1,495 394 (683)
Net income (loss) per share:
Basic.................................... $ 0.07 $ 0.17 $ 0.05 $(0.08)
Diluted.................................. $ 0.07 $ 0.17 $ 0.04 $(0.08)
Shares used in per share computation:
Basic.................................... 8,545 8,641 8,669 8,686
Diluted.................................. 8,978 9,003 9,074 8,686
Quarters Ended
------------------------------
Jun. Sep. Dec.
Mar. 31, 30, 30, 31,
1999 1999 1999 1999
-------- ------ ------ -------
Total net revenues.............................. $6,189 $7,523 $9,821 $12,875
Gross profit.................................... 2,533 3,522 4,669 6,518
Income (loss) from operations................... (401) 395 1,321 2,425
Net income (loss)............................... (201) 304 900 1,631
Net income (loss) per share:
Basic......................................... $(0.02) $ 0.03 $ 0.10 $ 0.18
Diluted....................................... $(0.02) $ 0.03 $ 0.10 $ 0.17
Shares used in per share computation:
Basic......................................... 8,701 8,757 8,823 9,033
Diluted....................................... 8,701 9,177 9,347 9,842
II-38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
II-24None.
II-39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTDirectors and Executive Officers of the registrant
The section entitled "Electionfollowing are our current executive officers and directors and their
ages as of Directors" appearingDecember 31, 1999:
Name Age Position
---- --- --------
Vincent J. Coates........... 74 Chairman of the Board, Secretary
John D. Heaton.............. 39 President, Chief Executive Officer and Director
Paul B. Nolan............... 44 Vice President and Chief Financial Officer
Roger Ingalls Jr............ 38 Vice President and Director of Marketing
William A. McGahan.......... 33 Vice President and Chief Scientist
Nathaniel Brenner........... 73 Director
Norman V. Coates............ 50 Director
Kanegi Nagai................ 68 Director
Edmond R. Ward.............. 60 Director
Mr. Vincent Coates has been our Chairman of the Board since our founding in
the Registrant's proxy
statement1975. He has also served as our Chief Executive Officer and President from our
founding through July 1988, except for the period January 1986 through
February 1987 when he served exclusively as Chief Executive Officer. He was
elected Secretary in February 1989. He resigned the position of Chief
Executive Officer in April 1998.
Mr. Heaton joined us in September 1990 and in April 1994 was elected Vice
President of Engineering and General Manager. In July 1995, he was appointed
to the Board of Directors and became General Manager. He has been President
since May 1996 and was elected Chief Executive Officer in April 1998. Mr.
Heaton served in various technical roles at National Semiconductor from 1978
to 1990 prior to joining us.
Mr. Nolan joined us in March 1989 and in March 1994 was elected Vice
President and Chief Financial Officer. Mr. Nolan served as Senior Financial
Analyst at Harris Corporation prior to joining us.
Mr. Ingalls has been employed by Nanometrics since March 1995 and was
elected Vice President in October 1997. He was appointed Director of Marketing
in February 1998. During his employment at Nanometrics, Mr. Ingalls has served
as U.S. Sales and Product Manager, and most recently Director of North
American Sales. Prior to joining Nanometrics, he served as a sales engineer
for Nikon Inc. from March 1993 to March 1995.
Dr. McGahan joined us in October 1995 and was elected Vice President in
October 1997 and Chief Scientist in December 1999. He served as Director of
Research and Development from January 1999 to December 1999. From January 1998
to January 1999, Dr. McGahan served as Director of Engineering. Prior to that,
he served as Applications Engineering Manager from October 1996 to October
1997 and as Advanced Metrology Development Manager from October 1995 to
October 1996. From September 1987 to October 1995, Dr. McGahan served as an
engineer for the J.A. Woollam Co., Inc., a manufacturer of spectroscopic
ellipsometers. Dr. McGahan has published 46 papers relating to ellipsometry
magneto-optics and thermal characterization of materials.
Mr. Brenner has served as one of our directors since June 1986. He joined
Beckman Instruments, Inc. in 1976 where he held the positions of Program
Manager, Marketing Manager (Instruments) and General Manager (Spectroscopy).
In 1992, Mr. Brenner retired from Beckman Instruments, Inc.
Mr. Norman V. Coates has served as one of our directors since May 1988. He
has operated Gem of the River Produce, a farming and produce packing operation
in Orleans, California, as a sole proprietor since 1978. He has also been
manager of the Boise Creek Farm operation since 1985 and a manager of Coates
Vineyards since 1997.
III-1
Mr. Nagai has served as one of our directors since May 1996. Mr. Nagai also
served us as a consultant from August 1995 until June 1998. From January 1990
to April 1995, Mr. Nagai was the President and Chief Executive Officer of Cybeq
Systems, a semiconductor equipment supplier. From 1983 to 1989, Mr. Nagai held
a number of management positions with the Mitsubishi Bank (currently the Bank
of Tokyo-Mitsubishi) and the Mitsubishi Materials Corporation.
Mr. Ward has served as one of our directors since August 1999. Since August
1999, Mr. Ward has been a General Partner of Virtual Founders. From April 1992
to June 1997, Mr. Ward was the Vice President of Technology at Silicon Valley
Group Inc.
Mr. Vincent Coates is the father of Mr. Norman Coates, one of our directors.
There are no other family relationships among any of our executive officers and
directors. All directors hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified.
Officers are elected by and serve at the discretion of the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, to be heldfile reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC") and the Nasdaq National
Market. Executive officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file. Based solely on May 15, 1997our review of the copies of such forms received by
us, or written representations from certain reporting persons, we believe that
during fiscal 1999 all filing requirements applicable to our executive officers
and directors and greater than 10% shareholders were complied with, except that
the Vincent J. Coates Separate Property Trust, U/D/T dated August 7, 1981 and
the Vincent J. Coates 1999 Charitable Trust UTA dated December 17, 1999, both
greater than 10% shareholders, each filed one report on Form 3 late.
III-2
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth certainthe compensation earned by our chief
executive officer and by our next most highly compensated executive officers
(collectively, the "Named Officers") during the past three fiscal years:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
---------------------------------- -------------
Securities
Underlying
Fiscal Year Salary Bonus Options (#)
----------- -------- ------ -----------
John D. Heaton....................................... 1999 $ 241,445 $ 5,338 50,000
President and Chief Executive Officer 1998 $ 206,668 $ 21,098 100,000
1997 $ 219,061 $ 45,261 75,000
Vincent J. Coates.................................... 1999 $ 204,800 $ -- --
Chairman of the Board and Secretary 1998 $ 215,231 $ 10,431 --
1997 $ 238,776 $ 47,405 --
Roger Ingalls Jr..................................... 1999 $ 178,529 $ 3,203 --
Vice President and Director of Marketing 1998 $ 209,178 $ 14,723 19,000
1997 $ 222,900 $ 22,642 25,000
William Fate......................................... 1999 $ 177,767 $ 2,925 --
Former Vice President and Director of 1998 $ 212,058 $ 13,442 19,000
International Sales 1997 $ 189,053 $ 21,630 4,000
William A. McGahan................................... 1999 $ 174,896 $ 3,681 --
Vice President and Chief Scientist 1998 $ 151,315 $ 15,934 38,000
1997 $ 143,390 $ 26,218 30,000
III-3
Paul B. Nolan........................................ 1999 $ 120,870 $ 2,643 --
Vice President and Chief Financial Officer 1998 $ 123,232 $ 13,809 --
1997 $ 135,551 $ 29,378 40,000
Stock Options Granted in the Fiscal Year Ended December 31, 1999
The following table sets forth information with respect to stock options
granted during the directorsfiscal year ended December 31, 1999 to each of the RegistrantNamed
Officers. All options were granted under our 1991 Stock Option Plan.
The potential realizable value amounts in the last two columns of the
following chart represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed 5%
and 10% annual rates of stock price appreciation from the date of grant to the
end of the option term are provided in accordance with rules of the SEC and do
not represent our estimate or projection of the future common stock price.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the common stock, overall market conditions and the option
holder's continued employment through the vesting period.
Option Grants in Last Fiscal Year
Individual Grants
------------------------------------------- Potential Realized
Number of % of Total Value at Assumed Annual Rates
Securities Options of Stock Price Appreciation for
Underlying Granted to Option Term
Options Employees Exercise -------------------------------
Name Granted in Fiscal Price Expiration
------ (#) (1) Year (2) ($/Sh) Date 5% ($) 10% ($)
------------ ---------- -------- ----------- ------------------------------
John D. Heaton............................. 50,000 11.0% 6.94 5/28/04 95,835 211,771
Vincent J. Coates.......................... -- -- -- -- -- --
Roger Ingalls Jr........................... -- -- -- -- -- --
William Fate............................... -- -- -- -- -- --
William A. McGahan......................... -- -- -- -- -- --
Paul B. Nolan.............................. -- -- -- -- -- --
- -----------------
(1) All options granted to the Named Officers in 1999 were granted at exercise
prices equal to the fair market value of our common stock on the dates of
grant. Historically, options granted become exercisable at the rate of 33%
on the first anniversary date of the option grant and 33% of the option
shares become exercisable each full year thereafter, such that full vesting
occurs three years after the date of grant. Options lapse after 5 years or
90 days after termination of employment.
(2) Based on 455,000 options granted during the fiscal year ended December 31,
1999.
III-4
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth the number of shares acquired upon the
exercise of stock options during 1999 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named Officers
at December 31, 1999.
Number of Securities Value of Unexercised
Underlying Unexercisable In-the-Money Options
Shares Options At Fiscal Year-End (#) At Fiscal Year-End ($) (2)
Acquired on Value Realized ($) ------------------------------ ----------------------------
Exercise (#) (1) Exercisable Unexercised Exercisable Unexercisable
------------ ------------------- ------------- -------------- -------------- -------------
John D. Heaton.............. -- -- 126,668 141,667 1,906,687 2,034,380
Vincent J. Coates........... -- -- -- -- -- --
Roger Ingalls Jr............ 25,000 416,375 32,999 21,001 481,507 285,557
William Fate................ 27,999 150,981 -- -- -- --
William A. McGahan.......... 25,000 193,505 29,332 33,668 416,453 458,144
Paul B. Nolan............... 25,000 264,725 61,666 13,334 960,640 200,010
- -----------------------
(1) The value realized upon exercise is incorporated herein(i) the fair market value of our common
stock on the date of exercise, less the option exercise price per share,
multiplied by reference. Certain information with respect to persons(ii) the number of shares underlying the options exercised.
(2) The value of unexercised options is (i) the fair market value of our common
stock on December 31, 1999 ($20.13 per share), less the option exercise
price of in-the-money options, multiplied by (ii) the number of shares
underlying such options.
Compensation of Directors
Directors who are not also our employees receive an annual retainer fee of
$5,000 plus $1,000 for each Board of Directors and committee meeting attended
(unless the Board and committee meeting take place on the same day, in which
case such directors receive a $1,000 fee) and are eligible to participate in our
1991 Director Option Plan as amended April 1994.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Pursuant to the terms of an agreement dated May 1, 1985 between us and
Vincent J. Coates, the terms of which were then amended and restated in August
1996 and again effective April 1998, we are obligated, in the event Mr. Coates
is required to resign as Chairman of the Board under certain circumstances, to
continue to pay Mr. Coates his salary and benefits for five years from the date
of such resignation.
In April 1998, we entered into an agreement with Mr. Heaton in which we
agree to pay Mr. Heaton his usual annual salary (excluding bonuses) for a period
of one year from the date that he is required or mayrequested for any reason not
involving good cause to involuntarily relinquish his positions as Chief
Executive Officer and President and as a director. If Mr. Heaton leaves us
voluntarily or if he is asked to leave under certain circumstances, no such
severance pay shall be deemedawarded.
Report on Repricing of Options
The following table summarizes stock options granted to beour executive
officers of that have been repriced during the Registrant is set forth
under the caption "Business-Executive Officerspast ten years.
III-5
Ten-Year Option Repricings
Number of Market Length of
Securities Price of Exercise Original
Underlying Stock at Price at New Option Term
Options Time of Time of Exercise Remaining at
Repricing Repriced Repricing Repricing Price Date of
Name Date (#) ($) ($) ($) Repricing
- -------------------------------------------- --------- ------------ ------------ --------- ----------- ------------------
John D. Heaton.............................. 9/15/98 16,668 5.125 5.25 5.125 2 years 2 months
President and Chief 9/15/98 75,000 5.125 10.22 5.125 3 years 11 months
Executive Officer 9/15/98 100,000 5.125 8.63 5.125 4 years 7 months
Roger Ingalls Jr............................ 9/15/98 25,000 5.125 6.13 5.125 1 year 11 months
Vice President and Director 9/15/98 5,000 5.125 5.25 5.125 2 years 2 months
of Marketing 9/15/98 25,000 5.125 10.22 5.125 3 years 11 months
William Fate................................ 9/15/98 15,000 5.125 6.13 5.125 1 year 11 months
Former Vice President and Director 9/15/98 9,000 5.125 5.25 5.125 2 years 2 months
of International Sales 9/15/98 4,000 5.125 10.22 5.125 3 years 11 months
William A. McGahan.......................... 9/15/98 20,000 5.125 5.88 5.125 2 years 4 months
Vice President and 9/15/98 30,000 5.125 10.22 5.125 3 years 11 months
Chief Scientist 9/15/98 10,000 5.125 8.63 5.125 4 years 7 months
9/15/98 3,000 5.125 8.50 5.125 4 years 9 months
Paul B. Nolan............................... 9/15/98 5,000 5.125 5.25 5.125 2 years 2 months
Vice President and Chief 9/15/98 40,000 5.125 10.22 5.125 3 years 11 months
Financial Officer
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Registrant" in Part IBoard of this report.
ITEM 11. EXECUTIVE COMPENSATIONDirectors of Nanometrics
Incorporated consisted of Nathaniel Brenner, Norman V. Coates and, until April
14, 1999, Clifford F. Smedley. No member of the Compensation Committee of our
Board serves as a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving as a member of our
Board of Directors or Compensation Committee.
Report of the Compensation Committee and Stock Option Committee of the Board of
Directors
The section entitled "Executive Compensation" appearing infollowing is the Registrant's
proxy statement forreport of the annual meetingCompensation Committee and the Stock
Option Committee of shareholdersthe Board of Directors describing compensation policies and
rationales applicable to be held on May 15,
1997, sets forth certain informationour executive officers with respect to the compensation
paid to such executive officers for the fiscal year ended December 31, 1999.
The information contained in such report shall not be deemed to be "soliciting
material" or to be "filed" with the Securities and Exchange Commission, nor
shall such information be incorporated by reference into any future filing under
the Securities Act or Exchange Act, except to the extent that we specifically
incorporate it by reference into such filing.
General. The Compensation Committee is responsible for making
recommendations to the Board of managementDirectors with respect to cash compensation
levels for our executive officers. During 1999, the Stock Option Committee was
responsible for determining levels of equity-based compensation for our
executive officers and other key personnel.
III-6
Compensation Philosophy. The Compensation Committee makes recommendations
as to the salaries of the Registrantexecutive officers by considering (i) the salaries of
executive officers in similar positions at comparably-sized peer companies, (ii)
our financial performance over the past year based upon revenues and operating
results and (iii) the achievement of individual performance goals related to
each executive officer's duties and areas of responsibility. The Compensation
Committee makes recommendations as to the levels of cash bonuses awarded to our
executive officers and views such bonuses as being an integral part of our
performance-based compensation program. Such bonuses are based on our profits
and are determined as a percentage of the executive salaries.
Equity-Based Compensation. The Stock Option Committee views stock options
as an important part of our long-term, performance-based compensation program.
The Stock Option Committee bases grants of stock options to our executive
officers under our 1991 Stock Option Plan (as amended through May 15, 1997) upon
such Committee's estimation of each executive's contribution to the long-term
growth and profitability of our company. The 1991 Stock Option Plan is intended
to provide additional incentives to the executive officers to maximize
shareholder value. Options are granted under the 1991 Stock Option Plan at the
then-current market price and are generally subject to three-year vesting
periods to encourage key employees to remain with us.
Compensation of President and Chief Executive Officer. The compensation of
our President and Chief Executive Officer was based upon the same criteria
described above. Specifically, the Compensation Committee considered several
factors as important in determining such compensation including progress toward
meeting the corporate plan and the objectives set for the President and Chief
Executive Officer during his tenure in the current fiscal year as well as
progress toward attaining longer range goals as a result of his leadership. In
recognition of his progress toward meeting corporate goals and to remain
competitive, based on a survey of other CEO salaries, the compensation of our
President and Chief Executive Officer was increased to an annual salary of
$250,000.
STOCK OPTION COMMITTEE COMPENSATION COMMITTEE
Nathaniel Brenner Nathaniel Brenner
Norman V. Coates Norman V. Coates
Clifford F. Smedley, until April 14, 1999
III-7
Performance Graph
Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the shareholders of our Common Stock with the
cumulative return of the Nasdaq U.S. Index and the Hambrecht & Quist Technology
Index for the period commencing on January 1, 1995 and ending on December 31,
1999. The information contained in the performance graph shall not be deemed to
be "soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated herein by reference.reference into any
future filing under the Securities Act or Exchange Act, except to the extent
that the Company specifically incorporates it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG NANOMETRICS INCORPORATED, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
[GRAPHIC OMITTED]
The following descriptive data is supplied in accordance with Rule 304(d)
of Regulation S-T
12/94 12/95 12/96 12/97 12/98 12/99
Nanometrics Incorporated 100 1,311 844 1,456 1,389 3,578
Nasdaq Stock Market (U.S.) 100 140 172 209 292 541
Hambrecht & Quist Technology 100 149 178 236 369 811
* $100 invested on 12/31/94 in Stock or Index--including reinvestment of
dividends. Fiscal year ending December 31.
III-8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The section entitled "Election of Directors" appearing in the Registrant's proxy
statement for the annual meeting of shareholders to be held on May 15, 1997,
sets forth certainfollowing table presents information with respect to beneficial
ownership of our common stock as of December 31, 1999 by:
. each person who beneficially owns more than 5% of the common stock;
. each of our executive officers;
. each of our directors; and
. all executive officers and directors as a group.
The applicable percentage of ownership for each shareholder is based on
9,163,998 shares of common stock outstanding as of December 31, 1999.
Ownership (1)
-------------------------------
Beneficial Owner Number of Shares Percentage
- ----------------------------------------------------------- -------------------------------
Vincent J. Coates (2)...................................... 5,388,774 58.8%
c/o Nanometrics Incorporated
310 DeGuigne Drive
Sunnyvale, CA 94086
Putnam Investments, Inc. (3)............................... 833,840 9.1%
One Post Office Square
Boston, MA 02109
FMR Corp. (4).............................................. 700,000 7.6%
82 Devonshire Street
Boston, MA 02109
Nathaniel Brenner (5)...................................... 55,999 *
Norman V. Coates (6)....................................... 38,049 *
John D. Heaton (7)......................................... 126,668 1.4%
Paul B. Nolan (8).......................................... 61,666 *
Kanegi Nagai (9)........................................... 13,999 *
Roger Ingalls Jr. (10)..................................... 32,999 *
William A. McGahan (11).................................... 29,332 *
Edmond R. Ward............................................. 0 *
All officers and directors as a group (9 persons) (12)..... 5,747,486 60.6%
- -----------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
The number of shares beneficially owned by a person includes shares of
common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of December 31, 1999. Such share
issuable pursuant to such options are deemed outstanding for computing the
percentage ownership of the Registrant's
Common Stockperson holding such options but are not deemed
outstanding for the purposes of computing the percentage ownership of each
other person.
III-9
(2) Includes 4,388,654 shares of common stock held of record by the Vincent J.
Coates Separate Property Trust, U/D/T dated August 7, 1981, for which Mr.
Coates acts as trustee, and 1,000,000 shares of common stock held of record
by the Vincent J. Coates 1999 Charitable Trust UTA dated December 17, 1999
for which Mr. Coates acts as trustee.
(3) According to a Schedule 13G filed with the Securities Exchange Commission
on or about February 17, 2000, Putnam Investments, Inc. ("PI") may be
deemed to be the beneficial owner of 833,840 shares of common stock. PI is
incorporated hereinidentified as a Parent Holding Company on its Schedule 13G.
(4) According to a Schedule 13G filed with the Securities Exchange Commission on
or about February 11, 2000, FMR Corp. ("FMR") may be deemed to be the
beneficial owner of 700,000 shares of common stock. FMR is identified as a
Parent Holding Company on its Schedule 13G.
(5) Includes 26,000 shares of common stock held of record by reference.the N&J Brenner
Living Trust, for which Mr. Brenner and his spouse act as trustees, for the
benefit of members of Mr. Brenner's immediate family, and 29,999 shares of
common stock issuable upon exercise of outstanding options exercisable
within 60 days of December 31, 1999.
(6) Includes an aggregate of 8,050 shares held as trustee on the behalf of other
family members and 29,999 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(7) Includes 126,668 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(8) Includes 61,666 shares of common stock issuable upon exercise of outstanding
options exercisable within 60 days of December 31, 1999.
(9) Includes 13,999 shares of common stock issuable upon exercise of outstanding
options exercisable within 60 days of December 31, 1999.
(10) Includes 32,999 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(11) Includes 29,332 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(12) Includes 324,662 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
III-10
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "TransactionsWe are the beneficiary of an insurance policy on the life of Vincent J.
Coates in a face amount of $8,000,000. Annual premiums, which are paid by us,
totaled $200,000 for fiscal 1999 and are fixed at $200,000 per year upon
continuation of the policy. In the event of termination of the policy, any cash
surrender value would belong to Mr. Coates. We have entered into an agreement
with Management" appearingMr. Coates providing that in the Registrant's proxy statement forevent of Mr. Coates's death, his estate
has the annual meetingoption to cause the Company to use the proceeds of shareholdersthe policy to
be held
on May 15, 1997, sets forth certain information with respectpurchase shares of our Common Stock owned by the estate at their then fair
market value. The estate is not obligated under the terms of the agreement to
certain businessexercise the option. If the option is not exercised, we would retain the
proceeds of the insurance. The purpose of this agreement is to provide Mr.
Coates' estate, at its option, the opportunity to obtain cash to pay estate
taxes without having to raise all of such money from sales in the open market.
Additional relationships and related transactions betweenare set forth above in
"Item 11. Executive Compensation" under the Registrantheading "Employment Contracts and
its directorsTermination of Employment and officers and is incorporated herein by reference.
III-1Change-in-Control Arrangements."
III-11
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements.
The following Consolidated Financial Statements of
Nanometrics Incorporated and Independent Auditors' Report are filed as part
of this Annual Report.
Independent Auditors' Report
Consolidated Balance Sheets, at December 31, 1996 and 1995
For the years ended December 31, 1996, 1995 and 1994:
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
NotesSee Index to Consolidated Financial Statements at Item 8 on page II-19
of this report.
2. Consolidated Financial StatementsStatement Schedules.
The following consolidated financial statement schedules of Nanometrics
Incorporated are filed as part of this Reportreport and should be read in conjunction
with the Consolidated Financial Statements of Nanometrics Incorporated.
Financial Statement Schedules for the years ended December 31, 1996, 1995 and
1994.Incorporated:
Schedule Page
-
-------- ----
II - Valuation and Qualifying Accounts .............. S-1Accounts............................... IV-4
Schedules not filed herein arelisted above have been omitted because of the absence of
conditions under which they are not
applicable or are not required or because the information called forrequired to be set forth
therein is shownincluded in the consolidated financial statementsConsolidated Financial Statements or notes hereto.thereto.
(b) Reports on Form 8-K:
None8-K. We did not file any reports on Form 8-K during
the quarter ended December 31, 1999.
(c) Exhibits.
The following exhibits are filed with this Annual Report on Form 10-K:
Exhibit
Number Description
---------- ---------------------------------------------------------
3.1(1) Restated and Amended Articles of Incorporation of
Registrant filed July 7, 1982
3.2(1) Certificate of Amendment of Articles of Incorporation
filed January 31, 1983
3.3(1) Certificate of Amendment of Articles of Incorporation
filed July 28, 1983
3.4(1) Certificate of Amendment of Certificate of Determination
of Preferences of Series
B Common Stock filed September 13, 1983
3.5(1) Certificate of Amendment of Articles of Incorporation
filed September 13, 1983
3.6(2) Certificate of Amendment of Articles of Incorporation
filed December 3, 1984
3.7(2) Certificate of Correction of Certificate of Amendment of
Certificate of Determination of Preferences of Series B
Common Stock filed March 19, 1985
3.8(2) Certificate of Amendment of Articles of Incorporation
filed June 27, 1988
3.9(2) Bylaws
4.1(1) Form of Common Stock Certificate
10.1(2) Form of Indemnification of Agreement for Directors &
Officers
10.2 Employee Stock Purchase Plan, as amended through March
1998
10.3(3) 1991 Stock Option Plan, as amended through May 15, 1997
10.4 1991 Director Option Plan as amended April 1994
10.5(5) Amendment to and Restatement of Redemption Agreement
dated March 4, 1993 between Vincent J. Coates and
Registrant
10.6(2) Consulting Agreement dated as of September 15, 1997
between the Registrant and Kanegi Nagai, as amended
10.7(2) Reverse Split Dollar Insurance Agreement and Collateral
Assignment dated March 15, 1993 between the Registrant
and Vincent J. Coates
IV-1
3. Exhibits.
3.1.(1) Restated and Amended Articles of Incorporation of Registrant filed July 7, 1982.
3.2.(1) Certificate of Amendment of Articles of Incorporation filed January 31, 1983.
3.3.(1) Certificate of Amendment of Articles of Incorporation filed July 28, 1983.
3.4.(1) Certificate of Amendment of Certificate of Determination of
Preferences of Series B Common Stock filed September 13, 1983.
3.5.(1) Certificate of Amendment of Articles of Incorporation filed September
13, 1983.
10.1(1) 1981 Incentive Stock Option Plan, with form of Stock Option Agreement.
10.2(1) Employee's Profit Sharing Plan, as amended.
10.3(1) Purchase Agreement dated November 9, 1982 between Registrant and Warner-Lambert Technologies, Inc. and letter
Agreement dated November 9, 1982 between Registrant, Warner-Lambert Technologies, Inc., Vincent J. Coates and
Leonard Welter.
10.4(2) Amendment to and Restatement of Redemption Agreement dated March 4,
1993 between Vincent J. Coates and Registrant.
10.6(3) 1991 Stock Option Plan.
10.7(4) 1991 Director Option Plan.
21 Subsidiaries of Registrant.
23 Independent Auditors' Consent (See page IV-4).
24 Power of Attorney (see page V-1).
27 Financial DataExhibit
Number Description
---------- ---------------------------------------------------------
10.8(2) Lease Agreement dated February 25, 1992 between PM-DE and
the Registrant, First Addendum to Lease dated February
22, 1992 and First Amendment to Lease dated April 24,
1997
10.9(2) Loan Agreement between Japan Development Bank and
Nanometrics Japan k.k.
10.10(2) Loan Agreement and Guarantee dated June 5, 1995 between
Mitsubishi Bank, Limited and Nanometrics Japan Ltd.
21(2) Subsidiaries of Registrant
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Report on Schedule
IV-2
1)24 Power of Attorney (see page IV-3)
------------------
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (File No. 2-93949), which
became effective November 28, 1984.
2)(2) Incorporated by reference to exhibit 10.10 filed withthe Registrant's Registration
Statement on Form 10-K dated March 29, 1993.
3)filed on April 1, 1998.
(3) Incorporated by reference to exhibitExhibit 4.1 filed with Registrant's
Registration Statement on Form S-8 (file number 33-43913)(File No. 333-33583) filed on
NovemberAugust 14, 1991.
4)1997.
(4) Incorporated by reference to exhibitExhibit 4.2 filed with Registrant's
Registration Statement on Form S-8 (file number 33-43913) filed on
November 14, 1991.
IV-3
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation(5) Incorporated by reference in Registration Statement Nos. 33-
8518, 33-8519 and 33-43913 of Nanometrics Incorporated on Form S-8 of our report
dated February 19, 1997, appearing in this Annual Report onto Exhibit 10.10 filed with Registrant's
Form 10-K of
Nanometrics Incorporated for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
San Jose, Californiadated March 24, 1997
IV-429, 1993.
(d) Consolidated Financial Statements and Schedules.
See Item 14(a) above.
IV-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 2, 2000
NANOMETRICS INCORPORATED
Date: March 27, 1997 By: /s/VINCENT J. COATES
Vincent J. Coates, Chairman Paul B. Nolan
--------------------------------
Paul B. Nolan
Chief Financial Officer and Chief Executive OfficerVice President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Vincent J. Coates,John D. Heaton and Paul B. Nolan jointly
and severally, his attorneys-in-fact, each with fullthe power of substitution, for
him in any and all capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this reportReport on
Form 10-K has been signed below by the following persons on behalf of the
registrant on the 2nd day of March, 2000 in the capacities and on the dates indicated:indicated.
Signature Title
Date
- --------- -----
----
/s/VINCENT John D. Heaton President, Chief Executive Officer and Director
- ---------------------------------------------------- (Principal Executive Officer)
John D. Heaton
/s/ Paul B. Nolan Chief Financial Officer and Vice President
- ---------------------------------------------------- (Principal Financial and Accounting Officer)
Paul B. Nolan
/s/ Vincent J. COATESCoates Chairman of the Board
and March 27, 1997
- ----------------------- Chief Executive Officer
(Vincent----------------------------------------------------
Vincent J. Coates) (Principal Executive Officer)Coates
/s/PAUL B. NOLAN Chief Financial Officer March 27, 1997 Nathaniel Brenner Director
- ----------------------- (Principal Accounting and
(Paul B. Nolan) Financial Officer)----------------------------------------------------
Nathaniel Brenner
/s/JOHN D. HEATON Norman V. Coates Director
President and March 27, 1997
- ----------------------- Chief Operating Officer
(John D. Heaton)----------------------------------------------------
Norman V. Coates
/s/NORMAN V. COATES Kanegi Nagai Director
March 27, 1997
- -----------------------
(Norman V. Coates)----------------------------------------------------
Kanegi Nagai
/s/NATHANIEL BRENNER Edmond R. Ward Director
March 27, 1997
- -----------------------
(Nathaniel Brenner)
/s/KANEGI NAGAI Director March 27, 1997
- -----------------------
(Kanegi Nagai)
/s/CLIFFORD F. SMEDLEY Director March 27, 1997
- -----------------------
(Clifford F. Smedley)----------------------------------------------------
Edmond R. Ward
V-1IV-3
SCHEDULESchedule II
NANOMETRICS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Balance at Charged Toto Deductions- Balance
beginning costs and write-offs at end
Year Ended of period expenses of accounts*accounts of period
---------- ------------ ------------- ----------------------- ---------------- ------------------ ---------------
December 31, 1996... $380,000 $ 39,0001999................. $420,000 $5,000 $ 0 $419,000$425,000
-------- ------ ------- --------
December 31, 1995... $270,000 $110,0001998................. $413,000 $7,000 $ 0 $380,000$420,000
-------- ------ ------- --------
December 31, 1994... $260,000 $527,000 $517,000 $270,0001997................. $419,000 $ 0 $(6,000) $413,000
-------- ------ ------- --------
* Includes recoveries of past due accounts previously written off.
S-1IV-4